DBRS Morningstar Confirms Ratings on UBSCM 2018-NYCH Mortgage Trust

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-NYCH issued by UBSCM 2018-NYCH Mortgage Trust as follows:

-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at AA (low) (sf)
-- Class X-NCP at A (sf)
-- Class D at A (low) (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 the continued improved performance of the collateral as performance metrics have rebounded significantly, nearing pre-pandemic levels and trending back in line with DBRS Morningstar’s expectations. With the prior rating action in August 2022, DBRS Morningstar confirmed the ratings and changed the trends on two classes to Stable from Negative to reflect the overall improved performance of the collateral and the projected stable performance of the transaction.

The transaction is collateralized by a $300.0 million floating-rate, interest-only (IO) mortgage loan that is secured by the fee-simple interests on seven limited-service and extended-stay hotels in New York City totaling 1,087 rooms. The loan had an initial term of three years with two one-year extension options with an initial maturity date of February 2021. Individual properties in the portfolio may be released subject to certain provisions, including a paydown in principal on the loan equal to 115% of the allocated loan amount for the released hotel(s). As of the June 2023 remittance, no properties have been released.

As a result of the coronavirus pandemic and its forced shutdown of the economy, the loan was transferred to special servicing in April 2020. The loan payments for April and May 2020, and subsequent months, were made by the mezzanine lender, and the borrower requested a forbearance and an extension of the maturity date. Although the loan was structured with two conditional one-year extension options, the collateral did not meet the debt yield requirements to extend the maturity date.

The mezzanine lender ultimately foreclosed on the portfolio in early 2021, brought the senior loan payments current, and received a modification in June 2021, extending the maturity date to February 2024. The modification required a paydown of $10.0 million and partial payment of default interest. The loan was returned to the master servicer in September 2021 as a corrected mortgage loan. The loan remained on the servicer’s watchlist from September 2021 to November 2022 because of sustained cash flow declines resulting from the residual effects of the pandemic. Because of the low debt yield, the servicer was trapping cash and, as of the June 2023 reporting, the loan reported $8.5 million in the capital reserve account and an additional $19.1 million in the other reserve account.

The seven hotels are in Manhattan submarkets that typically have very active lodging demand: Times Square (three hotels), the Financial District (two hotels), and one hotel in each of Chelsea and Herald Square. The midmarket hotels are flagged with well-known brands: Hampton Inn (three hotels), Holiday Inn Express (two hotels), Holiday Inn, and Candlewood Suites. At issuance, occupancy rates at the properties ranged from 90% to 95% with average daily rates (ADRs) ranging from $198 to $229 per room and revenue per available room (RevPAR) of $212. The sponsor invested $15.2 million, or $13,983 per room, for a portfolio-wide property improvement plan renovation that took place from 2016 to 2017.

A June 2021 appraisal reported a value of $357.5 million, representing a decline of 38.4% from the $580.7 million value at issuance. Even with this significant decline, the new value remains above the outstanding loan balance, providing some insulation for the bottom-rated classes. This value implies a loan-to-value (LTV) ratio of 81.1%. Cash flows have improved since 2021, however, suggesting that the as-is value has likely improved, as well. Additionally, DBRS Morningstar notes the mitigating factor in the mezzanine lender’s commitment to the property.

The servicer reported net cash flow (NCF) of $20.3 million for the trailing 12-month (T-12) period ended March 31, 2023, up from the YE2022 NCF of $19.0 million and YE2020 NCF of -$4.9 million. Some of the properties within the portfolio were closed months into 2021 while pandemic-related restrictions affecting travelers in New York City lingered into 2022. However, in the first full year of all properties within the portfolio being reopened, the portfolio has significantly rebounded, and metrics are moving closer to the YE2019 pre-pandemic NCF of $24.8 million and DBRS Morningstar NCF of $24.3 million (based on a haircut to the YE2019 NCF figure), as leisure travel, conventions and trade shows, and corporate meetings have ramped up. The DBRS Morningstar value considers a cap rate of 8.5%, resulting in a value of $286.0 million. This value implies an LTV ratio of 101.4% and an LTV ratio of 63.9% on the lowest-rated class with an investment-grade rating.

According to the most recent reporting, occupancy, ADR, and RevPAR metrics have continued to improve, trending toward pre-pandemic levels. The portfolio reported an occupancy rate of 75.6% as of the T-12 period ended March 31, 2023, which is up from 71.3% as of YE2022, 40% as of June 2021, and 58.1% as of YE2020. As of the T-12 period ended March 31, 2023, the portfolio reported ADR and RevPAR of $215.75 and $163.19, respectively, reflecting an upward trend from YE2022, year-to-date March 2022, and YE2020 when RevPAR was $153.24, $65.81, and $36.19, respectively. The YE2022 debt service coverage ratio (DSCR) was reported at 1.38 times (x), compared with the DSCR of -0.50x at Q2 2021, -0.43x at YE2020, and 2.18x at issuance. The loan has remained current since September 2021. DBRS Morningstar expects property metrics to continue to recover in line with the rebound of tourism and business travel. According to the city’s official destination marketing organization, NYC & Company, the city is expected to attract 61.7 million visitors in 2023, approximately 85% of the city’s 2019 record number of visitors and up from 56.4 million visitors in 2022 and 32.9 million visitors in 2021.

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 at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

Class X-NCP 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; 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 (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

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].