Morningstar DBRS Upgrades Credit Ratings on Two Classes of BBCMS Trust 2018-BXH

DBRS Limited (Morningstar DBRS) upgraded its credit ratings on two classes of Commercial Mortgage Pass-Through Certificates, Series 2018-BXH issued by BBCMS Trust 2018-BXH as follows:

--Class C to AAA (sf) from AA (low) (sf)
--Class D to AA (sf) from A (sf)

In addition, Morningstar DBRS confirmed its credit rating on the following classes:

--Class E at BBB (low) (sf)
--Class F at BB (low) (sf)

All trends are Stable.

The credit rating upgrades reflect the increased credit support provided to the bonds as a result of significant principal paydown totaling $124.2 million since issuance (a collateral reduction of 48.3%), following the release of six of the original 17 lodging properties collateralizing the underlying loan. The remaining properties within the portfolio continue to demonstrate improvements in operating performance with year-over-year growth in occupancy, average daily rate (ADR), and revenue per available room (RevPAR) metrics. Additional details are outlined below.

At issuance, the $257.0 million mortgage loan was secured by the fee-simple (16) and leasehold (one) interests in a portfolio of 17 limited-service, extended-stay, and full-service hotels totaling 2,189 keys across the United States, all of which were cross collateralized and cross defaulted. The loan is prepayable in whole or in part at any time, with individual property releases permitted, subject to a payment release price of 105.0% of the allocated loan amount for the first 25% of the original principal balance and 110.0% thereafter. For all property releases, the loan is subject to a minimum debt yield requirement equal to the greater of (1) 13.50% or (2) the lesser of the debt yield of all individual properties immediately prior to the consummation of the release and 14.0%.

The interest-only, floating-rate loan had an initial two-year term with five one-year extension options. The loan is currently on the servicer's watchlist because of its upcoming maturity in October 2024; however, the borrower has one extension option remaining. The servicer noted that the borrower has yet to confirm whether it intends to exercise the last extension option. In order to exercise the final extension option, the borrower is required to purchase an interest rate cap agreement, and the loan is subject to a 12.5 basis point increase in the current interest rate.

There are 11 hotels remaining in the portfolio, which comprise 1,454 keys, with properties in California representing approximately 42.0% of the allocated loan amount. The hotels operate under franchise agreements with three major brands¿Marriott, Hyatt, and Hilton. All franchise agreements extend beyond the fully extended loan maturity date, with expirations ranging from 2030 to 2037. The sponsor, BREIT Operating Partnership (an affiliate of The Blackstone Group) had planned to invest $14.4 million in improvements through 2023. All properties but one are located in suburban and urban markets. In addition, the remaining properties are relatively new in vintage, having a weighted-average (WA) year built of 2000.

Operating performance has steadily improved with the remaining properties in the portfolio reporting WA occupancy rate, ADR, and RevPAR metrics of 72.0%, $168.5, and $120.4 (a RevPAR penetration rate of 103.2%), respectively, for the trailing 12-month period (T-12) ended December 31, 2023. In comparison, the prior years' RevPAR figure was $110.2 with a RevPAR penetration rate of 101.9%. Based on the financial reporting for the T-12 month period ended September 30, 2023, the remaining properties within the portfolio generated net cash flow (NCF) of $16.9 million (reflecting a debt service coverage ratio (DSCR) of 1.20 times (x)), a significant improvement from the negative NCF reported in 2020 but still below the Morningstar DBRS NCF of $22.1 million for the remaining collateral. Given the floating rate nature of the loan, debt service obligations have increased considerably, placing downward pressure on the DSCR; however, Morningstar DBRS notes a mitigating factor in the active interest rate cap agreement.

Given the possibility that the significant collateral reduction tied to the property releases may have increased the risk of adverse selection, Morningstar DBRS' analysis considered a stressed scenario to further evaluate the support for credit rating upgrades. For this review, an updated Morningstar DBRS value was derived, based on a 20.0% haircut to the T-12 month ended September 2023 NCF for the remaining collateral, and a 9.6% cap rate. The resulting Morningstar DBRS value of $141.2 million represents a -56.6% variance from the issuance appraised value of $325.6 million for the remaining collateral. The resulting analysis suggests a significant amount of cushion remains against future cash flow volatility, further supporting the credit rating upgrades with this review. Morningstar DBRS maintained positive qualitative adjustments to the final loan-to-value- (LTV) sizing benchmarks used for this credit rating analysis, totaling 2.5% to account for the portfolio's globally recognized international brand affiliations and long-term management agreements, above-average quality given continuous sponsor investments, and location in some of the largest and strongest hospitality markets in the country.

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

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 Morningstar DBRS credit rating assigned to Class F is higher than the results implied by the LTV-sizing benchmarks by three or more notches. The variance is warranted when considering the results of Morningstar DBRS' stressed scenario, as outlined above and the general improvement in cash flow trends and key performance indicators evidenced over the last several reporting periods.

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 info-DBRS@morningstar.com.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

DBRS Limited
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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
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024), https://dbrs.morningstar.com/research/435293
-- 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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.