DBRS Morningstar Confirms Ratings on All Classes of BBCMS Trust 2018-BXH

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-BXH issued by BBCMS Trust 2018-BXH as follows:

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

All trends are Stable.

The rating confirmations reflect the continued stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations since the last review. At that time, DBRS Morningstar changed the trend on Class F to Stable from Negative, given the general improvement in performance of the underlying collateral, which had previously faced disruptions as a result of the Coronavirus Disease (COVID-19) pandemic. The portfolio continues to demonstrate improvements in key performance indicators, as evidenced by the last few reporting periods and, as detailed below.

At issuance, the $257.0 million mortgage loan was secured by the fee-simple (16) and leasehold (one) interests in a portfolio of 17 limited-service, extended-stay, and full-service hotels totalling 2,189 keys across the United States, all of which were cross-collateralized and cross-defaulted. The trust loan proceeds were used to recapitalize the portfolio, with the sponsor, BREIT Operating Partnership (an affiliate of The Blackstone Group), retaining more than $176.0 million of equity at closing. The loan is prepayable in whole or in part at any time, with individual property releases permitted, subject to a payment release price of 105.0% of the allocated loan amount for the first 25% of the original principal balance and 110.0% thereafter. For all property releases, the loan is subject to a minimum debt yield requirement.

According to the June 2023 remittance, the outstanding trust balance has been reduced to $185.7 million due to prepayments, primarily related to the release of three properties and a parking garage parcel from the Hyatt Place San Jose property. In addition, it appears that additional principal prepayments were made, which may be related to meeting the minimum debt yield requirement associated with property releases. DBRS Morningstar has requested clarification from the servicer and a response is outstanding as of the date of this press release. The interest-only (IO), floating-rate loan had an initial two-year term with five one-year extension options. The loan is currently scheduled to mature in October 2023; however, there are two extension options remaining. The servicer noted that it has reached out to the borrower regarding its plans for the upcoming maturity, but a response is pending. In addition, a replacement interest rate cap agreement is required as part of each extension, and it is noteworthy that given the current interest rate environment, the cost to purchase a rate cap has likely increased. As of the June 2023 loan-level reserve report, approximately $1.7 million was held across all reserve accounts.

The portfolio is geographically diversified across seven different states with primary concentrations in California, Massachusetts, and Florida. The hotels operate under franchise agreements with three major brands—Marriott, Hyatt, and Hilton, allowing the hotels to benefit from strong brand recognition as well as brand-wide reservation systems, marketing, and loyalty programs. All franchise agreements extend beyond the fully extended loan maturity date, with expirations ranging from 2030 to 2037. The properties underwent renovations totalling $13.9 million between 2015 and 2018, with the sponsor planning to invest an additional $14.4 million in improvements through 2023.

Performance has steadily improved with the portfolio reporting weighted-average occupancy rate, average daily rate, and revenue per available room (RevPAR) metrics of 75.4%, $154.2, and $115.5, respectively, for the trailing 12-month period (T-12) ended March 31, 2023. Operating performance across the portfolio has drastically improved from the lows of the pandemic when RevPAR was $51.2 (as of YE2020) and has generally seen a rebound close to issuance levels when RevPAR was reportedly $119.4. Based on the YE2022 financials, the portfolio generated net cash flow (NCF) of $23.8 million ($19.9 million for the remaining collateral), a significant improvement from the negative NCF reported in YE2020 but still below the DBRS Morningstar NCF of $29.8 million ($25.5 million for the remaining collateral). Despite continued interest rate volatility, the debt service coverage ratio remains healthy at 2.91 times as of YE2022.

For this review, DBRS Morningstar applied a 2.0% haircut to the YE2022 NCF (excluding the NCFs from the three released properties). A 9.6% capitalization rate was applied to that figure, resulting in a DBRS Morningstar value of $204.2 million, a -45.6% variance from the issuance appraised value of $375.1 million for the remaining collateral.

DBRS Morningstar maintained positive qualitative adjustments to the final loan-to-value (LTV) sizing benchmarks used for this rating analysis, totalling 2.5% to account for cash flow volatility, property quality, and market fundamentals.

The DBRS Morningstar rating assigned to Class F is higher than the results implied by the LTV sizing benchmarks by three or more notches. The variance is warranted given the general improvement in cash flow trends and key performance indicators over the last several reporting periods as well as the sponsor’s continued commitment to the portfolio. The transaction benefits from collateral reduction of 27.8% since issuance and includes $50.0 million of below investment-grade cushion, further strengthening credit enhancement levels, especially for the higher-rated bonds. As such, the DBRS Morningstar rating assigned to Class C is lower than the results implied by the LTV sizing benchmarks by three or more notches. However, DBRS Morningstar conducted an upgrade stress to test the durability of the rating on that class, which it did not pass. As such, the variance is warranted.

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 (July 4, 2023) at https://www.dbrsmorningstar.com/research/416784.

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 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 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 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].