Morningstar DBRS Downgrades Credit Ratings on Four Classes of BX Trust 2017-CQHP

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on four classes of Commercial Mortgage Pass-Through Certificates, Series 2017-CQHP issued by BX Trust 2017-CQHP as follows:

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

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (low) (sf)

The trends on Classes D, E, and X-EXT were changed to Negative from Stable. All other trends are Stable, excluding Class F, which has a credit rating that does not generally carry a trend in commercial mortgage-backed securities (CMBS).

The credit rating downgrades reflect the continued distressed performance of the underlying collateral hotels and the deterioration in the collateral’s as-is appraised value. The credit rating actions are further supported by a recoverability analysis based on the newly derived Morningstar DBRS value, as further described below. According to the February 2024 appraisals, the aggregate as-is value of the collateral declined to $321.6 million, representing a 10.7% decline from the October 2022 appraised values and a 23.9% decline from the issuance appraised values. Furthermore, outstanding advances continue to accrue, with principal and interest advances totalling $32.2 million as of the April 2024 remittance. Factoring in all outstanding advances and cumulative unpaid advance interest, the loan’s total exposure is currently $317.8 million, resulting in an implied loan-to-value ratio (LTV) approaching 100%. Morningstar DBRS considered a stressed scenario based on a haircut to the most recent appraised values to reflect the potential volatility that could be experienced over the remainder of the workout period. The results of the analysis suggested an as-is LTV of 100.1% based on the whole loan amount of $273.7 million (116.2% when factoring in the loan’s total exposure), further supporting the credit rating downgrades. The trend changes to Negative reflect the possibility of additional value deterioration and increasing cumulative advances in the event that the loan’s workout period is prolonged.

The $273.7 million loan, along with $61.3 million of mezzanine debt and $8.1 million of sponsor equity, refinanced $336.1 million in existing debt and paid closing costs. The sponsor for this loan is Blackstone Real Estate Partners VII, L.P. (Blackstone). The transaction is collateralized by a single loan secured by a portfolio of four Club Quarters Hotels totaling 1,228 keys across four major U.S. cities: San Francisco (346 keys; 39.4% of allocated loan amount (ALA)), Chicago (429 keys; 26.4% of ALA), Boston (178 keys; 18.2% of ALA), and Philadelphia (275 keys; 16.0% of ALA). The collateral has been challenged since the onset of the coronavirus pandemic in early 2020 and has remained with the special servicer since June 2020. The loan’s sponsor, Blackstone, advised the special servicer that it was not willing to inject additional capital to fund operating expenses or debt service payments and, according to special servicer commentary, the trust was the winning bidder at the February 2024 foreclosure sale of the Boston property and the special servicer will be pursuing foreclosure of the other three assets.

The portfolio was most recently appraised in February 2024 with a combined value of $321.6 million, remaining in line with the June 2023 aggregate appraised value of $325.4 million. The February 2024 appraisals have not been provided to Morningstar DBRS as of the date of this press release; however, when compared with the June 2023 appraisal, the aggregate value decline from the portfolio’s previous October 2022 appraised value was driven exclusively by the San Francisco property, which saw its as-is value decline 25.1% from $160.8 million to $120.4 million, while the other three properties reported modest value increases. In its analysis for this review, Morningstar DBRS considered a hypothetical stressed value scenario, as further described below, that suggested an implied LTV figure in excess of 100%, based on the total loan exposure.

For the trailing 12-month (T-12) period ended September 30, 2023, the portfolio reported weighted-average (WA) occupancy rate, average daily rate, and revenue per available room (RevPAR) figures of 62.4%, $87, and $119, respectively. The WA RevPAR for the T-12 period ended December 31, 2022, was reported at $127. The WA RevPAR penetration rate for the T-12 period was 75.0%, in line with the prior T-12 period, suggesting the properties continue to underperform relative to their competitive sets. Although performance metrics have been trending positively year over year since bottoming out in 2020, it is unlikely the portfolio will stabilize to pre-pandemic figures in the near to medium term. The subject properties rely heavily on commercial segmentation because of the brand’s focus on business travel and member-driven corporate demand, which has seen a longer recovery period than other demand segmentations. According to the financials for the nine months ended September 30, 2023, annualized net cash flows continue to lag well behind pre-pandemic levels and remain below breakeven levels, with a consolidated trust loan debt service coverage ratio of 0.45 times.

In its analysis for this review, Morningstar DBRS derived a stressed value of $273.4 million by applying a 15.0% haircut to the February 2024 appraised value of $321.6 million. This value represents a variance of -35.3% from the issuance appraised value of $422.5 million and a variance of -5.1% from the previous Morningstar DBRS value of $288.0 million derived at the last surveillance review in May 2023. The updated Morningstar DBRS value implies an LTV of 100.1% on the whole loan debt, increasing to 116.1% when factoring in the loan’s total exposure inclusive of all cumulative advances. Morningstar DBRS maintained its qualitative adjustments totaling -0.5% for cash flow volatility because of the collateral’s reliance on business travel and 1.25% for market fundamentals because of the hotels’ locations in prime central business district markets. Given the recent foreclosure sale for the Boston property and the upcoming foreclosure sales for the remaining three properties, Morningstar DBRS conducted a recoverability analysis based on the newly derived Morningstar DBRS value, which suggests significant credit support deterioration to Classes D and E, with losses impacting Class F, supporting the downgrades on those classes.

ENVIRONMENTAL, SOCIAL, AND 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 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 (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

Class X-EXT is an interest-only (IO) certificates that reference 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 the 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 ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

This are solicited credit ratings.

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 Morningstar DBRS 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. 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
-- 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 https://dbrs.morningstar.com or contact us at [email protected].