DBRS Morningstar Confirms Ratings on All Classes of BAMLL Commercial Mortgage Securities Trust 2017-SCH

DBRS, Inc. (DBRS Morningstar) confirmed the following ratings of the Commercial Mortgage Pass-Through Certificates, Series 2017-SCH issued by BAMLL Commercial Mortgage Securities Trust 2017-SCH:

-- Class A-F at AAA (sf)
-- Class X-FEX at AAA (sf)
-- Class B-F at AA (sf)

All trends are Stable.

The rating confirmations reflect the continued improved performance of the collateral as performance metrics have rebounded significantly, nearing pre-pandemic levels, in line with DBRS Morningstar’s expectations. At the prior rating action in June 2022, DBRS Morningstar confirmed the ratings and changed the trends to Stable from Negative to reflect the improved near- to medium-term outlook for the collateral and the projected stable performance of the transaction.

The transaction consists of two separate groups of certificates split between the Fee Mortgage Group and the Leasehold Mortgage Group. The Fee Mortgage Group of certificates is backed by a $140.0 million first mortgage loan secured by the borrower’s fee interest in the 2.3 acres of land occupied by the Sheraton Grand Chicago hotel, while the Leasehold Mortgage Group of certificates is backed by a $115.0 million leasehold mortgage loan secured by the leasehold interests under a ground lease on the same property. The Fee Mortgage Group of certificates (including the vertical risk retention piece) represents 100% of the beneficial interests in only the Fee Mortgage Loan. Similarly, the Leasehold Mortgage Group of certificates represents 100% of the beneficial interests in only the leasehold mortgage loan. The two loans are not cross-collateralized or cross-defaulted. DBRS Morningstar rates only three of the Fee Mortgage Group certificates (Classes A-F, X-FEX, and B-F) and does not rate any of the Leasehold Mortgage Group of certificates.

The Sheraton Grand Chicago is a 1,218-key full-service convention hotel in downtown Chicago adjacent to the Chicago River. The hotel has 125,000 square feet (sf) of dedicated meeting space comprising 43 rooms, including a 40,000-sf ballroom that holds 4,500 people. Other amenities include a fitness center, an indoor heated pool, a sun deck, a dry sauna, and a FedEx business center.

The land is leased to the owner and operator of the Sheraton Grand Chicago on a 99-year ground lease that began on January 1, 2017. Ground rent payments began at $9.0 million per year and escalate by 10.5% every five years. The loan is structured with a three-year initial term and four one-year extension options, subject to the ground lease remaining in place. The borrower has exercised three extension options to date and has an upcoming maturity in November 2023. The second, third, and fourth extension options are subject to a 0.25% extension fee. The ground lessor and ground lessee are affiliated entities owned by the sponsor, Tishman Hotel & Realty L.P. (Tishman), who originally developed the hotel and opened it in 1992.

The fee mortgage loan reported a YE2022 net cash flow (NCF) of $9.9 million (entirely attributed to ground rent payment) and debt service coverage ratio (DSCR) 3.61 times (x), compared with a YE2020 NCF of $9.0 million and DSCR 3.29x. The leasehold mortgage loan reported a YE 2022 NCF of $11.9 million (including the ground rent expense) and DSCR 3.69x, compared with a YE2021 NCF of -$16.3 million and DSCR of -4.40x, and a YE2020 NCF of -$29.9 million and DSCR of -8.06x.

Based on the DBRS Morningstar value of $270.5 million and the trust’s cumulative debt of $255.0 million, there remains $15.5 million of implied equity. As of the May 2023 remittance, both the fee mortgage loan and the leasehold mortgage remain current, with no reported delinquencies or defaults to date. Payments have continued on the ground lease supporting the fee mortgage debt service despite the reduced demand that began with the onset of the COVID-19 pandemic. While demand is on an upward trajectory, it has not yet reached pre-pandemic levels. According to the Metropolitan Pier and Exposition Authority, more than 2.5 million people are expected to attend events at Chicago’s convention complex in 2023 compared with 1.5 million people who visited the complex in 2022, an indicator that convention travelers, a major demand driver for the subject property, are on the rise.

The Sheraton Grand Chicago officially reopened after pandemic-related closures in June 2021 and the servicer reported a YE2022 NCF of $21.8 million (excluding the ground rent expense), up from the YE2021 NCF of -$7.3 million and YE2020 NCF of $20.9 million. In its first full year of being reopened, the hotel quickly rebounded, nearing the YE2019 pre-pandemic NCF of $23.6 million and DBRS Morningstar NCF of $24.3 million, as leisure travel, conventions, and corporate meetings have ramped up.

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-FEX is an interest-only (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 North American CMBS Surveillance Methodology (March 16, 2023), which can be found on https://www.dbrsmorningstar.com/research/410912.

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

The DBRS Morningstar rating assigned to Class BF is higher than the results implied by the LTV sizing benchmark. This variance is warranted given recent increases in net cash flow and other performance metrics combined with DBRS Morningstar’s expectations for continued stable-to-improving performance for the underlying asset.

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 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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

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

North American 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)

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)

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

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