Morningstar DBRS Upgrades Credit Ratings on Two Classes of Braemar Hotels & Resorts Trust 2018-PRME, Changes Trend on Two Classes to Stable

DBRS Limited (Morningstar DBRS) upgraded its credit ratings on the following Commercial Mortgage Pass-Through Certificates, Series 2018-PRME issued by Braemar Hotels & Resorts Trust 2018-PRME and changed the trends to Stable from Positive:

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

Morningstar DBRS confirmed its credit ratings on the following remaining classes with Stable trends:

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class E at BB (sf)
-- Class F at B (low) (sf)

The credit rating upgrades reflect the collateral's overall performance improvements following the Coronavirus Disease (COVID-19) pandemic and signs of stabilizing revenues. The trust continues to benefit from increased credit support from a partial principal paydown in June 2023. Morningstar DBRS updated the loan-to-value (LTV) sizing benchmarks based on a stressed haircut to the most recent net cash flow (NCF), which was positive pressure for the capital stack, further supporting the credit rating upgrades and resolving the previous Positive trends on Classes C and D.

The interest-only (IO) floating-rate loan is secured by four full-service hotels in four different cities: Seattle (361 keys; 31.0% of the allocated loan amount (ALA)), San Francisco (410 keys; 26.7% of the ALA), Chicago (415 keys; 22.9% of the ALA), and Philadelphia (499 keys; 19.4% of the ALA). The sponsor for the loan is Braemar Hotels & Resorts, Inc. (formerly Ashford Hospitality Prime, Inc.). The portfolio has a combined 1,685 keys managed by Marriott International, Inc. and AccorHotel Group and operates under three flags: Courtyard by Marriott, Marriott, and Sofitel.

At issuance, the trust consisted of $370.0 million of senior debt, of which $65.0 million of mezzanine debt was held outside the trust. In June 2023, a $120.6 million principal curtailment was made on the trust loan when the borrower exercised its fourth maturity extension option. The borrower also paid down the mezzanine loan by $43.6 million, resulting in a collateral reduction of 32.6% since issuance. According to the servicer, the borrower exercised its final extension option, with final maturity slated for June 2025.

According to the March 2024 financial reporting, the trailing 12-month (T-12) NCF was $31.7 million and reflected a debt service coverage ratio (DSCR) of 1.55 times, which is a slight decline from the YE2023 NCF of $32.9 million but a significant improvement from YE2021 when NCF was negative. The most recent NCF was lower than the Morningstar DBRS NCF of $36.7 million in 2020 when Morningstar DBRS assigned credit ratings, but revenues were generally higher than Morningstar DBRS' expectations and continue to improve year over year, suggesting that the lower NCF is related to increased expenses. According to the STR, Inc. report for the T-12 period ended May 31, 2024, the portfolio occupancy, average daily rate, and revenue per available room (RevPAR) figures were 69.5%, $276, and $192, respectively. This is an improvement over the prior year and issuance RevPAR figures of $178 and $188, respectively. The weighted-average RevPAR penetration for the portfolio is above 100%; however, the Sofitel Chicago Magnificent Mile and Courtyard Philadelphia Downtown reported RevPAR penetration rates of 89.3% and 94.1%, respectively.

Morningstar DBRS' analysis considered a stressed scenario to further evaluate the support for credit rating upgrades. For this review, Morningstar DBRS derived an updated value based on a haircut to the T-12 period ended March 31, 2024, NCF and an 8.7% capitalization rate, which remains unchanged since issuance. The resulting Morningstar DBRS Value of $292.1 million is higher than the prior year's Morningstar DBRS Value of $270.2 million based on the T-12 period ended March 31, 2023, NCF at the time, but represents a -19.0% variance from the issuance appraised value of $370.0 million. The resulting analysis suggests a significant positive trend across the bottom half of the capital stack, further supporting the credit rating upgrades. Morningstar DBRS maintained positive qualitative adjustments to the LTV sizing benchmarks totaling 2.75% to account for the portfolio's globally recognized international brand affiliations and geographic diversity.

The Morningstar DBRS credit ratings assigned to Classes C and D are lower than the results implied by the LTV sizing benchmarks by three or more notches. These variances are warranted given that the in-place cash flows continue to lag behind issuance levels and two of the four properties in the portfolio are underperforming compared with the competitive sets, which increases the refinance risk as the loan approaches its June 2025 maturity.

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 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.

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 info-DBRS@morningstar.com.

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
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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 (July 11, 2024), https://dbrs.morningstar.com/research/436004
-- 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 dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.