Morningstar DBRS Upgrades Credit Ratings on Three Classes of GS Mortgage Securities Corporation Trust 2017-SLP

DBRS Limited (Morningstar DBRS) upgraded its credit ratings on three classes of Commercial Mortgage Pass-Through Certificates, Series 2017-SLP issued by GS Mortgage Securities Corporation Trust 2017-SLP as follows:

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

In addition, Morningstar DBRS confirmed its AAA (sf) credit rating on the Class B Certificates.

All trends are Stable.

The credit rating upgrades reflect the enhanced credit support and continued deleveraging of the lodging portfolio collateralizing the underlying mortgage loan, as well as the results of the stressed scenario considered by Morningstar DBRS as part of this review, as further described below. According to the June 2024 reporting, the transaction had a balance of $486.2 million, with $47.2 million of principal repayment collected since Morningstar DBRS' last review in July 2023, in accordance with the terms of a previous loan modification and additional principal curtailments, contributing to a collateral reduction of 32.9% since issuance. Morningstar DBRS does not rate the three most subordinate certificates, which combine for a balance of $304.8 million, providing significant insulation to the rated portion of the capital stack. Based on the stressed scenario analysis, Morningstar DBRS' loan-to-value ratio (LTV) is 44.4% for the Morningstar DBRS-rated debt and 127.9% for the all-in debt.

The certificates represent the beneficial ownership interest in an interest-only (IO), fixed-rate mortgage loan with an original aggregate principal amount of $800.0 million. At issuance, the collateral consisted of the fee and leasehold interests in a portfolio 138 hotels, all but two of which were select-service, limited-service, or extended-stay formats, totaling 10,576 keys, located across 84 metropolitan statistical areas in 27 states, operating under 16 different brands across the six different flags, the majority of which were Marriott or Hilton affiliated. The sponsor for this loan is SCG Hotel Investors Holdings, L.P., an affiliate of Starwood. Starwood is a private investment firm with more than $115 billion of assets under management that focuses primarily on global real estate, having raised more than $75 billion of capital and invested in more than $240 billion of assets since 1991.

The loan was previously transferred to special servicing in November 2022 after passing its initial maturity in October 2022; however, the loan was returned to the master servicer in April 2023 after a loan modification was executed. Terms of the agreement included the release of 47 properties from the portfolio based on the required release premiums (ranging from 105% to 120% of the allocated loan amount (ALA)), which resulted in approximately $247.0 million of principal paydown, inclusive of a $15.0 million equity injection from the sponsor to bridge the gap between the net sale proceeds and the release premiums. While no additional properties have been released since, the loan modification included a loan extension through February 2024, with one additional 12-month extension option requiring a 10% principal curtailment based on the ALA, which the borrower executed, resulting in a principal paydown of approximately $40.8 million in February 2024. The agreement also included an increase to the interest rate to 5.50% from 4.60%, with the difference being applied as monthly principal curtailments and the establishment of an excess cash flow reserve, which totaled $18.7 million based on the June 2024 reporting.

There are currently 91 properties remaining in the portfolio, comprising 7,202 keys, with properties in Texas representing approximately 22.1% of the ALA. The majority of the properties are located within suburban markets with Morningstar DBRS Market Rank of 3, 4, or 5); however, Morningstar DBRS also notes the significant concentration of properties within tertiary markets (Morningstar DBRS Market Rank of 2).

Based on the most recent servicer reported financials, the portfolio had a YE2023 occupancy, average daily rate (ADR), and RevPAR figures of 68%, $121, and $83, respectively, below the pre-pandemic levels with YE2019 figures at 75.8%, $146, and $110, respectively. While the portfolio has yet to surpass pre-pandemic levels, it has shown steady improvement from the YE2021 and YE2022 RevPARs of $62 and $74, respectively, with the vast majority of properties remaining in the portfolio exhibiting RevPAR penetration rates of more than 100.0% as of YE2023, as reflected in the WA RevPAR penetration of 114.0%.

The portfolio reported a consolidated YE2023 NCF of $46.7 million (reflecting a debt coverage service ratio (DSCR) of 5.83 times (x) for the Class A Certificate and 1.57x for the full debt stack) for the remaining properties, below the comparable YE2022 NCF derived by Morningstar DBRS at last review of $53.9 million. While departmental income saw a moderate improvement, operating expenses increased by approximately $9.2 million (+8.9% YoY), when compared to the previous year, primarily driven by increased franchise fees (+20.8% YoY), general and administrative expenses (+29.5% YoY), and advertising and marketing expenses (+10.5% YoY), together accounting for $7.3 million of the increases. In addition, Morningstar DBRS notes the increased concentration of tertiary locations within the remaining portfolio, a factor that could continue to contribute to increased cash flow volatility over the remainder of the loan term.

Given the possibility that the significant collateral reduction tied to the property releases increases the risk of adverse selection (a possibility that appears bolstered by the lower market ranks for the remaining collateral compared with the portfolio as a whole at issuance), Morningstar DBRS considered a stressed scenario in evaluating the support for upgrades, driven by the principal reduction and corresponding increased credit support since the last rating action in 2023. A new Morningstar DBRS value was derived, based on a 20.0% haircut to the YE2023 NCF for the remaining collateral and a 9.75% cap rate. The resulting Morningstar DBRS value of $384.6 million represented a -53.1% variance from the corresponding issuance appraised value of $819.4 million for the remaining collateral. Despite the rise in operation expenses, this stressed analysis suggested significant cushion against future cash flow volatility, supporting the rating upgrades with this review.

Morningstar DBRS maintained the positive qualitative adjustment that was applied to the final LTV sizing benchmarks during Morningstar DBRS' last review, totaling 0.5% to account for cash flow volatility of the remaining properties in the 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.

Classes X-B 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 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.

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)

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].