Morningstar DBRS Confirms Credit Ratings on All Classes of UBSCM 2018-NYCH Mortgage Trust

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-NYCH issued by UBSCM 2018-NYCH Mortgage Trust as follows:

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

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the underlying hotel portfolio, as evidenced by the year-over-year (YOY) growth in net cash flow (NCF) and revenue per available room (RevPAR).

The underlying loan, which had an original balance of $300.0 million, is secured by the borrower's fee-simple interest in seven limited-service and extended-stay hotels in New York City, totalling 1,087 rooms. As of the June 2024 remittance, there has been $20.0 million of principal paydown, reducing the trust balance to $280.0 million. Additional debt held outside of the trust includes a subordinated mezzanine loan totalling $85.0 million.

The interest-only (IO), floating-rate loan was structured with an initial three-year term and two one-year extension options (a fully extended maturity date in February 2023). Travel restrictions and limited end-user demand caused by the COVID-19 pandemic significantly affected operations across the collateral portfolio, which resulted in the transfer of the loan to the special servicer in April 2020. The borrower requested a forbearance and an extension of the loan's maturity date, and although the loan was structured with two conditional one-year extension options, the collateral did not meet the debt yield requirements to extend the maturity date. The mezzanine lender ultimately foreclosed on the portfolio in early 2021, brought the senior loan payments current, and received a modification in June 2021, extending the maturity date to February 2024. The modification required a principal paydown of $10.0 million and a partial payment of default interest. The loan was returned to the master servicer in September 2021 as a corrected mortgage loan; however, remained on the servicer's watchlist until November 2022 as operating performance across the portfolio continued to recover.

The mezzanine lender has kept payments current since assuming the loan and executing the modification; however, in October 2023, requested the loan be transferred back to the special servicer because of a lack of refinance options at maturity. The loan was modified a second time in February 2024, terms of which included an additional $10.0 million principal paydown, a nine-month extension of the maturity date to November 9, 2024, further cash management provisions, additional guarantees, and the extension of an interest rate cap agreement. The loan returned to the master servicer in May 2024 and is no longer in special servicing. The loan documents allow the borrower to partially prepay the loan when releasing individual properties, subject to a debt yield test and a release price of 115.0% of the allocated loan amount. As of the June 2024 remittance, no properties have been released from the trust.

The seven hotels are in Manhattan submarkets that typically have very active lodging demand: Times Square (three hotels), the Financial District (two hotels), and one hotel in each of the Chelsea and Herald Square submarkets. The midmarket hotels are flagged with well-known brands including Hampton Inn (three hotels), Holiday Inn Express (two hotels), Holiday Inn, and Candlewood Suites. At issuance, occupancy rates at the properties ranged from 90.0% to 95.0% with average daily rates (ADRs) ranging from $198 to $229 per room. The previous sponsor invested $15.2 million ($13,983 per room) to undergo a portfoliowide property improvement plan prior to issuance. As of the June 2024 reporting, approximately $11.6 million was held across capital improvement and other reserve accounts.

Operating performance across the portfolio has stabilized with healthy YOY NCF growth, that has exceeded pre-pandemic levels. According to the year-end (YE) 2023 financials, the portfolio generated $25.5 million of NCF (a debt service coverage ratio (DSCR) of 1.1 times (x)), a considerable improvement from the YE2022 figure of $19.0 million (a DSCR of 1.4x) and the YE2019, pre-pandemic figure of $24.8 million (a DSCR of 1.6x). Given the floating-rate nature of the loan, debt service obligations have increased more than 70.0% between YE2022 and YE2023, placing downward pressure on the DSCR. The portfolio reported a YE2023 weighted-average (WA) occupancy rate of 80.8%, ADR of $226.0, and RevPAR of $183.0, respectively, compared with the YE2022 figures of 71.3%, $215.0, and $153.0. Although occupancy continues to trail the issuer's underwritten figure of 93.0%, the portfolio's most recently reported consolidated ADR is well above the issuance figure of $210.0.

Morningstar DBRS' analysis for this review considered a NCF of $25.0 million, which was derived by applying a 2.0% haircut to the YE2023 NCF. An 8.5% cap rate was maintained, resulting in an updated Morningstar DBRS value of $293.6 million (an implied loan-to-value ratio of 95.4%). Morningstar DBRS maintained positive qualitative adjustments, totalling 0.5% to account for generally high cash flow volatility and healthy market fundamentals. The portfolio was last appraised in June 2021, at a value of $357.5 million, compared with the issuance value of $580.7 million. The updated Morningstar DBRS value represents a -17.9% variance from the June 2021 appraised value and a -49.4% variance from the issuance appraised value.

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

Class X-NCP is an 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 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)

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].