Morningstar DBRS Downgrades Credit Ratings on Six Classes of BX Trust 2017-CQHP

DBRS, Inc. (Morningstar DBRS) downgraded its credit ratings on six classes of Commercial Mortgage Pass-Through Certificates, Series 2017-CQHP issued by BX Trust 2017-CQHP as follows:

-- Class A to AA (sf) from AAA (sf)
-- Class B to BBB (sf) from AA (sf)
-- Class C to BB (sf) from A (low) (sf)
-- Class X-EXT to B (high) (sf) from BBB (low) (sf)
-- Class D to B (sf) from BB (high) (sf)
-- Class E to C (sf) from B (sf)

In addition, Morningstar DBRS confirmed the following credit rating:

-- Class F at C (sf)

Morningstar DBRS changed the trends on Classes A, B, and C to Negative from Stable, while the trends on Classes X-EXT and D continue to be Negative. Classes E and F have credit ratings that typically do not carry a trend in commercial mortgage-backed securities (CMBS).

The credit rating downgrades and Negative trends reflect Morningstar DBRS' view that the capitalization (cap) rates implied by the most recent appraised values and the most recently reported cash flows for each collateral hotel property are likely well below market, with revenue per available room (RevPAR) growth slowing or reversing for two of the three properties, suggesting the achieved sale prices could be significantly depressed by comparison.

The servicer most recently reported an annualized Q3 2023 net cash flow figure of $7.6 million for the remaining three hotels in the portfolio, with an implied cap rate of 3.1% (with a range of 2.0% to 4.7%) on the combined February 2024 appraised values of $247.2 million. Comparatively, the appraiser's cap rates ranged from 8.0% to 8.7% for the as-is value estimates. The RevPAR figures shown in the reporting provided to Morningstar DBRS as of the trailing 12-month (T-12) period ended December 31, 2024, showed that the Philadelphia and Chicago hotels had RevPAR growth of approximately $7.00 and $20.00, respectively, over the T-12 periods ended September 30, 2023, and the San Francisco hotel saw a RevPAR decline of $3.00 over the same period. While these figures suggest the combined 2024 cash flow figures should show growth over the Q3 2023 figures provided to date, all three hotels remain well below pre-coronavirus pandemic RevPAR performance and the appraiser's stabilized RevPAR figures for each.

One of the original collateral hotels, Club Quarters Hotel Boston, was liquidated from the trust in January 2025, with a sale price of $75.0 million, slightly above the $74.4 million appraised value as of February 2024. The Boston property's RevPAR growth trend over the past few years has been relatively favorable as compared with the other three properties, particularly the Club Quarters Hotels in San Francisco and Philadelphia. After repaying servicer advances and other trust expenses, a principal paydown of $31.4 million was applied with the January 2025 remittance; interest shortfalls totaling approximately $475,500 were repaid to the Class F and RR Interest certificateholders. As of the April 2025 remittance, the servicer is paying all interest due, with relatively nominal amounts outstanding for Class F from previous shortfall periods. The April 2025 reporting shows a trust exposure of $246.2 million, inclusive of $2.6 million in outstanding interest advances, with $8.0 million reported in the replacement reserve account. A 10.0% haircut to the February 2024 appraised values yields a value of $222.5 million. Given that Morningstar DBRS expects the achieved sales prices could be significantly lower than the February 2024 appraised values, particularly for the San Francisco and Philadelphia properties, the continued growth of interest shortfalls that could reduce principal repayment when the properties are disposed was a consideration for the credit rating downgrades at the top of the capital stack.

As mentioned above, according to the February 2024 appraisals, the aggregate as-is value of the remaining collateral declined to $247.2 million, representing a 14.5% decline from the October 2022 appraised values for those same properties and a 27.6% decline from the issuance appraised values. The original $273.7 million loan, along with $61.3 million of mezzanine debt and $8.1 million of sponsor equity, refinanced $336.1 million in existing debt and paid closing costs. The sponsor for this loan is Blackstone Real Estate Partners VII, L.P. (Blackstone). The underlying loan was initially collateralized by a single loan secured by a portfolio of four Club Quarters Hotels totaling 1,228 keys across four major U.S. cities: San Francisco (346 keys; 39.4% of allocated loan amount (ALA)), Chicago (429 keys; 26.4% of ALA), Boston (178 keys; 18.2% of ALA), and Philadelphia (275 keys; 16.0% of ALA). The loan transferred to the special servicer in June 2020 and has remained in special servicing and delinquent on payments since that time. Early in the workout process, it was reported that Blackstone advised the special servicer that it was not willing to inject additional capital to fund operating expenses or debt service payments. The trust took title to the Boston property in February 2024 and, as of the April 2025 commentary, the special servicer reported that foreclosure is being pursued for the remaining three properties.

In the analysis for this review, Morningstar DBRS derived a stressed value of $173.0 million, based on a 30.0% haircut to the February 2024 appraised values. Previously, Morningstar DBRS was considering a 15.0% haircut to the February 2024 appraised values for the portfolio; however, because of the factors as previously described in the low implied cap rates and the RevPAR trends continuing to show lags from the stabilized figures, a higher haircut was warranted. The previous qualitative adjustments in the LTV Sizing of -0.5% for cash flow volatility because of the collateral's reliance on business travel and 1.25% for market fundamentals because of the hotels' locations in prime central business district markets (net positive adjustment of 0.75%) were not applied with this review given the continued performance lags and concerns about investor appetite for the hotels amid the current environment. The resulting LTV Sizing Benchmarks supported the credit rating downgrades with this review.

Although the loan is in special servicing and the trust is expected to ultimately take title of the remaining three properties and liquidate the remaining assets, the timeframe for the final resolution remains unknown. In a hypothetical liquidation scenario based on the $173.0 million Morningstar DBRS Value, Morningstar DBRS projected liquidated losses of $88.4 million, with a loss severity of 36.7% and losses contained to the Class E and F certificates. The loss severity and likelihood of liquidated losses reaching classes further up in the capital stack is notably sensitive to further stresses to the Morningstar DBRS Value and/or increased interest shortfalls through the remainder of the workout period given the relatively skinny Class C and D balances. These factors were also considered in the rationale for the credit rating downgrades 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 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.

Class X-EXT is an interest-only (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 (February 28, 2025) https://dbrs.morningstar.com/research/448963.

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

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.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

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, Inc.
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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 Single-Asset/Single-Borrower Ratings Methodology (February 28, 2025),
https://dbrs.morningstar.com/research/448962
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024),
tps://dbrs.morningstar.com/research/439702
-- Legal Criteria for U.S. Structured Finance (December 3, 2024),
https://dbrs.morningstar.com/research/444064
-- Interest Rate Stresses for U.S. Structured Finance Transactions (March 27, 2025),
https://dbrs.morningstar.com/research/450750
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024),
https://dbrs.morningstar.com/research/438283

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