Morningstar DBRS Confirms Credit Ratings on All Classes of COMM 2020-CBM Mortgage Trust, Changes Trends to Negative from Stable on Five Classes

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2020-CBM issued by COMM 2020-CBM Mortgage Trust as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class X-NCP at AAA (sf)
-- Class B at AA (sf)
-- Class X-CP at AA (low) (sf)
-- Class C at A (high) (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)

Morningstar DBRS changed the trends on Classes X-CP, C, D, E, and F to Negative from Stable. All remaining trends are Stable.

Although the portfolio continues to demonstrate incremental improvements in operating performance, as evidenced over the last few reporting periods, cash flow continues to lag well behind pre-pandemic levels. The Negative trends reflect Morningstar DBRS' concerns regarding the limited potential for pre-pandemic cash flow to be fully recaptured prior to the loan's maturity date in February 2025. In addition, performance declines from issuance may have eroded property values, which could impede the borrower's efforts to secure replacement financing in the near-to-medium term. Lastly, there is risk associated with the loan's interest-only (IO) structure, which does not allow for deleveraging given the lack of amortization.

Travel restrictions and limited end-user demand resulting from the pandemic significantly affected operations across the collateral portfolio shortly after issuance. However, performance and net cash flow (NCF) have trended upward since the onset of the pandemic. According to the year-end (YE) 2023 financial reporting, the portfolio generated $66.9 million of NCF (a debt service coverage ratio (DSCR) of 2.73 times (x)), a considerable improvement from the YE2022, YE2021, and YE2020 figures of $61.9 million (a DSCR of 2.53x), $34.3 million (a DSCR of 1.40x), and -$15.7 million (a DSCR of -0.64x), respectively. Given this upward trajectory, Morningstar DBRS changed the trends on Classes E and F to Stable from Negative with the July 2022 rating action. Despite the continued improvement in cash flow, the variance between the in-place figures and the Morningstar DBRS NCF of $80.1 million (derived when ratings were assigned in September 2020) remains sizeable and may suggest flattening demand across the portfolio. Given the proximity to the final maturity date in 2025, an updated Morningstar DBRS value was derived, with the resulting Loan-To-Value (LTV) Sizing Benchmarks suggesting downward pressure, most notably for Classes C through F, further supporting the assignment of Negative trends with this review. Additional details of the analytical approach are further outlined below.

The underlying $684.0 million loan is secured by a first-priority mortgage on the fee and leasehold interests in 52 limited-service hotel properties totaling 7,677 keys. The trust loan is part of a split loan structure composed of seven senior promissory notes with an aggregate principal amount of $298.0 million, one junior promissory note with an aggregate principal amount of $286.0 million, and four senior promissory non-trust notes totaling $100.0 million. The debt contributed to the transaction consists of the seven senior promissory notes and one junior promissory note totaling $584.0 million.

The portfolio primarily includes older-vintage hotels, with 47 properties, representing 90.4% of the rooms, built in 1989 or earlier. All the hotels operate under the Courtyard by Marriott flag, benefiting from strong brand recognition as well as brand-wide reservation systems, marketing, and loyalty programs. The properties are located across 25 states, with concentrations in California, Florida, Illinois, and Colorado representing 25.2%, 7.6%, 7.1%, and 6.6% of the allocated loan amount, respectively. There was a $99.0 million reserve established at closing to fund capital improvements across the portfolio. As of the April 2024 reporting, most of that reserve has been depleted, with a current balance of $725,604. In addition, the servicer noted that a second reserve of approximately $70.0 million was slated to be collected over the first four years of the loan term to fund additional improvements to properties within the portfolio. Morningstar DBRS has reached out to the servicer to inquire about the balance of the second reserve but the response remains outstanding as of the date of this press release.

The portfolio's consolidated occupancy has steadily improved from 30.0% at YE2020 to 63.0% at YE2023, but still trails the issuer's underwritten figure of 71.6%. However, average daily rates (ADR) have increased from issuance with the financial reporting for the trailing nine-month period ending September 2023 reflecting a weighted-average ADR of $151.60, considerably higher than the issuance figure of $131.40. On an aggregate basis, the portfolio has typically outperformed its competitive set, with occupancy, ADR, and revenue per available room penetration rates higher than 100.0% since 2016. The sponsor for the transaction is CBM Joint Venture Limited Partnership, a joint venture between affiliates of Clarion Partners, LLC (Clarion) and the Michigan Office of Retirement Services (the majority equity interest holder). Clarion acquired the portfolio and other interests between 2005 and 2012, investing $370.4 million toward capital expenditures prior to issuance with an ongoing commitment to the portfolio as evidenced by the continued capital investment and established reserves.

Morningstar DBRS' analysis for this review considered an NCF of $65.6 million, which was derived by applying a 2.0% haircut to the YE2023 NCF. A 9.0% cap rate was applied to that value, resulting in an updated Morningstar DBRS value of $728.4 million (an implied LTV of 93.9%). Morningstar DBRS maintained positive qualitative adjustments, totaling 4.0% to account for the portfolio's globally recognized Marriott International brand affiliation and long-term management agreements, above-average quality given continuous sponsor investments, and location in some of the largest and strongest hospitality markets in the country. The updated Morningstar DBRS value represents a -18.1% variance from the value derived in March 2020 and a -38.5% variance from the as-is appraised value of $1.2 billion at issuance (an implied LTV of 57.7%).

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

Classes X-NCP and X-CP are 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 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 Morningstar DBRS rating assigned to Classes C, D, E, and F are higher than the results implied by the LTV sizing benchmarks by three or more notches. The variances are warranted given the general improvement in cash flow trends and key performance indicators evidenced over the last several reporting periods suggesting the propensity for cash flow to continue to improve should these trends continue, as well as the sponsor's continued commitment to the portfolio. In addition, the transaction includes more than $175.0 million of below investment-grade cushion, further strengthening credit enhancement levels, especially for the higher-rated bonds.

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.

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. Morningstar DBRS' outlooks and credit ratings are monitored.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
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 dbrs.morningstar.com or contact us at [email protected].