Morningstar DBRS Confirms Credit Ratings on All Classes of Atrium Hotel Portfolio Trust 2018-ATRM

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-ATRM issued by Atrium Hotel Portfolio Trust 2018-ATRM as follows:

-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (high) (sf)
-- Class X-NCP at A (low) (sf)
-- Class D at BBB (high) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the underlying hotel portfolio, as evidenced by the year-over-year (YOY) growth in net cash flow (NCF) and revenue per available room (RevPAR).

The $635.0 million mortgage loan is secured by the fee and leasehold interests in a portfolio of 24 limited-service, extended-stay, and full-service hotels totaling 5,734 keys across the United States, all of which are cross-collateralized and cross-defaulted. The portfolio is geographically diversified across 12 different states with primary concentrations in Texas (22.3% of the total loan amount), Arkansas (16.5% of the total loan amount), and Missouri (12.4% of the total loan amount). All but one of the hotels operate under franchise agreements with either Hilton Hotels & Resorts or Marriott International. As part of the sponsor's acquisition of the portfolio, at issuance all franchise agreements were extended beyond their fully extended loan maturity dates, with expirations ranging from 2028 to 2038. The transaction benefits from a strong, experienced sponsor, Atrium Hospitality, a leading hotel and asset management firm with a portfolio of 80 hotels totaling 21,000 rooms across 29 states.

The interest-only (IO), floating-rate loan had an initial two-year term with five one-year extension options. The servicer has confirmed that the borrower has exercised its fifth and final extension option, with the loan now scheduled to mature in June 2025. The loan documents allow the borrower to partially prepay the loan when releasing individual properties, subject to a debt yield test and a release price of 105.0% of the allocated loan amount (ALA) until 10.0% of the original principal balance has been repaid,110.0% of the ALA when 10.0% to 25.0% of the original principal balance has been repaid, and 115.0% of the ALA thereafter. As of the July 2024 remittance, no properties have been released from the trust.

The loan was previously in special servicing with a modification approved in 2020. The borrower was required to contribute $10.0 million to the reserve accounts as part of the modification and the 18-month repayment period for deferred amounts began in September 2021. The servicer reports the loan is current and the borrower is in compliance with the terms of the modification. As of the July 2024 reporting, approximately $28.6 million was held across all reserve accounts.

Operating performance continues to incrementally improve, with the portfolio reporting weighted-average occupancy rate, average daily rate, and RevPAR metrics of 70.3%, $144.5, and $102.7, respectively, as of the trailing 12 months (T-12) ended March 31, 2024. It is noteworthy that RevPAR has exceeded the issuance figure of $94.86. Likewise, NCF continues to trend upward, with the T-12 ended March 31, 2024 financial reporting reflecting a figure of $77.2 million, significantly higher than the YE2022 and YE2023 figures of $62.6 million and $69.5 million, respectively.

Morningstar DBRS' analysis for this review considered a NCF of $75.7 million, which was derived by applying a 2.0% haircut to the T-12 ended March 31, 2024 NCF. A 10.0% cap rate was maintained, resulting in an updated Morningstar DBRS value of $755.6 million and an implied loan-to-value (LTV) ratio of 84.0%. The updated Morningstar DBRS value is relatively in line with the Morningstar DBRS value derived during the review undertaken following the update made to the "North American Single-Asset/Single-Borrower Methodology" in 2020, but represents a -24.8% variance from the appraised value of $1.0 billion at issuance. Morningstar DBRS maintained positive qualitative adjustments to the LTV Sizing Benchmarks used for this rating analysis, totaling 1.5% to account for generally low cash flow volatility, above-average property quality, and weak market fundamentals given the collateral properties are mostly located in secondary or tertiary markets.

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 at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

Class X-NCP is 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 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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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

Rating North American CMBS Interest-Only Certificates (June 28, 2024), https://dbrs.morningstar.com/research/435294

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 (July 17, 2023).

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.