Morningstar DBRS Downgrades Credit Ratings on Two Classes of J.P. Morgan Chase Commercial Mortgage Securities Trust 2018-ASH8, Changes Trend on Four Classes to Negative

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on two classes of Commercial Mortgage Pass-Through Certificates, Series 2018-ASH8 issued by J.P. Morgan Chase Commercial Mortgage Securities Trust 2018-ASH8 as follows:

-- Class E to B (sf) from BB (low) (sf)
-- Class F to CCC (sf) from B (low) (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (sf)
-- Class X-EXT at BBB (high) (sf)
-- Class D at BBB (sf)

Morningstar DBRS changed the trends on Classes C, D, E, and X-EXT to Negative from Stable. Class F no longer has a trend given the class now has a rating that does not typically carry a trend in Commercial Mortgage Backed Securities (CMBS) ratings. The trends on all remaining classes are Stable.

The credit rating downgrades reflect the increased credit risk as exhibited in the downward pressure in the loan-to-value (LTV) sizing benchmarks following updates to the analysis with this review. The updates to the Morningstar DBRS Net Cash Flow (NCF) and the LTV sizing benchmarks were made to reflect the sustained cash flow declines for the last several years. Initially, the cash flow declines from Morningstar DBRS' expectations when the ratings were assigned in 2020 were believed to be partially related to the COVID-19 pandemic-related demand fluctuations, with the possibility that performance could improve over time. However, the trends observed in the most recent reporting suggests the cash flow impairment will be a longer-term factor. Given the proximity to the extended 2026 maturity and the below breakeven debt service coverage ratio (DSCR), the Negative trends reflect the generally increased risk of near-term default should performance continue to deteriorate.

The credit rating confirmations for the investment-grade portion of the capital stack reflect the generally low to moderate LTVs implied by the Morningstar DBRS value at the respective cumulative exposures for each class, reflecting there is significant cushion against further value deterioration and/or realized loss for those bonds. The senior classes have benefited from the increased credit support that has resulted from a total principal paydown of $60.0 million, and a sizable remaining balance of $150.6 million in below-investment-grade certificates. At issuance, the $395.0 million mortgage loan was secured by the fee and leasehold interests in a portfolio of eight full-service hotels totaling 1,964 keys across six states in the United States, all of which are cross-collateralized and cross-defaulted. To date, there have been no property releases. The portfolio is largely concentrated in California (two hotels, 743 keys; 33.7% of the allocated loan amount (ALA)), Florida (two hotels, 334 keys; 22.4% of the ALA), and Oregon (one hotel, 276 keys; 22.2% of the ALA), with the remaining collateral in Virginia, Minnesota, and Maryland.

The subject financing, along with $112.4 million of equity from the sponsor, retired $378.9 million of existing debt and established upfront reserves. All but one of the hotels are affiliated with Hilton Hotels & Resorts, IHG Hotels & Resorts, or Starwood Hotels and Resorts Worldwide, Inc. There is one hotel that operates as an independent entity. Flags within the portfolio include Embassy Suites by Hilton, Crowne Plaza, Hilton, and Sheraton Hotels and Resorts, allowing the hotels to benefit from strong brand recognition as well as brandwide reservation systems, marketing, and loyalty programs. The properties were built between 1727 and 1999; however, they all underwent renovations between 2013 and 2015. Between 2013 and November 2017, $60.2 million ($30,124 per key) of improvements were made on the various properties. Since the hotels were acquired, approximately $85.5 million ($43,534 per key) has been invested in improvements. The transaction also benefits from a strong, experienced sponsor, Ashford Hospitality Trust, a leading hotel and asset management firm and a publicly traded real estate investment trust that focuses on upscale, full-service hotels in the top 25 metropolitan statistical areas.

The loan transferred to special servicing in February 2024 due to a maturity default. A loan modification agreement was executed in April 2024 with terms that included extending the loan's maturity date to February 2025, with an option to extend it further by another year to February 2026 that requires an 8.0% debt yield. The terms also required a $10 million principal paydown, with an additional $10 million to be paid within the next six months. Additionally, the borrower is permitted to sell properties in the portfolio provided that the post-sale debt yield requirements are being met. The servicer reports the loan is current and the borrower is in compliance with the terms of the modification. As of the June 2024 loan-level reserve report, approximately $8.3 million was held across all reserve accounts.

At last review in June 2023, Morningstar DBRS changed the trends on Classes E and F to Stable from Negative based on the upward trajectory in cash flows which was evident from the increase over the 2021 figures with the YE2022 and trailing 12-months (T-12) ended March 31, 2023, NCF figures. Per the YE2023 financial reporting, the portfolio generated an NCF of $24.5 million, which was just below the YE2022 figure of $25.0 million; however, that figure is well below Morningstar DBRS NCF of $35.8 million derived in 2020 and suggests previous trends showing cash flow growth have stalled and/or reversed. The NCF decrease compared with issuance has been driven in large part by significant increases to operating expenses, specifically repairs and maintenance as well as insurance expenses. The loan is also susceptible to debt service volatility because of the floating-rate nature, resulting in a YE2023 DSCR of 0.84 times (x), below the YE2022 DSCR of 1.67x. The portfolio's consolidated occupancy has steadily improved to 69.4% at YE2023 from 36.3% at YE2020, but still trails below the Morningstar DBRS concluded occupancy rate of 77.5% in 2020. Furthermore, RevPAR as of the YE2023 reporting was $132.47, compared with the RevPAR of $133.49 assumed by Morningstar DBRS in 2020 when ratings were assigned. On an aggregate basis, the portfolio has generally outperformed its competitive set, with occupancy, average daily rate and revenue per available room penetration rates of 108.8%, 98.7%, and 107.2%, respectively, for the trailing 12 months (T-12) ended March 31, 2024.

Given the sustained delta between the in-place cash flows and the Morningstar DBRS NCF derived in 2020, an updated Morningstar DBRS value was derived with this review, with the resulting LTV Sizing Benchmarks suggesting downward pressure, most notably for Classes C through F. A Morningstar DBRS NCF of $23.9 million was derived by applying a 2.0% haircut to the YE2023 NCF figure. A 9.2% cap rate was applied to that value, resulting in an updated Morningstar DBRS value of $259.9 million (an implied LTV of 128.8%). Morningstar DBRS maintained positive qualitative adjustments, totaling 1.0% to account for cash flow volatility, property quality, and market fundamentals. The updated Morningstar DBRS value represents a -30.3% variance from the value derived in March 2020 and a -50.3% variance from the as-is issuance appraised value of $523.3 million.

The Morningstar DBRS credit ratings assigned to Classes C and D had a variance higher than the results implied by the LTV sizing benchmarks by three or more notches. The variances are warranted given the recent maturity extension, which required that the borrower contribute a total of $20.0 million in principal repayments within six months of the modification's closing date. In addition, the classes in question are generally well insulated against loss in a recoverability analysis based on the updated Morningstar DBRS value, suggesting near-term risks of loss remain generally low. Finally, both classes carry Negative trends, reflecting the increased risks as outlined above.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or 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 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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The Morningstar DBRS Long-Term Obligation Rating Scale definition indicates that credit ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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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 (June 28, 2024), https://dbrs.morningstar.com/research/435294
-- 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

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].