DBRS Morningstar Places the Ratings on All Classes of Ashford Hospitality Trust 2018-KEYS Under Review With Negative Implications

DBRS Limited (DBRS Morningstar) placed its ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2018-KEYS issued by Ashford Hospitality Trust 2018-KEYS Under Review with Negative Implications as follows:

-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (high) (sf)
-- Class D at A (low) (sf)
-- Class E at BBB (low) (sf)
-- Class X-EXT at B (sf)
-- Class F at B (low) (sf)

There are no trends for these rating actions.

At the last review in June 2022, DBRS Morningstar confirmed the ratings with Stable trends based on expectations that performance for the underlying assets would continue to stabilize following the adverse effects of the Coronavirus Disease (COVID-19) pandemic. However, all six loans were transferred to special servicing in April 2023. Consequently, DBRS Morningstar placed all classes Under Review with Negative Implications to reflect its updated valuation analysis, which suggests significant value decline in a default scenario that could result in downgrades to the bonds.

The senior mortgage loan proceeds of $982.0 million, along with mezzanine debt of $288.2 million, refinanced existing debt of $1.1 billion, funded $14.1 million of upfront reserves and $25.6 million in closing costs, and facilitated a $163.4 million cash-equity distribution. The debt, which is split into six floating-rate interest-only (IO) loans, is collateralized by 34 hotel properties across 16 states with the largest concentration by allocated loan balance in California at 34.7%. The uncrossed loans had an initial 24-month term with five one-year extension options. Two extension options remain, conditional upon a debt yield that is at least 25 basis points higher than the issuance debt yield of 12.9%. The sponsor, Ashford Hospitality Trust, Inc., indicated that it is unable to pay off the loan by the June 2023 maturity.

Little information has been provided to date regarding the borrower’s plans to modify or extend the loan, or what workout strategies are being discussed.

As of the YE2022 financials, the loans reported a weighted-average (WA) debt yield of 8.16% and a WA debt service coverage ratio (DSCR) of 1.90 times (x), compared with the DSCR of 1.61x for YE2021. On an individual basis, pools A, B, C, D, E, and F reported DSCRs of 1.52x, 0.83x, 2.05x, 2.67x, 2.11x, and 1.97x, respectively, for the same period. Performance continues to stabilize but remains well below pre-pandemic levels. The DSCR was reported at 2.40x on a combined basis for YE2019.

The latest appraisals, dated March 2021, obtained by the special servicer valued the collateral on an as-is basis at a combined figure of $1.3 billion. DBRS Morningstar previously derived a value of $1.2 billion in 2020 based on a stressed cash flow approach to reflect concerns regarding the hospitality sector during the height of the pandemic. To test the durability of the ratings, in light of the slower-than-expected recovery of the underlying assets and upcoming maturity default, DBRS Morningstar updated its cash flow approach to approximate the current value of the properties. DBRS Morningstar’s net cash flow (NCF) analysis was based on a haircut to the YE2022 NCF of $80.1 million with a capitalization rate of 9.5%. This analysis resulted in a DBRS Morningstar value of $826.1 million, representing a variance of -33.4% from the DBRS Morningstar value of $1.2 billion derived in 2020. The DBRS Morningstar value implies a loan-to-value (LTV) ratio of 118.9%, compared with the 2020 LTV of 79.1%. Although the loan is current as of the May 2023 reporting, DBRS Morningstar notes that in a liquidation scenario, the lower performing properties will not receive the benefit of pooled recovery proceeds, as the underlying loans are not cross-collateralized. Over the coming weeks, DBRS Morningstar will seek to gather additional information regarding the special servicer’s workout strategy and the borrower’s intentions for refinancing the debt.

DBRS Morningstar maintained positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 2.0% to account for property quality and market fundamentals. The DBRS Morningstar analysis resulted in negative variances from the LTV Sizing Benchmarks of three or more notches to Classes A, B, C, D, E, and F. These variances from the LTV sizing benchmarks are warranted given the uncertain workout strategy. DBRS Morningstar will continue to collect information on the portfolio’s performance, market dynamics, and the planned resolution strategy in the coming months to resolve the Under Review ratings.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022) at https://www.dbrsmorningstar.com/research/396929.

Class X-EXT is an IO certificate that references a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

The rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

DBRS Morningstar notes a risk sensitivity analysis was not completed for this rating action as the ratings of all classes were placed Under Review with Negative Implications.

This rating is Under Review with Negative Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period. In the coming weeks, DBRS Morningstar will gather additional information regarding the special servicer’s workout strategy in an effort to resolve the under review ratings. Given the collateral, the resolution period may extend beyond 90 days.

DBRS Limited
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The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023)
https://www.dbrsmorningstar.com/research/410191

Rating North American CMBS Interest-Only Certificates (December 19, 2022)
https://www.dbrsmorningstar.com/research/407577

Legal Criteria for U.S. Structured Finance (December 7, 2022)
https://www.dbrsmorningstar.com/research/407008

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022)
https://www.dbrsmorningstar.com/research/402646

North American Commercial Mortgage Servicer Rankings (September 8, 2022)
https://www.dbrsmorningstar.com/research/402499

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022)
https://www.dbrsmorningstar.com/research/402153

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].