DBRS Morningstar Confirms Ratings on All Classes of CLNY Trust 2019-IKPR, Changes Trends on Three Classes to Negative From Stable

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2019-IKPR issued by CLNY Trust 2019-IKPR as follows:

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

In addition, DBRS Morningstar changed the trends on Classes D, E, and F to Negative from Stable. Class G has a rating that does not typically carry a trend for commercial mortgage-backed securities (CMBS) ratings. All remaining classes have Stable trends.

The interest-only (IO), floating-rate underlying loan is secured by a portfolio of 46 extended-stay, limited-service, and full-service hotels in 16 states across the U.S. with approximately 6,000 guest rooms. The majority of the portfolio consists of extended-stay hotels, representing 78.3% of total rooms, with select-service and full-service hotels representing 15.2% and 6.5% of total rooms, respectively. These hotels operate under the Marriott, Hyatt, and Hilton brands, in addition to eight different sub-brands.

The collateral was significantly affected by the Coronavirus Disease (COVID-19) pandemic shortly after issuance. Performance and net cash flow (NCF) have trended upward since the onset of the pandemic, with the year-end (YE) 2021 NCF reported at $39.2 million, a significant improvement over the YE2020 NCF of $18.1 million. Given this trajectory, DBRS Morningstar had changed the trends on Classes E and F to Stable from Negative at the August 2022 review. Despite the continued improvement in cash flow (the YE2022 NCF figure was $54.3 million), the delta between the in-place figures and the DBRS Morningstar NCF of $73.1 million remains quite large. This discrepancy has been compounded in the last year with increases in interest rates and what appears to be a leveling of the demand for the core product in the portfolio, extended-stay hotels. In addition, the loan is scheduled to mature in November 2023. Although the borrower has three additional one-year extension options available, it is required to purchase an interest rate cap agreement with each extension, and the costs for those have increased significantly in the last year. Given these risks, DBRS Morningstar changed the trends on three classes to Negative as outlined above, with the analytical approach further described below.

There have been no property releases to date, and all hotels in the portfolio are conjoined by cross-defaulted and cross-collateralized mortgages, deeds of trust, indenture deeds of trust or similar instruments applicable in each jurisdiction, plus liens on the furniture, fixture, equipment, and leases. The loan sponsor at issuance, Colony Capital exited the hospitality business and sold six of its portfolios, including the subject, to Highgate and an affiliate of Cerberus Capital Management, L.P. The sale loan assumption was considered a neutral to positive development given Highgate is an experienced owner and operator of lodging portfolios of more than 87,500 hotel rooms across the U.S., Europe, Caribbean, and Latin America.

As previously mentioned, the YE2022 NCF improved substantially year over year but is still well below the DBRS Morningstar NCF. Departmental revenue is 8.7% below the DBRS Morningstar figure, while total expenses have been relatively in line with expectations, bringing the operating expense (opex) ratio to 72.2%, compared with the DBRS Morningstar opex ratio of 65.5%. The loan is susceptible to debt service volatility as a result of the floating-rate structure, resulting in YE2022 debt service coverage ratio (DSCR) of 1.70 times (x), below the YE2021 DSCR of 1.84x despite the NCF improvement.

According to reporting provided by the servicer, the portfolio reported YE2022 occupancy rate, average daily rate (ADR), and revenue per available room (RevPAR) of 56.7%, $133.86, and $75.86, respectively. The RevPAR is relatively unchanged from the YE2021 figure of $74.46, but it is an improvement from the YE2020 figure of $57.08. DBRS Morningstar received STR, Inc. reports for majority of the properties. Based on the reporting, the portfolio has shown a further increase in RevPAR based on the trailing three-month period (T-3) ended February 28, 2023.

In the analysis for this review, DBRS Morningstar considered a stressed value based on the YE2022 NCF and a capitalization rate of 9.0%, which resulted in a DBRS Morningstar value of $603.6 million. This represents a -44.2% haircut to the issuance value of $1.1 billion and a -25.7% haircut to the DBRS Morningstar value derived in 2020 when ratings were assigned. DBRS Morningstar applied positive qualitative adjustments, totaling 2.0% to account for property quality and market fundamentals. In previous years, DBRS Morningstar had given credit for low cash flow volatility, but given the trends as outlined above, that credit was removed with this review.

As a result of the stressed approach with this review, the ratings on Classes B through F are higher than the results implied by the loan-to-value sizing benchmarks by three or more notches. These variances are warranted given the trends showing NCF growth continues to be seen over the lows experienced in the pandemic. In addition, DBRS Morningstar notes that the allocated loan balance attributed to properties that exhibited RevPAR increases over the T-3 period ended February 28, 2023, is enough to cover the four most senior classes, supporting the Stable trends for the top three classes. Finally, DBRS Morningstar notes the new sponsors’ recent acquisition of the portfolio and exhibited commitment since the loan was assumed. Cash flow trends will continue to be monitored, as will the November 2023 maturity, as DBRS Morningstar evaluates the Negative trends placed with this review.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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).

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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar Long-Term Obligation Rating Scale definition indicates that credit ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and credit ratings are monitored.

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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)

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].