Morningstar DBRS Downgrades Credit Ratings on Three Classes of Morgan Stanley Capital I Trust 2019-PLND

DBRS Limited (Morningstar DBRS) downgraded its ratings on three classes of the Commercial Mortgage Pass-Through Certificates, Series 2019-PLND issued by Morgan Stanley Capital I Trust 2019-PLND as follows:

-- Class D to BBB (high) (sf) from A (sf)
-- Class E to CCC (sf) from BBB (low) (sf)
-- Class F to C (sf) from B (high) (sf)

In addition, Morningstar DBRS confirmed its ratings on the remaining classes as follows:

-- Class A at AAA (sf)
-- Class X-EXT at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at AA (low) (sf)
-- Class G at C (sf)

The trend on Classes C and D was changed to Negative from Stable with this review. All other trends are Stable with the exception of Classes E, F, and G, which now have a credit rating that generally does not carry a trend in commercial mortgage-backed securities (CMBS).

The rating downgrades on Classes D, E, and F are reflective of the increased loss expectations for the loan, which remains in special servicing as of this rating action, driven by the loan's increasing exposure and recent decline in appraised value, while the negative trends now assigned to Classes C and D represent the potential for further credit deterioration based on the uncertain timeline for disposition and potential for value to decline further. Additionally, Morningstar DBRS' credit ratings are constrained by Morningstar DBRS' expectation of accruing interest shortfalls prior to disposition, which has also contributed to Morningstar DBRS' trend changes. Interest shortfalls currently total $2.5 million, up from a total interest shortfall amount of $0.1 million at the time of the last credit rating action. Unpaid interest continues to accrue month over month, driven primarily by appraisal subordinate entitlement reduction (ASER). Morningstar DBRS has minimal tolerance for unpaid interest to high investment-grade rated bonds, limited to one to two remittance cycles for the AA (sf) and A (sf) credit rating categories.

The floating rate transaction is secured by a $240.0 million first-lien mortgage loan on two Hilton-branded full-service hotels on adjacent city blocks in Portland, Oregon. The Hilton Portland Downtown (Hilton Downtown) and The Duniway Portland (the Duniway) are near the corner of SW Taylor Street and SW 6th Avenue in Portland's downtown core. The two hotels, combined, contain 782 rooms, approximately 63,000 square feet of meeting space, and three food and beverage outlets. The loan initially transferred to the special servicer for monetary default in June 2020, and, since that time, the loan has passed its initial maturity date of May 2021, was foreclosed in January 2023, and the assets are now real estate owned. There is a planned property improvement plan (PIP) in 2025 for both properties, which is targeted to renovate guest rooms, the meeting space, and common areas. The special servicer is reportedly working to stabilize property performance ahead of disposition.

The most recent appraisals dated March 2023 value the properties at $254.8 million combined on an as-is basis, a decline from the June 2022 combined value of $297.7 million and the issuance value of $340.6 million. Although the most recent value remains above the total trust amount, the appraised value is somewhat inflated given the loan has outstanding principal and interest (P&I) advances totalling $39.5 million as of the April 2024 remittance. At the time of the last rating action, that figure was reported as $28.7 million. Morningstar DBRS' approach for purposes of this credit rating action included a recoverability analysis based on a stress to the most recent appraised value, and implies a liquidated value per room of approximately $300,000, supported by recent sales comparables.

For the trailing 12-month (T-12) period ended December 31, 2023, STR reported that occupancy, average daily rate, and revenue per available room (RevPAR) were 53.6%, $167.42, and $89.75, respectively, for the Hilton Downtown, and 55.2%, $167.50, and $92.51, respectively, for the Duniway. For the same T-12 period, the two properties achieved RevPAR penetrations of 103.5% and 102.1%, relative to their competitive sets. Both properties exhibited improvements across occupancy, RevPAR, and RevPAR penetration. The subject properties have seen some improvements across certain performance metrics coming out of the pandemic; however, cash flows have not re-stabilized. According to the most recent financials, the annualized net cash flow (NCF) for the trailing nine-month period ended September 30, 2023, was reported at approximately $9.0 million. Although this represents an increase as compared to the YE2022 figure of $8.6 million, performance is not expected to rebound to pre-pandemic levels.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS  
There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (January 23, 2024), https://dbrs.morningstar.com/research/427030.

Class X-EXT is an interest-only (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 Morningstar DBRS.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798.

Other methodologies referenced in this transaction are listed at the end of this press release.

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.

Morningstar DBRS 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.

Morningstar DBRS notes that a sensitivity analysis was not performed for this review as the transaction was analyzed on a recoverability approach.

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

DBRS Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

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

-- North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428799

-- Rating North American CMBS Interest-Only Certificates (December 13, 2023), https://dbrs.morningstar.com/research/425261

-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623

-- DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023), https://dbrs.morningstar.com/research/420982

-- North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592

-- Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279, (July 17, 2023).

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