Morningstar DBRS Downgrades Credit Rating on One Class of Ashford Hospitality Trust 2018-KEYS

DBRS Limited (Morningstar DBRS) downgraded its credit rating on one class of the Commercial Mortgage Pass-Through Certificates, Series 2018-KEYS issued by Ashford Hospitality Trust 2018-KEYS as follows:

-- Class E to BB (sf) from BBB (low) (sf)

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

-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (high) (sf)
-- Class D at A (low) (sf)
-- Class F at CCC (sf)

Morningstar DBRS changed the trend on Class D to Stable from Negative and maintained the Negative trend for Class E. All other trends are Stable, except for Class F, which has a credit rating that generally does not carry a trend in commercial mortgage-backed securities (CMBS) ratings.

The credit rating downgrade and Negative trend for Class E reflects the overall increased risks as a result of the continued performance declines for pools A and B. Given the performance challenges, Morningstar DBRS believes it is likely that the as-is values have collectively declined from the July 2023 appraisal values. This suggests the Class E certificate could be susceptible to losses in a liquidation scenario for those pools.

Pools C, D, and E have an upcoming final maturity date in June 2025 and, although financial performance generally trails behind Morningstar DBRS expectations from 2020 when ratings were assigned, the outlook for a successful takeout at maturity remains generally stable given the sponsor's significant capital contributions to support those pools in the last year, as further described below. The analysis conducted for this review suggests that the capital structure provides significant insulation against potential losses for Classes A, B, C, and D, supporting the credit rating confirmations and the Stable trends with this review.

The subject transaction is collateralized by the debt on a portfolio of hotel properties. The senior mortgage loan proceeds of $982.0 million, along with the mezzanine debt of $288.2 million, refinanced the existing debt of $1.1 billion and facilitated a $163.4 million cash-equity distribution. At issuance, the senior debt was split into six floating-rate interest-only (IO) loans, which are not cross collateralized or cross defaulted. As of the August 2024 remittance, there has been a collateral reduction of 32.4% since issuance due to the payoff of one formerly specially serviced loan, Pool F, with the November 2023 remittance and required partial paydowns for Pools C, D, and E in 2023. In total, the five remaining loans (known as Pools A, B, C, D, and E) are collateralized by 27 hotel properties located across various states. Since the last credit rating action, the borrower has sold two performing properties: Sheraton Hotel Bucks County Langhorne (Pool C) and One Ocean Resort Hotel & Spa (Pool D). At issuance, the six loans had an initial 24-month term with five one-year extension options.

In April 2023, all loans were transferred to the special servicer after the sponsor, Ashford Hospitality Trust, Inc. (Ashford), indicated that it would be unable to pay off the six loans (or meet the requirements for a fourth extension option that remained available) by the June 2023 maturity date. The terms of the fourth extension required a debt yield that was at least 25 basis points higher than the issuance debt yield of 12.9%. In July 2023, Ashford issued a press release stating that they had agreed to make the necessary paydowns for Pools C, D, and E in the amounts of $62.0 million, $26.0 million, and $41.0 million, respectively, in order to meet the debt yield requirements for the fourth extension. Following the paydowns, the maturity dates for Pools C, D, and E were extended by one year and the loans were returned to the master servicer. Most recently, a one-year extension to June 2025 was executed for those three pools. Pools A and B have remained with the special servicer.

According to the special servicer, the workout strategy for both Pools A and B is to transfer the majority of the collateral properties to the trust via a deed-in-lieu (DIL) of foreclosure. These pools combine for 14 properties and, according to the most recent servicer commentary, a receiver was appointed in March 2024 with the lender foreclosing on two Texas properties in July 2024. A DIL was accepted on 10 other properties in August 2024. For the two other properties, one is being sold through the receiver while the remaining property's workout is still to be determined.

As of the trailing three-month (T-3) financials for the period ended March 31, 2024, Pools A and B reported net cash flow (NCF) of $12 million and $6.4 million, respectively, with both pools reporting positive NCF growth over YE2022. YE2023 financials were not made available for those pools. Performance has generally continued to improve from the pandemic-driven lows but remains well below pre-2020 levels. The servicer provided financials for Pools C, D, and E for the T-12 period ended March 31, 2024, which showed financial performance in line with previous years' reporting, with the exception of Pool D, where performance continues to lag pre-pandemic metrics. The performance for Pool D has stabilized and reported cash flows have come back in line with the Morningstar DBRS NCF derived in 2020 when ratings were assigned.

According to the July 2024 STR reports, Pools A and B reported a T-12 weighted-average (WA) occupancy rate, average daily rate (ADR), and revenue per available room (RevPAR) of 67%, $144, and $97, respectively, showing slight declines from the respective May 2023 figures of 68%, $140, and $96. The WA RevPAR penetration rate as of July 2024 was 106%, generally in line with the rate of 104% for the prior year. The performing Pools C, D, and E reported T-12 ended July 31, 2024, WA occupancy, ADR, and RevPAR figures of 75%, $197, and $149, respectively, all slight increases from the May 2023 figures. RevPAR penetration also increased slightly, to 114%, up from 112% from the prior year.

Given two of the remaining five pools will remain in special servicing with a liquidation ultimately expected to occur, as well as the near-term final maturity dates in June 2025 for the other three pools, Morningstar DBRS conducted a recoverability analysis in evaluating the credit risks for this transaction. The liquidation scenario considered for Pools A and B was based on a significant haircut to the July 2023 appraised values given the expectation that values have since declined given the reporting metrics provided by the special servicer. The analysis suggested loss severities in excess of 30% for Pool A and 70% for Pool B. The most recent appraisals available for the Pool C, D, and E collateral properties are as of March 2021. Conservative haircuts to those values suggested a full recovery of the principal balance for all three loans remains relatively likely. In addition to the stable-to-improving performance metrics for those pools from the 2021 periods considered as part of the appraisals, there is also cushion against loss in the combined principal paydown of $129 million in 2023 made as part of the maturity extension. The total implied liquidated loss amount, all from Pools A and B, is in excess of $150 million. That would be contained to the CCC (sf)-rated Class F certificate; however, given the significantly reduced credit support implied by that scenario, as well as the generally increased volatility with the pending resolutions for Pools A and B, the credit rating downgrade to below investment grade for the Class E certificate, and Negative trends for that certificate, are warranted.

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 Factors in Credit Ratings (August 13, 2024; https://dbrs.morningstar.com/research/437781)

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.

The credit ratings of this transaction are highly subject to the assets liquidation values because the deal is in windown with some nonperforming assets. As a result, a performing loan sensitivity whereby Morningstar DBRS stresses the Morningstar DBRS Cap Rate and Morningstar DBRS NCF to evaluate the impact of a Morningstar DBRS value decline was not completed. 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.

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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)

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, 2024; https://dbrs.morningstar.com/research/438283/north-american-commercial-mortgage-servicer-rankings)

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 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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.