DBRS Morningstar Confirms Ratings on All Classes of CSMC Trust 2017-CHOP

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2017-CHOP (the Certificates) issued by CSMC Trust 2017-CHOP (the Trust) as follows:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar expectations since the last review as the underlying collateral continues to demonstrate steady recovery from the Coronavirus Disease (COVID-19) pandemic with performance nearing pre-pandemic levels.

The Certificates represent the beneficial ownership interest in an interest-only (IO), floating-rate mortgage loan with an original aggregate principal amount of $780.0 million. The collateral consists of the fee and leasehold interests in a portfolio of 48 select-service, limited-service, and extended-stay hotels, totaling 6,401 keys, located across 31 metropolitan statistical areas in 21 states. The hotels operate under eight different flags across the Marriott, Hilton, and Hyatt brands. The loan was in special servicing beginning in 2020 and was ultimately resolved when a buyer for all 48 hotels was secured and the new ownership, an affiliate of Kohlberg Kravis Roberts & Co. (KKR), assumed the underlying loan.

As of the May 2023 remittance, the Trust reported a current balance of $737.4 million, representing a collateral reduction of 5.5% stemming from aggregate principal curtailments of $42.6 million in April 2023 and May 2023, partially paying off four properties as permitted in the loan documents. The properties include Courtyard Fort Worth I 30 West Near NAS JRB, Residence Inn Dallas DFW Airport, Residence Inn Dallas Park Central, and Hampton Inn & Suites Atlanta Duluth, and approximately 87% of the initial aggregate principal balance was repaid. The borrower is permitted to release properties from the loan by prepayment of a portion of the mortgage loan equal to (1) 105.0% of the applicable allocated loan amount (ALA) with respect to releases up to the first 10.0% of the original principal balance of the loan; (2) 110.0% of the ALA with respect to releases up to 20.0% of the original balance of the loan; or (3) 115.0% of the ALA with respect to further releases, provided that the debt yield with respect to the remaining properties will be equal to or greater than the greater of (A) 8.15% or (B) the debt yield of all properties immediately prior to the consummation of such release.

The loan was modified as part of KKR’s assumption, with terms including an extension of the maturity date to June 2027, a borrower-funded debt service reserve equal to 12 months of payments, the replacement of the current property management team with Schulte Hospitality Group and Hersha Hospitality Management, and the loan remaining in cash management for the life of the extended term. KKR Real Estate Partners Americas III AIV, LP, as the replacement guarantor and environmental indemnitor, also provided a flag loss guaranty and a property improvement plan completion guaranty. KKR is a leading global investment firm with approximately $504.0 billion of assets under management as of YE2022 financials. The borrower is required to maintain an interest rate cap agreement that had a Libor strike price of 3.0% from issuance through the initial maturity date, and replacement interest rate cap agreements for each extension period with a strike rate that would result in a debt service coverage ratio of at least 1.20 times.

As of the May 2023 remittance, the loan is current and performing, but it is still being monitored on the servicer’s watchlist due to deferred maintenance concerns. One property had experienced water damage in December 2022 because of frozen pipes, which resulted in 45 down units; however, the servicer confirmed that all repairs have been completed.

Based on the YE2022 financials, the portfolio reported a YE2022 occupancy rate, average daily rate (ADR), and revenue per available room (RevPAR) of 70.4%, $130.26, and $91.72, respectively, nearing pre-pandemic levels with YE2019 figures at 76.0%, $124.73, and $95.06, respectively. Portfolio performance has shown steady improvements from the YE2021 and YE2020 RevPARs of $70.88 and $47.83, respectively.

The portfolio had performed in line with expectations up until the outbreak of the pandemic, showing a YE2019 net cash flow (NCF) of $68.1 million, an increase of 6.9% from the issuer’s NCF of $63.7 million. The pandemic has had a disproportionate impact on lodging properties, and the portfolio reported a YE2020 NCF of only $3.5 million. The portfolio began to recover in 2021 and reported a YE2021 NCF of $34.6 million and a YE2022 NCF of $57.8 million, which is only marginally below the DBRS Morningstar NCF of $58.3 million.

The appraiser at issuance determined the value of the portfolio to be $1.06 billion, based on a bulk sale assumption, and $941.0 million on an individual basis. Appraisals were ordered while the loan was in special servicing; however, the reports were never finalized before KKR assumed the loan for an undisclosed purchase price and brought it current. The servicer has confirmed that the purchase price was in excess of the implied DBRS Morningstar value of $613.3 million. The DBRS Morningstar value suggests a loan-to-value ratio (LTV) of 120.2% compared with the issuer’s value of $1.06 billion, implying a still relatively high LTV of 69.6%. While leverage on the entire loan is high on the DBRS Morningstar value, the LTV on the remaining $437.4 million of rated proceeds is lower at only 71.3%.

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 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 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].