Morningstar DBRS Confirms Credit Ratings on All Classes of Morgan Stanley Capital I Trust 2017-ASHF

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2017-ASHF issued by Morgan Stanley Capital I Trust 2017-ASHF as follows:

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

All trends are Stable.

The credit rating confirmations reflect the overall stable-to-improved performance of the underlying hotel portfolio, as evidenced by year-over-year growth in net cash flow (NCF), occupancy, and revenue per available room (RevPAR) figures as reported by STR. Morningstar DBRS’ loan-to-value ratio (LTV) is 74.8% for the Morningstar DBRS-rated debt and 102.9% for the all-in debt. The credit profile of the transaction remains in line with Morningstar DBRS’ expectations.

The subject transaction comprises an interest-only (IO), floating-rate loan, collateralized by a portfolio of 17 hotel properties, with multiple formats including all-suite, full-service, limited-service, and extended-stay hotels. The portfolio totals 3,128 rooms across seven states. As of the May 2024 remittance, the trust balance of $409.7 million represented a collateral reduction of approximately 4.0% since issuance. There have been no releases of the underlying hotels; however, a parking parcel was previously released, and there have been multiple principal curtailments over the past year. All hotels in the portfolio operate under nationally recognized flags, including Hilton Worldwide Holding Inc. and Marriott International, Inc. (Marriott).

The loan is sponsored by Ashford Hospitality Trust, Inc. (Ashford), an experienced hotel investment company and publicly traded real estate investment trust. The hotels are managed by two separate companies: Marriott manages five of the hotels while Remington Lodging and Hospitality, LLC manages the remaining 12.

According to the February 2024 STR reports, the portfolio reported a T-12 ended February 29, 2024, weighted-average occupancy rate of 71.7%, average daily rate of $165, and RevPAR of $119, respectively, representing a RevPAR penetration rate of 111.9%. The most recent occupancy and RevPAR figures compare with 70.0% and $114 for the year prior, and a pre-Coronavirus Disease pandemic RevPAR of $113 as of YE2019.

The reported NCF also indicates year-over-year improvements as the portfolio continues to stabilize following performance bottoming out in 2020. This improvement is in line with Morningstar DBRS expectations, though the NCF is still lower than pre-pandemic figures. The YE2023 NCF was reported to be $37.8 million, up from $34.5 million at YE2022 and $16.4 million at YE2021. The DSCR has declined to 1.10x as of YE2023 from 1.79x the year prior as a result of increased debt service payments stemming from a higher interest rate. Morningstar DBRS notes the improving performance trends across occupancy, ADR, RevPAR, and overall NCF, in addition to the portfolio’s recent deleveraging as mitigating factors. As of the May 2024 remittance, there was $1.7 million available in an FF&E reserve, after the borrower withdrew a $0.7 million disbursement, indicating some periodic replacements or updates.

The loan’s final maturity is scheduled for November 2024. To evaluate the likelihood of a refinance, the Morningstar DBRS Value was updated with this review, based on a Morningstar DBRS NCF of $37.1 million, which represents a haircut to theservicer’s reported NCF for YE2023, and a Morningstar DBRS cap rate of 9.31% for a resulting Morningstar DBRS value of $398.3 million. This figure compares with the previous Morningstar DBRS value of $439.9 million, which was derived in 2020 utilizing pre-pandemic performance metrics. The Morningstar DBRS value derived as part of this review represents a variance of -17.1% from the 2020 appraised value and -31.9% from the issuance appraised value, and suggests a Morningstar DBRS LTV of just under 75% on the rated portion of the debt stack and just over 100% on the whole loan balance. No qualitative adjustments were made to the LTV Sizing Benchmarks. While the value decline is a noteworthy risk, there are mitigating factors in the significant principal paydown over the last few years. With the reduced trust exposure to the loan, the value decline did not result in ratings pressure with the updated LTV Sizing Benchmarks. Although the all-in Morningstar DBRS LTV suggests a refinance of the full debt could require a significant equity contribution, it is worthy to note that the sponsor has exhibited significant commitment to the collateral portfolio and the trust debt to date and Morningstar DBRS believes there should be significant incentive for the borrower and servicer to successfully resolve any issues that arise as part of the upcoming maturity.

The Morningstar DBRS credit rating assigned to Class C is lower than the result suggested by the LTV Sizing Benchmark by three notches. The variance is warranted given uncertain loan level event risk and loan level performance trends not yet demonstrated. The loan has an upcoming maturity in November 2024 with no extension options remaining. Although Morningstar DBRS believes the loan’s leverage point and performance trends suggest a healthy likelihood for refinance, the most recent NCF suggests performance has not restabilized to pre-pandemic levels.

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; https://dbrs.morningstar.com/research/427030)

Class XEXT 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 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, Inc.
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Chicago, IL 60602 USA
Tel. +1 312 332-3429

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

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

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)

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)

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