Morningstar DBRS Downgrades Credit Ratings on Five Classes of CLNY Trust 2019-IKPR, Assigns Negative Trends

DBRS Limited (Morningstar DBRS) downgraded the credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2019-IKPR issued by CLNY Trust 2019-IKPR as follows:

-- Class B to AA (low) (sf) from AAA (sf)
-- Class C to A (low) (sf) from AA (low) (sf)
-- Class D to BB (sf) from A (low) (sf)
-- Class E to B (low) (sf) from BB (sf)
-- Class F to CCC (sf) from B (sf)

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

-- Class A at AAA (sf)
-- Class G at CCC (sf)

Negative trends were maintained for Classes D and E, while the trends on Classes A through C were changed to Negative from Stable. Classes F and G have credit ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) credit ratings.

The credit rating downgrades and Negative trends reflect the downward pressure in the loan-to-value (LTV) sizing benchmarks following updates to Morningstar DBRS' analysis with this review, which reflects the portfolios sustained net cash flow (NCF) declines when compared to the Morningstar DBRS NCF derived when the credit ratings were assigned in 2020. In addition, the loan was modified to allow for little to no deleveraging in order to exercise its remaining two one-year extension options, therefore increasing the refinance risk and further supporting the Negative trends.

The interest-only (IO), floating-rate loan is secured by a portfolio of 46 extended-stay, limited-service, and full-service hotels in 16 states across the U.S. with approximately 6,000 guest rooms. The majority of the portfolio consists of extended-stay hotels, representing nearly 80.0% of total rooms. These hotels operate under the Marriott, Hyatt, and Hilton brands, in addition to eight different sub-brands. There have been no property releases to date, and all hotels are conjoined by cross-defaulted and cross-collateralized mortgages, deeds of trust, indenture deeds of trust, or similar instruments applicable in each jurisdiction, plus liens on the furniture, fixture, equipment, and leases.

With the July 2023 credit rating action, Morningstar DBRS assigned Negative trends on Classes D, E, and F as the YE2022 NCF of $54.3 million was well below the Morningstar DBRS NCF of $73.1 million; however, the collateral had shown steady improvement in NCF year over year since the onset of the coronavirus pandemic and a positive trajectory in the revenue per available room (RevPAR). With the YE2023 reporting, NCF has further declined to $46.5 million, widening the delta from Morningstar DBRS' expectations. The decline was primarily driven by an increase in expenses, notably insurance, advertising and marketing, general and administrative, and room expenses. In addition, because of the floating-rate nature of the loan, the debt service has increased substantially with the YE2023 figure for the A-Note component at $56.9 million (resulting in a debt service coverage ratio (DSCR) of below 1.0 times (x)), compared to YE2022 of $26.5 million and YE2021 of $19.0 million. It is worthy to note that the borrower is required to purchase an interest rate cap agreement with each extension option where a minimum DSCR of 1.10x is achieved. The volatility in NCF, despite improvements in revenues, and the unlikely scenario of NCF rebounding near Morningstar DBRS' expectations supports the credit rating downgrades and Negative trends.

The loan was modified where the required debt yield requirement to exercise the fourth extension option was waived, which would extend the loan to November 2025, while the final extension option now requires a debt yield of only 7.75% for the senior debt instead of the original 10.2% threshold. In addition, the borrower's contribution to cure the debt yield hurdle was capped at $10.0 million on the senior debt, thereby inhibiting the loan to de-lever upon final maturity. Other terms of the modification included the removal of mezzanine debt service payments from the waterfall in the cash management agreement to allow additional cash to be trapped. In the event a property is released, the debt yield for the remaining properties in the loan must be greater than or equal to the debt yield prior to release, compared to the original debt yield requirement of 10.2% on the senior debt. The loan is currently on the watchlist because of a low DSCR and a cash trap event. According to the servicer, there is $15.4 million held in the cash management account. The servicer's June 2024 loan level reserve report also noted $17.7 million in repair reserves, $6.3 million in other reserves, and $4.1 million in replacement reserves.

At issuance, the initial sponsor, Colony Capital, Inc. had planned to complete a portfolio-wide property improvement plan of $113.7 million between 2019 to 2024. The servicer noted that the current loan sponsor, Highgate (an affiliate of Cerberus Capital Management, L.P.), which assumed the loan in 2021, has completed all work required by the respective franchise agreements, although the final cost was not provided. According to the T-12 period ended February 29, 2024, occupancy, average daily rate, and RevPAR reported for the majority of the properties were 69.1%, $154, and $105, respectively, which is an improvement from the T-12 period ended February 28, 2023, RevPAR of $102 but still slightly below the issuance figure of $108.

In the analysis for this review, Morningstar DBRS considered a stressed value based on the YE2023 NCF and a capitalization rate of 9.0%, which resulted in a Morningstar DBRS value of $517.4 million, compared to the prior review's analyzed value of $603.6 million. The updated value represents a -52.2% variance from the issuance value of $1.1 billion and an implied LTV of 145.9%. When including the mezzanine debt, the whole-loan LTV is 165.3%. Positive qualitative adjustments totaling 2.0% were maintained to reflect the property quality and market fundamentals as the properties are geographically diverse.

The credit ratings assigned to Classes B through D are higher than the implied ratings by the LTV sizing benchmarks by three or more notches. These variances are warranted given that RevPAR and revenues are trending upwards. However, considering the overall NCF has declined and the execution of the loan modification prevents additional principal paydown, Negative trends were assigned to Classes A through E. Morningstar DBRS will continue to closely monitor this loan and further evaluate the Negative trends assigned with this review.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

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/420982)
-- North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://dbrs.morningstar.com/research/435293)
-- Legal Criteria for U.S. Structured Finance (April 15, 2024; https://dbrs.morningstar.com/research/431205/legal-criteria-for-us-structured-finance)

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279. (July 17, 2023)

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