DBRS Morningstar Confirms All Classes of HIT Trust 2022-HI32

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2022-HI32 issued by HIT Trust 2022-HI32 as follows:

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

All trends are Stable.

The rating confirmations reflect a deal that is early in its lifecycle with limited reporting and no changes to the underlying performance of the collateral since issuance. The transaction is collateralized by a portfolio consisting of 32 hotels totaling 4,168 keys across 18 states. The properties are a combination of limited-service, extended-stay, select-service, and full-service hotels. The portfolio operates under 10 different brands, including Marriott, Hilton, and Hyatt franchises that benefit from national reservation systems. The portfolio benefits from granularity by allocated loan amount (ALA) and market, with only one property that represents more than 10.0% of the total ALA. The transaction sponsor is an affiliate of Hospitality Investors Trust, Inc. (HIT). The subject financing of $465.0 million, along with a $5.3 million equity of sponsor equity, was used to refinance $455.3 million of existing debt, establish $8.0 million of upfront property improvement plan (PIP) reserve, and cover closing costs. The loan is a two-year floating-rate interest-only mortgage loan with three one-year extension options.

The hotels were constructed between 1979 and 2013, and capital expenditures (capex) of approximately $79.8 million were invested in the properties between 2015 and 2021. The sponsor plans to contribute an additional $92.7 million of capex ($22,253 per key) through 2027, of which $74.3 million is part of brand-mandated PIPs and will be partially funded by the $8.0 million ($2,790 per key) upfront PIP reserve. Per the servicer, $39.1 million of capex have been completed, are currently in progress, or are in an initial planning phase. The largest renovation currently in progress is at the Hilton Garden Inn Monterey (10.2% of ALA), which is undergoing a $12.5 million full renovation. Three other collateral properties have had full renovations completed, the largest of which is the Courtyard Carlsbad (2.9% of ALA), which underwent a $5.7 million renovation. In addition, the loan is structured with a $15.0 million letter of credit as credit support for required PIP obligations. Starting in October 2023, and on each payment date in January, April, July, and October thereafter, the borrower is required to deposit $2.25 million each quarter (less the amount the borrower has expended on scheduled PIP expenses and excluding amounts drawn from the reserves or the letter of credit) to the PIP reserve.

According to the YE2022 financials, the portfolio reported a net cash flow (NCF) of $45.0 million (representing a debt service coverage ratio (DSCR) of 1.18 times (x)), in line with the pre-pandemic NCF at YE2019 of $45.0 million and slightly above the DBRS Morningstar NCF of $42.5 million. At issuance, collateral performance was depressed because of the effects of the Coronavirus Disease (COVID-19) pandemic, although month-over-month, the portfolio was showing signs of improvement. Based on the STR report for the trailing 12 month (T-12) period ended April 30, 2022, the portfolio reported a weighted-average (WA) occupancy rate of 70.6%, average daily rate (ADR) of $128.50, and revenue per available room (RevPAR) of $90.72. Performance has rebounded to pre-pandemic levels with the STR report for the T-12 period ended March 31, 2023, reporting a WA occupancy rate of 74.6%, ADR of $153.89, and RevPAR of $115.62, representing a RevPAR penetration rate of 109.24%, higher than the pre-pandemic RevPAR of $101.53.

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.

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; 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.

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

DBRS Limited
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Tel. +1 416 593-5577

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)

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].