DBRS Morningstar Downgrades One Class of Ashford Hospitality Trust 2018-KEYS, Changes Trends on Two Classes to Negative

DBRS Limited (DBRS Morningstar) downgraded its credit rating on one class of the Commercial Mortgage Pass-Through Certificates, Series 2018-KEYS issued by Ashford Hospitality Trust 2018-KEYS as follows:

-- Class F to CCC (sf) from B (low) (sf)

In addition, DBRS Morningstar confirmed its credit ratings on the following classes:

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

DBRS Morningstar also discontinued and withdrew its credit rating on Class X-EXT, which is past its stated maturity date of June 2023 and as confirmed with the September 2023 remittance, is no longer receiving interest payments. DBRS Morningstar changed the trends on Class D and Class E to Negative from Stable; all other classes, except Class F, have Stable trends. Class F now has a rating that generally does not carry a trend in commercial mortgage-backed securities (CMBS) ratings. Simultaneously, DBRS Morningstar removed the Under Review with Negative Implications designation of the rated classes, where they were placed in June 2023.

The downgrade of the Class F and the Negative trends for Class D and Class E reflect the increased risks for the transaction as a result of the decline in performance of the underlying collateral, as detailed below. While the performance trends and other recent developments for the underlying collateral suggest an increased risk of loss for those classes, the analysis conducted for this review suggests that the capital structure provides the remaining classes sufficient insulation against losses, supporting the rating confirmations and the Stable trends.

The subject transaction is collateralized by the debt on a portfolio of hotel properties. The senior mortgage loan proceeds of $982.0 million, along with the mezzanine debt of $288.2 million, refinanced the existing debt of $1.1 billion, funded $14.1 million of upfront reserves and $25.6 million in closing costs, and facilitated a $163.4 million cash-equity distribution. The senior debt is split into six floating-rate interest-only (IO) loans, which are not cross collateralized or cross defaulted. In total, the six loans (known as Pools A, B, C, D, E and F) are collateralized by 34 hotel properties across 16 states with the largest concentration by allocated loan balance in California. The six loans had an initial 24-month term with five one-year extension options. Earlier this year, the sponsor, Ashford Hospitality Trust, Inc. (Ashford), indicated that it would be unable to pay off the six loans by the June 2023 maturity and subsequently all the loans were transferred into special servicing in April 2023.

The sponsor did have the fourth extension option available; however, the terms required a debt yield that was at least 25 basis points higher than the issuance debt yield of 12.9%. That threshold was not met for any of the six loans and in July 2023, Ashford issued a press release stating that they had agreed to make the necessary paydowns for Pools C, D and E in the amounts of $62 million, $26 million and $41 million, respectively, in order to meet the debt yield requirements. The one-year extension option for those Pools have been executed, bringing the loan maturity dates out to June 2024 with one final extension option remaining. However, as noted in the July press release, Ashford stated that it was not willing to contribute to paydowns for the other three Pools (A, B and F), with an estimated $255 million in total that would have been required to meet the debt yield threshold. Ashford stated a loan modification was being pursued, but noted that nothing had been agreed upon as of the July 2023 press release, and the special servicer has confirmed that status has continued into September 2023. With the September 2023 remittance, Pool C has returned to the master servicer with Pools D and E expected to be returned in the near term. Pools A, B and F will remain with the special servicer; the workout strategy remains listed as to be determined; however, DBRS Morningstar believes a foreclosure or deed-in-lieu of foreclosure is likely, based on Ashford’s public statements to date.

At issuance, the 34 lodging properties were valued at $1.7 billion, but the March 2021 appraisals previously obtained by the special servicer showed a value decline to $1.3 billion. DBRS Morningstar previously derived a value of $1.2 billion in 2020 based on a stressed cash flow approach, reflecting concerns regarding the hospitality sector during the height of the Coronavirus Disease (COVID-19) pandemic. Given three of the six Pools will remain in special servicing with a liquidation scenario likely, and the other three Pools requiring significant principal paydowns for the extension requirements to be met, DBRS Morningstar conducted a recoverability analysis for this review, based on a significant haircut to the 2021 appraised values. That analysis suggested loss severities in excess of 15% for Pool A, 20% for Pool B and 10% for Pool F. DBRS Morningstar’s estimated liquidated losses are comfortably contained to the Class F certificate, supporting the downgrade of the credit rating, with the implied reduction in credit support for Class D and Class E contributing to the Negative trends assigned to those two classes.

As of the year-end (YE) 2022 financials, Pools A, B and F reported debt service coverage ratios (DSCR) of 1.52x, 0.83x and 1.97x, respectively, as compared to the YE2021 figures of 1.84x, 0.44x and 0.71x, respectively. Performance has generally continued to improve from the pandemic-driven lows, but remains well below pre-2020 levels. The trailing 12 month financials for the period ended June 30, 2023, that were provided for Pools C, D and E showed year-over-year growth, but performance for those collateral sets also continues to lag the metrics considered in 2020 when the DBRS Morningstar ratings were assigned. These factors also support the Negative trends on Class D and Class E.

According to the provided May 2023 STR reports, Pools A, B and F reported WA occupancy, average daily rate (ADR) and revenue per available room (RevPAR) figures of 69%, $161 and $111, respectively. As compared to issuance figures, the same Pools reported WA figures of 78%, $158 and $123, respectively. The WA RevPAR penetration rate for the specially serviced pools as of May 2023 was 118%, encouraging but also notably down from 122% at issuance. The declines were most pronounced for Pools A and B (declines of 8% and 20%, respectively) while Pool F has seen a moderate increase in RevPAR penetration rates from issuance, softening the decline on a WA basis. These figures suggest that there is limited room for revenue growth for those hotels within their respective markets, supporting the haircuts to the 2021 valuations in the analysis for this review.

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

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 the 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.

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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 (August 23, 2023); https://www.dbrsmorningstar.com/research/419592

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].