DBRS Morningstar Changes Trends on Three Classes of BBCMS Trust 2018-CBM to Negative from Stable

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

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

In addition, DBRS Morningstar revised the trends on Classes D, E, and F to Negative from Stable. This reflects DBRS Morningstar’s concerns regarding the limited potential for pre-Coronavirus Disease (COVID-19) pandemic cash flow to be fully recaptured, in addition to the loan being past its July 2023 maturity date. With this review, DBRS Morningstar re-evaluated its cash flow approach to derive an updated DBRS Morningstar value of $331.5 million, which represents a -50.9% variance to the issuance appraised value, with the resulting impact to the Loan-To-Value (LTV) Sizing Benchmarks suggesting downgrade pressure for the bottom three classes, supporting the Negative trends. The trends for Classes A, B, and C, which have a current cumulative balance of $228.7 million, remain Stable.

The $415.0 million floating-rate loan is secured by a portfolio of 30 Courtyard by Marriott select-service hotels, totaling 4,379 rooms spread across 15 states. The portfolio is geographically diverse, with hotels in 23 metropolitan statistical areas across 15 states. California accounts for the largest percentage of the pool, at 29.8% by allocated loan amount, followed by 10.8% in Michigan, and 9.6% in Florida. No property represents more than 6.6% of the total allocated loan amount. Since issuance, there have been no property releases.

The loan was previously in special servicing in 2020 and was ultimately resolved when a new borrower assumed the loan. The original loan sponsor, Colony Capital, Inc. (Colony), transferred 100% of its interests to a joint venture (JV) between Highgate Capital Investments, L.P. (Highgate) and Cerberus Real Estate Capital Management, LLC (Cerberus) in March 2021. The transfer was part of a larger sale of six select-service hotel portfolios that Colony agreed to sell to the JV between Highgate and Cerberus. The sale included 197 properties for an aggregate sale price of $67.5 million and the assumption of the $2.7 billion outstanding mortgage debt on all 197 properties. The current sponsor has continued to fund capital projects, with $4.3 million in owner-funded items budgeted for 2022 and $4.3 million budgeted for 2023.

The YE2022 net cash flow (NCF) for the combined portfolio was reported to be $30.1 million, up from $12.8 million at YE2021 and negative cash flow of -$9.4 million at YE2020. The most recent NCF continues to lag the DBRS Morningstar NCF of $47.6 million derived in 2020 when ratings were assigned. The cash flow trends suggest the portfolio continues to stabilize from the effects of the coronavirus pandemic, with a weighted-average revenue per available room (RevPAR) improvement of 25.9% year-over-year for the trailing 12 months, ended March 31, 2023. Nearly all of the underlying properties are outperforming their competitive sets in terms of occupancy, average daily rate (ADR), and RevPAR. The portfolio’s consolidated occupancy, ADR, and RevPAR for YE2022 were reported to be 62.6%, $138.92, and $89.31, respectively, according to the servicer. In comparison, the occupancy, ADR, and RevPAR at issuance were 72.0%, $130.10, and $93.73, respectively.

The loan was structured with an initial term of two years, with five additional one-year extension options. As of the July 2023 remittance, the loan has passed its currently scheduled maturity date of July 9, 2023, and the servicer reports that borrower is engaged in discussions to execute its fourth extension option. The initial interest rate was set at a 2.17% spread over one-month Libor, with a Libor cap of 4.5%. With the fourth extension option, the spread would be scheduled to increase by 25 basis points. The in-place interest rate cap agreement is scheduled to expire on July 15, 2023. According to the servicer, the borrower has requested a modification of the loan terms in order to effectuate the fourth extension option, and negotiations are ongoing.

At issuance, the portfolio was appraised at a value of $674.0 million. In July 2020, the portfolio was reappraised at a value of $533.7 million, representative of a 20.82% decline from the issuance appraised value. Although cash flow trends showing year-over-year improvements are encouraging, DBRS Morningstar remains concerned that the portfolio is not likely to fully recapture pre-pandemic performance, and expects that a modification of the loan will be costly. In the analysis for this review, DBRS Morningstar derived a value of $331.5 million based on the YE2022 NCF of $30.1 million and a cap rate of 9.06%. DBRS Morningstar maintained positive qualitative adjustments, totaling 4.0% to account for the portfolio’s globally recognized Marriott International brand affiliation and long-term management agreements, in addition to property quality and market fundamentals. DBRS Morningstar notes that the analysis is conservative, given the YE2022 NCF is still considered a stressed figure, with the STR reports provided showing RevPAR improvements have continued in 2023, suggesting the YE2023 NCF should show improvement, as well.

The ratings on all classes are higher than the results implied by the LTV sizing benchmarks by three or more notches. These variances are warranted given the substantial year-over-year improvements as illustrated by the weighted-average RevPAR growth of 25.9% and 135% NCF growth. DBRS Morningstar notes that the portfolio is likely still affected by the effects of the pandemic, along with the increased challenges present by the high interest rate environment.

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 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.

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.

DBRS, Inc.
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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].