Morningstar DBRS Assigns Provisional Credit Ratings to Atrium Hotel Portfolio Trust 2024-ATRM

DBRS, Inc. (Morningstar DBRS) assigned provisional credit ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2024-ATRM (the Certificates) to be issued by Atrium Hotel Portfolio Trust 2024-ATRM (the Trust):

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

All trends are Stable.

The Atrium Hotel Portfolio Trust 2024-ATRM transaction is secured by the borrower's fee-simple and/or leasehold interests in 24 hospitality properties across 14 states. The portfolio totals 6,106 keys and includes 14 properties that operate under the Hilton brand family (3,946 keys, representing 73.5% of the allocated loan amount (ALA)), nine properties that operate under the Marriott brand family (1,859 keys, representing 21.5% of ALA), and one independent property (301 keys, representing 5.1% of ALA). The portfolio includes 18 full-service hotels (5,060 keys), three limited-service hotels (609 keys), and three extended-stay hotels (437 keys). The properties were constructed between 1992 and 2009, with a weighted-average (WA) year built of 2003 and a WA year renovated of 2015.

The sponsor of the transaction is Atrium Holding Company (Atrium), a leading owner and operator of hospitality properties in the United States. Atrium has acquired approximately $5 billion of hospitality properties since 2001 and has a portfolio of 77 hotels totaling approximately 20,000 keys across 28 states. Atrium acquired 21 of the 24 properties in the subject portfolio out of a bankruptcy reorganization of The Revocable Trust of John Q. Hammons and its affiliates. Nineteen of these properties were acquired in 2018 and securitized in the AHPT 2018-ATRM transaction. The sponsor acquired the remaining five properties between 2005 and 2019; three have existing debt (two of which were securitized), while two are currently unencumbered.

From 2019 to July 2024, the borrower invested approximately $121.1 million ($19,830 per key) into property improvement plan (PIP) renovations and other capital expenditures across the portfolio, with investment at each property ranging from $4,085 per key to $56,606 per key. The borrower plans to spend approximately an additional $126.1 million ($20,659 per key or $34,466 per renovated key) from Q4 2024 to 2029 to complete brand-mandated PIP renovations at 14 properties. From 2019 to 2023, properties in the portfolio that received full renovations experienced revenue per available room (RevPAR) penetration growth of 16.5%, compared with 1.0% for nonrenovated properties. Morningstar DBRS believes that the future PIP renovations will help the portfolio maintain or improve its competitive position and sustain its current RevPAR growth.

The brand-mandated PIP renovations will be partially funded by a $40.0 million upfront PIP reserve. The remaining approximate $86.1 million of renovation costs will be funded via an ongoing monthly PIP work, replacements, and furniture, fixtures, and equipment reserve in the amount of 4% of gross revenue and an additional ongoing monthly reserve in the amount of $1.0 million per month that begins in November 2026. Morningstar DBRS considers using ongoing reserves to fund future capital improvements to be a less prudent loan feature for loans secured by hospitality properties compared with reserving all costs for future capital improvements upfront. Morningstar DBRS considered the portfolio's reliance on ongoing reserves to fund the brand-mandated PIP renovations when making adjustments to the Morningstar DBRS loan-to-value (LTV) Sizing Benchmarks.

The largest properties by net cash flow (NCF) for the trailing 12-month period ended August 31, 2024 (T-12 2024), are Rogers (Bentonville) Embassy Suites, which represents approximately 11.6% of the T-12 2024 NCF; Frisco Embassy Suites, which represents approximately 7.7% of the T-12 2024 NCF; and Hilton Long Beach, which represents approximately 6.7% of the T-12 NCF. The portfolio is located across 14 states and 21 distinct metropolitan statistical areas, with the largest concentrations by ALA in Texas (18.4% of ALA), Arkansas (14.3% of ALA), Nebraska (11.1% of ALA), and Missouri (10.3% of ALA). Most properties in the portfolio are in areas with a Morningstar DBRS Market Rank of 2 (41.4% of ALA), 3 (21.3% of ALA), or 5 (21.2% of ALA), and the portfolio has a Morningstar DBRS WA Market Rank of 3.3. The majority of the properties are in suburban areas within secondary or tertiary markets, but they benefit from being near local demand drivers.

In 2019, prior to the coronavirus pandemic, the portfolio achieved an occupancy rate of 68.8% and an average daily rate (ADR) of $145.63, resulting in a RevPAR of $100.13. Following a significant decline during 2020 because of the pandemic, the portfolio's performance was able to recover to pre-pandemic levels by 2022, with the YE2022 RevPAR of $101.83 representing a 1.7% increase over the YE2019 RevPAR. Over the past two years, the portfolio has continued to experience consistent topline growth. During the T-12 2024, the portfolio achieved a RevPAR of $115.55, representing a 15.4% increase over the YE2019 RevPAR and a 3.2% increase over the YE2023 RevPAR. The portfolio achieved a WA RevPAR penetration of 127.3% during the T-12 ended July 31, 2024, and did not see WA RevPAR penetration decline to less than 105.9% between 2015 and 2023, indicating that the majority of properties in the portfolio have historically outperformed their respective competitive sets. Based on an occupancy rate of 70.1% and an ADR of $161.81, Morningstar DBRS concluded a RevPAR of $113.46, which is 1.8% lower than the T-12 2024 RevPAR of $115.55 and 1.4% greater than the YE2023 RevPAR of $111.93.

The portfolio's appraised value is approximately $1.45 billion, which includes a premium of approximately 4.8% for the treatment of the individual properties as a portfolio; this equates to a moderately high Issuer LTV of 68.0%. Without the portfolio premium, the Issuer LTV increases to 71.3%. The Morningstar DBRS-concluded value of approximately $1.11 billion ($181,753 per key) represents a 23.4% discount to the appraised value and results in a Morningstar DBRS whole loan LTV of 88.8%, which indicates high-leverage financing.

Morningstar DBRS' credit rating on the Certificates addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related Principal Distribution Amounts and Interest Distribution Amounts for the rated classes.

Morningstar DBRS' credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, the credit ratings do not address Yield Maintenance Premiums.

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) at https://dbrs.morningstar.com/research/437781.

The Class X certificates are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche, possibly 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 the North American Single-Asset/Single-Borrower Ratings Methodology (September 19, 2024), https://dbrs.morningstar.com/research/439699.

Other methodologies referenced in this transaction are listed at the end of this press release.

With regard to due diligence services, Morningstar DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of Morningstar DBRS' methodology, Morningstar DBRS used the data file outlined in the independent accountant's report in its analysis to determine the credit ratings referenced herein.

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.

A provisional credit rating is not a final credit rating with respect to the above-mentioned securities and may change or be different than the final credit rating assigned or may be discontinued. The assignment of final credit ratings on the above-mentioned securities is subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalize the credit ratings.

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

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283
-- Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria, (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- Rating North American CMBS Interest-Only Certificates (June 28, 2024), https://dbrs.morningstar.com/research/435294

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