Morningstar DBRS Confirms All Credit Ratings on HMH Trust 2017-NSS

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2017-NSS issued by HMH Trust 2017-NSS as follows:

-- Class A at CCC (sf)
-- Class B at C (sf)
-- Class C at C (sf)
-- Class D at C (sf)
-- Class E at C (sf)

There are no trends as the CCC (sf) and C (sf) credit rating categories typically do not carry trends in commercial mortgage-backed securities (CMBS) credit ratings.

The collateral for the underlying loan consists of the fee-simple interest in one hotel and the leasehold interests in 21 hotels across nine different states, with the largest concentrations in California, Florida, and North Carolina. Morningstar DBRS previously downgraded all classes in May 2024 based on Morningstar DBRS' projected liquidated amount for the loan, which has been in special servicing since May 2020. Given the presence of additional leased fee debt on the ground underneath 21 of the 22 properties, Morningstar DBRS previously derived a look-through value for the portfolio to evaluate the recoverability prospects to the subject trust in the event of a liquidation. Morningstar DBRS had applied a capitalization rate of 9.25% to the appraiser's year two net cash flow (NCF) estimate for each property, excluding ground rent expense, and applied an additional 10% haircut to account for the potential of future value volatility over the remaining workout period, resulting in a value of $324.1 million for the portfolio's fee-simple interest.

Because the collateral is primarily composed of leasehold interests, with each property subject to substantial ground lease payments (exceeding 35% of the updated look-through portfolio NCF), Morningstar DBRS assumed that the value attributed to the leased fee would be commensurate with the $224.0 million of debt that is estimated to be outstanding on the land underneath the hotels, which would imply a value for the collateral totaling approximately $99.9 million, representing a variance of -45.0% from the May 2024 appraised value of $181.8 million. Based on the Morningstar DBRS Value of $99.9 million, Morningstar DBRS estimated that a liquidated loss of approximately $148.4 million would be realized at disposition, eroding into Class A and supporting the credit rating confirmations with this review. For more information on the previous credit rating action, please see the press release titled "Morningstar DBRS Downgrades Credit Ratings on All Classes of HMH Trust 2017-NSS" dated May 23, 2024, on the Morningstar DBRS website.

While the potential for principal loss is the primary driver for the CCC (sf) and C (sf) credit ratings, the consideration of increasing interest shortfalls prior to disposition remains a factor. Interest shortfalls totaled $13.1 million as of the April 2025 remittance, with Classes E, F, and a portion of Class D being shorted, up from a total interest shortfall amount of $8.6 million at the time of the last credit rating actions. Unpaid interest continues to accrue month over month, driven primarily by the appraisal subordinate entitlement reduction (ASER) amounts calculated by the special servicer as new appraisals have been obtained.

In February 2024, the receiver was granted full authority to convey, liquidate, or otherwise dispose of the collateral properties through a combination of deeds in lieu of foreclosure, receiver sales, or nonjudicial foreclosure sales. The Comfort Inn - Fayetteville property (3.9% of the allocated loan amount (ALA)) was liquidated in October 2024, with proceeds applied to property protection advances and principal and interest advances, with a holdback of $1.8 million for future advances. Eleven hotels have reportedly completed the deed-in-lieu process, with another six hotels in process. According to the April 2025 servicer commentary, seven properties are being targeted for June or July 2025 auctions, with one property, the Homewood Suites Phoenix (3.0% of ALA), in the process of being sold, with a closing targeted in Q2 2025. The special servicer is projecting a complete liquidation of the portfolio by Q2 2026.

The properties have solid brand affiliation, with either Hilton Worldwide Holdings Inc.; Hyatt Hotels Corporation; Marriott International, Inc.; or Choice Hotels International, Inc. flags on each hotel. Nearly half the pool operates as extended-stay hotels, with the remaining operating as either limited-service or select-service hotels. The sponsor for the loan is Jay H. Shidler, founder of The Shidler Group, which was founded in 1972 and is headquartered in Honolulu. The capital stack includes a $25.0 million mezzanine loan held outside of the trust, and the trust permits an additional $26.0 million mezzanine loan; however, additional mezzanine debt has not been obtained to date. The mezzanine loans are co-terminous with the trust mortgage loan, which matured in July 2022.

Since Morningstar DBRS' prior credit rating action in May 2024, an additional round of appraisals was obtained by the servicer, valuing the collateral portfolio on an as-is basis at $181.8 million in May 2024, in line with the August 2023 appraised value of $180.0 million and 54.6% below the issuance value of $400.4 million. Based on the most recent value, the trust loan's loan-to-value ratio (LTV) is 112.2%. Outstanding advances continue to accrue, with principal and interest advances totaling $17.7 million as of the April 2025 remittance. Accounting for all outstanding advances, ASER, and unpaid advance interest, the loan's total exposure has increased to $242.0 million from $234.7 million at Morningstar DBRS' last review, resulting in an implied LTV of approximately 133.1%.

According to the YE2024 financials, the portfolio reported a consolidated NCF of $1.8 million, representing a 67.4% decline from the YE2023 NCF of $5.7 million. Per the January 2025 STR, Inc. report, the portfolio reported a trailing 12-month occupancy, average daily rate, and revenue per available room of 65.1%, $135, and $92, respectively, generally in line with January 2024 levels. The portfolio NCF continues to lag the appraiser's expectations, suggesting that there could be increased value volatility as the properties are disposed of over the next year. Furthermore, the collateral's ground rent obligations continue to limit cash flow growth. Using the appraiser's year two NCF, which assumes a nominal amount of stabilization, the ground rent expense as a percentage of NCF exceeds 35.0%, ranging from 15.9% to 100.0% across the portfolio.

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.

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.

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 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.

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.

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 (February 28, 2025), https://dbrs.morningstar.com/research/448962
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- Legal Criteria for U.S. Structured Finance (December 3, 2024), https://dbrs.morningstar.com/research/444064
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283

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