DBRS Morningstar Confirms Ratings on All Classes of J.P. Morgan Chase Commercial Mortgage Securities Trust 2018-ASH8

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-ASH8 issued by J.P. Morgan Chase Commercial Mortgage Securities Trust 2018-ASH8:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (sf)
-- Class X-EXT at BBB (high) (sf)
-- Class D at BBB (sf)
-- Class E at BB (low) (sf)
-- Class F at B (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, when the trends on Classes E and F were changed to Stable from Negative, based on the general improvement in performance of the underlying collateral, which had previously faced disruptions as a result of the Coronavirus Disease (COVID-19) pandemic. Although cash flows continue to lag behind pre-pandemic levels, the portfolio overall continues to demonstrate improvements in key performance indicators, as evidenced by the last few reporting periods. In addition, the transaction benefits from a recent sizable principal repayment, as described in more detail below. At issuance, the $395.0 million mortgage loan was secured by the fee and leasehold interests in a portfolio of eight full-service hotels totaling 1,964 keys across six states in the United States, all of which are cross collateralized and cross defaulted. To date, there have been no property releases. The portfolio is largely concentrated in California (two hotels, 743 keys; 33.7% of the allocated loan amount (ALA)), Florida (two hotels, 334 keys; 22.4% of the ALA), and Oregon (one hotel, 276 keys; 22.2% of the ALA), with the remaining collateral in Virginia, Minnesota, and Maryland.

The subject financing, along with $112.4 million of equity from the sponsor, retired $378.9 million of existing debt and established upfront reserves. All but one of the hotels are affiliated with Hilton Hotels & Resorts, IHG Hotels & Resorts, or Starwood Hotels and Resorts Worldwide, Inc. There is one hotel that operates as an independent entity. Flags within the portfolio include Embassy Suites by Hilton, Crowne Plaza, Hilton, and Sheraton Hotels and Resorts, allowing the hotels to benefit from strong brand recognition as well as brand-wide reservation systems, marketing, and loyalty programs. The franchise agreements of Embassy Suites by Hilton Santa Clara Silicon Valley, Embassy Suites by Hilton Crystal City National Airport, and Embassy Suites by Hilton Orlando Airport expired in February 2023. As of the most recent update provided by the servicer, these hotels continue to be owned and operated by Hilton, they are not required to have franchise agreements, and do not pay a franchise fee in addition to the management fee. All other franchise agreements have been extended beyond the fully extended loan maturity date. The transaction benefits from a strong, experienced sponsor, Ashford Hospitality Trust, a leading hotel and asset management firm and a publicly traded real estate investment trust that focuses on upscale, full-service hotels in the top 25 metropolitan statistical areas.

The interest-only (IO), floating-rate loan had an initial two-year term with five one-year extension options. The borrowers are obligated to provide a replacement interest rate cap agreement for any extension period with a strike price when added to the spread or alternate spread of the mortgage loan that would result in a debt service coverage ratio (DSCR) of not less than 1.25 times (x). The servicer confirmed that the borrower executed an interest rate cap agreement with an effective date of February 15, 2023, and has successfully exercised the fourth extension option, pushing the loan maturity date to February 15, 2024. According to the June 2023 remittance, the outstanding trust balance has been reduced to $325.0 million because of the $50 million principal repayment, primarily related to meeting the minimum debt yield requirement of 10.25% associated with the fourth extension option.

The loan was previously in special servicing in April 2020 with a modification approved in January 2021, resulting from a request for relief that was related to the coronavirus pandemic. The loan modification included the suspension of furniture, fixtures, and equipment monthly deposits between April 2020 and December 2020 and reduced future debt yield extension tests. The servicer reports the loan is current and the borrower is in compliance with the terms of the modification. As of the June 2023 loan-level reserve report, approximately $11.7 million was held across all reserve accounts.

Since DBRS Morningstar’s last rating action, performance has steadily improved, with the portfolio reporting weighted-average occupancy rate, average daily rate (ADR), and revenue per available room (RevPAR) metrics of 70.6%, $191.0, and $134.8, 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 $59.2 (as of YE2020) and has generally seen a rebound close to issuance levels when RevPAR was reportedly $133.4. Based on the T-12 ended March 31, 2023, financials, the portfolio generated net cash flow (NCF) of $27.8 million, a significant improvement from the negative NCF reported in YE2020 but still below the DBRS Morningstar NCF of $35.8 million. Departmental revenue is 4.6% less than the DBRS Morningstar figure while total expenses has been relatively in line with expectations, bringing the operating expense (opex) ratio to 59% compared with the DBRS Morningstar opex ratio of 52%. The loan is susceptible to debt service volatility because of the floating-rate nature, resulting in a T-12 March 31, 2023, DSCR of 1.50x, below the YE2022 DSCR of 1.67x despite the NCF improvement. DBRS Morningstar received STR reports for all properties and based on the reporting, the portfolio has shown positive growth in occupancy, ADR, and RevPAR based on the T-3 ended March 31, 2023.

Given the proximity to the final maturity date in 2025, an updated DBRS Morningstar value was derived for this review. DBRS Morningstar’s analysis for this review considered a NCF of $27.3 million, which was derived by applying a 2.0% haircut to the T-12 ended March 31, 2023, NCF. A 9.22% cap rate was applied to that value, resulting in a DBRS Morningstar value of $296.1 million. DBRS Morningstar maintained positive qualitative adjustments to the final loan-to-value (LTV)-sizing benchmarks used for this rating analysis, totaling 1.0% to account for cash flow volatility, property quality, and market fundamentals. The June 2023 DBRS Morningstar value represents a –21.0% variance from the value derived in March 2020 and a -43.4% variance from the appraised as-is value of $523 million at issuance. The June 2023 DBRS Morningstar value implies a LTV of 116.5% compared with an LTV of 75.5% on the as-is appraised value at issuance. The decline in value from the 2020 DBRS Morningstar value is generally reflective of a sustained contraction in cash flow, which remains below pre-pandemic levels. Although this scenario suggested moderate negative pressure when comparing the resulting LTV-sizing benchmarks to the class structure, primarily at the bottom of the capital stack, the impact was overall not considered significant given the mitigating factors in the portfolio’s positive cash flow trends that have been sustained in recent years, suggesting performance continues to trend back to pre-pandemic levels. In addition, the sponsor’s commitment to the loan appears strong given the recent principal repayment and rate cap acquisition as part of the loan extension.

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).

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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Tel. +1 416 593-5577

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

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)

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].