DBRS Morningstar Upgrades Ratings on Four Classes of Ashford Hospitality Trust 2018-ASHF

DBRS Limited (DBRS Morningstar) upgraded its ratings on four classes of Commercial Mortgage Pass-Through Certificates, Series 2018-ASHF issued by Ashford Hospitality Trust 2018-ASHF as follows:

-- Class B to AA (high) (sf) from AA (sf)
-- Class C to A (high) (sf) from A (sf)
-- Class X-EXT to A (low) (sf) from BBB (high) (sf)
-- Class D to BBB (high) (sf) from BBB (sf)

DBRS Morningstar also confirmed its ratings on the following classes:

-- Class A at AAA (sf)
-- Class E at BB (sf)
-- Class F at B (low) (sf)

All trends are Stable.

The rating upgrades reflect the strong rebound in portfolio net cash flows (NCFs) since the Coronavirus Disease (COVID-19) pandemic, driven by growth in occupancy, average daily rates (ADR), and revenue per available room (RevPAR). On average, the portfolio is performing well above its competitive set across all of these metrics. Given this, DBRS Morningstar updated its cash flow approach, as described in further detail below.

At issuance the loan was secured by the borrower’s fee-simple interest in 17 properties (representing 67.8% of the allocated loan amount (ALA)), the combined fee and leasehold interests in four properties (27.0% of the ALA), and a ground lease on one property (5.3% of the ALA) in the Ashford Highland Hospitality portfolio that consists of one luxury hotel and 22 full-service, select-service, limited-service, and extended-stay hotels, totaling 5,785 keys. In 2019, three hotels were sold and released from the original portfolio at a release price of 115% of the ALA as outlined in the loan documents, bringing the outstanding balance of the pooled trust mortgage down to $720.7 million. There have been no releases since 2019. The properties are spread across 12 states and the District of Columbia, with the largest state concentration in Texas (four properties; 21.5% of the ALA). Most of the hotels benefit from strong brand recognition, operating under the Marriott, Hilton, and Hyatt flags.

According to the Q1 2023 financials, the consolidated NCF for the trailing 12 months (T-12) ended March 31, 2023, was reported at $82.2 million, which represents a 13.2% increase from the YE2022 figure of $72.6 million and a 187.4% increase from the YE2021 figure of $28.6 million. The increase in cash flows was primarily due to increased room and food and beverage revenues coinciding with increased occupancy.

Individual STR, Inc. reports were provided for the 19 properties remaining in the pool. The weighted-average (WA) occupancy, ADR, and RevPAR across the portfolio were 71.5%, $199, and $142, respectively, for the T-12 period ended March 31, 2023. These metrics represent substantial improvements year over year, with WA occupancy, ADR, and RevPAR growth of 24.8%, 16.3%, and 45.3%, respectively, from the T-12 period ended March 31, 2022. In addition, individual properties within the portfolio outperformed their competitive sets with WA occupancy, ADR, and RevPAR penetration rates of 110.6%, 107.5%, and 119.6%, respectively. The improved performance metrics highlight the portfolio’s strong recovery since the onset of the coronavirus pandemic.

The NCF of $82.2 million for the T-12 period ended March 31, 2023, is in line with the DBRS Morningstar NCF of $83.3 million derived in 2020, which was based on a haircut to the YE2019 NCF. When ratings were assigned in 2020, DBRS Morningstar also considered a stressed scenario given the unique challenges for hotels amid the coronavirus pandemic. Based on that scenario, DBRS Morningstar assigned ratings that were lower than those implied by the baseline scenario. As property-level cash flows have since stabilized near pre-pandemic levels, in the analysis for this review DBRS Morningstar considered the baseline scenario, with the results of the loan-to-value sizing supporting the upgrades with this review. To test the durability of the ratings and temper the recent performance improvements, DBRS Morningstar once again considered a stressed scenario based on a conservative haircut to the NCF for the T-12 period ended March 31, 2023, which further supports the upgrades.

The interest-only (IO) loan had an initial two-year term followed by five successive one-year extension options. The borrower has exercised its fourth extension option, extending the maturity to April 2024. To achieve the debt yield hurdle for the fourth extension option, the borrower elected to contribute a principal paydown of $35.8 million, which was reflected with the April 2023 remittance. There is additional senior and junior mezzanine financing totaling $202.3 million outside the trust that is co-terminous with the trust financing, which has amortized to $186.3 million as of June 2023. The sponsor had previously invested $227.5 million ($39,328 per room) in the portfolio’s hotels since acquisition in 2013.

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/416784 (July 4, 2023).

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 credit ratings are subject to surveillance, which could result in credit 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 credit rating was initiated at the request of the rated entity.

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

This is a solicited credit rating.

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

DBRS Limited
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The credit 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].