Morningstar DBRS Confirms Credit Ratings on All Classes of BAMLL Commercial Mortgage Securities Trust 2017-SCH

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2017-SCH issued by BAMLL Commercial Mortgage Securities Trust 2017-SCH as follows:

-- Class A-F at AAA (sf)
-- Class X-FEX at AAA (sf)
-- Class B-F at AA (sf)

All trends are Stable.

The credit rating confirmations reflect the continued improved performance of the underlying collateral, in line with Morningstar DBRS' expectations, as evidenced by the more than 20% year-over-year increase in borrower-reported revenue from YE2022 to YE2023. In addition to the strong performance metrics, the sponsor, Tishman Hotel & Realty, L.P. (Tishman), recently exercised a put option requiring Marriott International Inc. (Marriott) to purchase the land and improvements for a total of $500 million by November 2024.

The transaction consists of two separate groups of certificates split between the Fee Mortgage Group and the Leasehold Mortgage Group. The Fee Mortgage Group of certificates is backed by a $140.0 million first mortgage loan secured by the borrower's fee interest in the 2.3 acres of land occupied by the Sheraton Grand Chicago hotel, while the Leasehold Mortgage Group of certificates is backed by a $115.0 million leasehold mortgage loan secured by the leasehold interests under a ground lease on the same property. The Fee Mortgage Group of certificates (including the vertical risk retention piece) represents 100% of the beneficial interests in only the Fee Mortgage Loan. Similarly, the Leasehold Mortgage Group of certificates represents 100% of the beneficial interests in only the leasehold mortgage loan. The two loans are not cross-collateralized or cross-defaulted. Morningstar DBRS rates only three of the Fee Mortgage Group certificates (Classes A-F, X-FEX, and B-F) and does not rate any of the Leasehold Mortgage Group of certificates.

The Sheraton Grand Chicago is a 1,218-key full-service convention hotel in downtown Chicago adjacent to the Chicago River. The hotel has 125,000 square feet (sf) of dedicated meeting space comprising 43 rooms, including a 40,000-sf ballroom that holds 4,500 people. Other amenities include a fitness center, an indoor heated pool, a sun deck, a dry sauna, and a FedEx business center.

The land is leased to the owner and operator of the Sheraton Grand Chicago on a 99-year ground lease that began on January 1, 2017. Ground rent payments began at $9.0 million per year and escalate by 10.5% every five years. The loan is structured with a three-year initial term and four one-year extension options, subject to the ground lease remaining in place. The borrower has exercised each of the four extension options to date and has an upcoming final maturity in November 2024. The second, third, and fourth extension options were subject to a 0.25% extension fee. The ground lessor and ground lessee are affiliated entities owned by the sponsor, Tishman, which originally developed the hotel and opened it in 1992.

The hotel is managed by Sheraton Operating Corporation (Sheraton), a subsidiary of Starwood Hotels & Resorts Worldwide LLC, which is in turn owned by Marriott. The first of two 10-year extension options to the management agreement expired December 31, 2022. Hotel ownership has limited termination rights under the agreement. Prior to issuance, two violations of noncompete clauses, one by Sheraton in 2013 and one by Marriott, resulted in settlement agreements between the borrower and property management. As a key provision of the agreement, Marriott provides a six-year net operating income guarantee of $34.5 million (including the ground rent payment) that increases by 2.0% per year and expires in 2023. The agreement also provides the leasehold owner with an option to put the leasehold interest to Marriott in the first half of 2024; this was previously set to be exercised in 2022 but was changed to early 2024 in August 2021. As previously mentioned, Tishman exercised this put option, and Marriott is required to fund the option later this year, resulting in the elimination of their ground lease payment obligation. Upon payment, Morningstar DBRS expects the outstanding certificate balances to be repaid.

According to the STR, Inc. report for the trailing 12-month (T-12) period ended February 2024, occupancy was 65.4%, up from 54.6% at YE2022 and 26.2% at YE2021 but still lagging the pre-pandemic occupancy level of 74.8% in 2019. However, the revenue per available room (RevPAR) for the T-12 period ended February 2024 climbed to $143.25 from $118.39 at YE2022, nearing the YE2019 RevPAR of $150.05. According to the Metropolitan Pier and Exposition Authority, 180 events are slated for 2024, a substantial increase from 2023, when there were 115 events with a record $168.4 million in tax revenue; the 2024 figure is an increase of 6.3% from 2019, demonstrating that convention travelers (a major demand driver for the subject property) are on the rise.

The Sheraton Grand Chicago officially reopened in June 2021 after pandemic-related closures, and the servicer reported a YE2022 net cash flow (NCF) of $21.8 million (excluding the ground rent expense), up from the YE2021 NCF of -$7.3 million and YE2020 NCF of $20.9 million. In its first full year of being reopened, the hotel quickly rebounded, nearing the YE2019 pre-pandemic NCF of $23.6 million and Morningstar DBRS NCF of $24.3 million. While Morningstar DBRS has not received the requested YE2023 operating statement analysis report from the servicer as of the date of this press release, borrower-provided financials reflect year-over-year gross revenue growth of more than 20% as of YE2023, in line with RevPAR growth of more than 20% year over year. The Morningstar DBRS value of $270.5 million was derived at issuance, based on the Morningstar DBRS NCF and a capitalization rate of 9.00%. Morningstar DBRS expects NCF to continue to increase with the rise in leisure travel, conventions, and corporate meetings.

Morningstar DBRS' credit rating on Class B-F is higher than the results implied by the loan-to-value sizing benchmark by more than three notches. This variance is warranted given continued increases in NCF and other performance metrics, combined with Morningstar DBRS' expectation for continued stable to improving performance for the underlying asset.

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-FEX 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.
22 West Washington Street
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.

-- 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

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