Morningstar DBRS Upgrades Credit Ratings on Three Classes of CSMC Trust 2017-CHOP

DBRS Limited (Morningstar DBRS) upgraded its credit ratings on the Commercial Mortgage Pass-Through Certificates Series 2017-CHOP issued by CSMC Trust 2017-CHOP as follows:

-- Class B to AA (sf) from AA (low) (sf)
-- Class C to AA (low) (sf) from A (sf)
-- Class D to BBB (high) (sf) from BBB (low) (sf)

Morningstar DBRS also confirmed the credit ratings on the following classes:

-- Class A at AAA (sf)
-- Class X-EXT at AAA (sf)
-- Class E at BB (low) (sf)

All trends are Stable.

The credit rating confirmations reflect the stable to improving year-over-year performance metrics for the 36 loans remaining in the portfolio as evidenced by cash flow and revenue per available room (RevPAR) figures that have surpassed pre-pandemic levels. The credit rating upgrades reflect the enhanced credit support and continued deleveraging of the collateral as a result of 12 property releases from the trust to date, as well as the results of the stressed scenario considered by Morningstar DBRS as part of this review, as further described below.

The Certificates represent the beneficial ownership interest in an interest-only (IO), floating-rate mortgage loan with an original aggregate principal amount of $780.0 million. At issuance, the collateral consisted of the fee and leasehold interests in a portfolio of 48 select-service, limited-service, and extended-stay hotels, totaling 6,401 keys, located across 31 metropolitan statistical areas in 21 states, operating under eight different flags across the Marriott, Hilton, and Hyatt brands. The loan was in special servicing beginning in 2020 and was ultimately resolved when a buyer for all 48 hotels was secured and the new ownership, an affiliate of Kohlberg Kravis Roberts & Co. (KKR), assumed the underlying loan.

The trust balance of $619.6 million, as of the April 2024 remittance, represents a collateral reduction of 20.6% stemming from aggregate principal curtailments of $160.4 million through releasing 12 properties from the trust in accordance with the lease provisions, all of which have been released since the last credit rating action. The borrower is permitted to release properties from the loan by prepayment of a portion of the mortgage loan equal to (1) 105.0% of the applicable allocated loan amount (ALA) with respect to releases up to the first 10.0% of the original principal balance of the loan; (2) 110.0% of the ALA with respect to releases up to 20.0% of the original balance of the loan; or (3) 115.0% of the ALA with respect to further releases, provided that the debt yield with respect to the remaining properties will be equal to or greater than the greater of (A) 8.15% or (B) the debt yield of all properties immediately prior to the consummation of such release.

The loan was modified as part of KKR's assumption, with terms including an extension of the maturity date to June 2027, a borrower-funded debt service reserve equal to 12 months of payments, the replacement of the current property management team with Schulte Hospitality Group and Hersha Hospitality Management, and the loan remaining in cash management for the life of the extended term. KKR Real Estate Partners Americas III AIV, LP, as the replacement guarantor and environmental indemnitor, also provided a flag loss guaranty and a property improvement plan completion guaranty. KKR is a leading global investment firm with approximately $552.8 billion of assets under management as of YE2023. The borrower is required to maintain an interest rate cap agreement that had a Libor strike price of 3.0% from issuance through the initial maturity date, and replacement interest rate cap agreements for each extension period with a strike rate that would result in a debt service coverage ratio of at least 1.20 times.

As of the April 2024 reporting, the loan is current and performing but is still being monitored on the servicer's watchlist for deferred maintenance concerns. Morningstar DBRS has not received an update on the resolution of these concerns as of the date of this press release, however, the servicer noted that deferred maintenance letters have been sent to the borrower to address the issues.

Based on the most recent servicer reported financials, the portfolio has a YE2023 occupancy rate, average daily rate (ADR), and RevPAR of 72.7%, $138.36, and $100.85, respectively, surpassing pre-pandemic levels with YE2019 figures at 76.0%, $124.73, and $95.06, respectively. The portfolio performance has shown steady improvement from the YE2022 and YE2021 RevPARs of $92.91 and $71.62, respectively. The vast majority of properties remaining in the portfolio exhibited RevPAR penetration rates over 100.0% for the trailing 12 months (T-12) ended December 31, 2023.

In the analysis for this review, Morningstar DBRS excluded the 12 released properties from the pool, resulting in a consolidated YE2023 net cash flow (NCF) figure of $51.3 million for the 36 remaining properties, which is notably higher than the comparative YE2022 and YE2021 figures of $46.8 million and $28.4 million, respectively. In the base case scenario, Morningstar DBRS applied a standard surveillance haircut to the adjusted YE2023 figure and a 9.5% capitalization rate, which yields a base case Morningstar DBRS value of $529.6 million. To evaluate the potential for upgrades given the significant paydown in the last year, Morningstar DBRS applied a 20.0% stress to the adjusted YE2023 NCF and a 9.5% capitalization rate, resulting in a stressed value of $432.4 million. The loan-to-value (LTV) sizing benchmarks resulting from that stressed analysis indicate the upgrade to Classes B, C, and D was warranted. The implied Morningstar DBRS LTV for the stressed scenario is 143.3% on the entire loan and 73.9% on the remaining $319.6 million of rated proceeds. Morningstar DBRS anticipates a continued stable to improving performance for the underlying collateral portfolio.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS   
There were no Environmental/Social/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 (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

Class X-EXT is an IO certificate that references a single rated tranche. 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 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.

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

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

-- 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/legal-criteria-for-us-structured-finance

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.

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