DBRS Morningstar Assigns Ratings to Natixis Commercial Mortgage Securities Trust 2018-RIVA

DBRS Limited (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2018-RIVA (the Certificates) issued by Natixis Commercial Mortgage Securities Trust 2018-RIVA as follows:

-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at AA (low) (sf)
-- Class D at A (low) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class V1-A at AAA (sf)
-- Class V1-B at AA (high) (sf)
-- Class V1-C at AA (low) (sf)
-- Class V1-D at A (low) (sf)
-- Class V1-E at BBB (low) (sf)
-- Class V1-F at BB (low) (sf)
-- Class V1-XF at BB (low) (sf)
-- Class V2-A at BB (low) (sf)
-- Class V2-XF at BB (low) (sf)
-- Class X-EXT at AAA (sf)
-- Class X-F at BB (low) (sf)

All trends are Negative because the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic. DBRS Morningstar also designated Class F as having Interest in Arrears.

These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about October 8, 2020. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, at www.dbrsmorningstar.com. On March 27, 2020, DBRS Morningstar placed the ratings on its outstanding SASB transactions secured by hospitality properties Under Review with Negative Implications while MCR placed the ratings on its outstanding SASB transactions secured by hospitality properties Under Review Negative as the global shelter-in-place and travel restrictions related to the coronavirus have had an extreme impact on the short-term performance of this asset class. For further information on these rating actions, please see the DBRS Morningstar press release dated March 27, 2020, at www.dbrsmorningstar.com and the MCR press release dated March 27, 2020, at www.morningstarcreditratings.com.

To assign ratings to this transaction, DBRS Morningstar considered both the impact of the updated NA SASB Methodology and its scenarios attributable to the ongoing coronavirus pandemic on the ratings.

Because of the coronavirus’ significant impact on hospitality performance, DBRS Morningstar first considered the application of the updated NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology” to arrive at a baseline result, which incorporated qualitative assumptions, capitalization rates, and loan-to-value (LTV) ratio sizing benchmark quality/volatility adjustments and excluded any potential changes in current or future expected asset performance resulting from the coronavirus.

DBRS Morningstar then overlaid scenarios incorporating market value declines (MVDs) consistent with the projections in its “Global Macroeconomic Scenarios: September Update” published on September 10, 2020, on top of the baseline result to determine the impact of coronavirus-related changes in asset performance on the subject transaction on a tranche-by-tranche basis. For more information on these scenarios, please refer to the Coronavirus Impact Analysis section of this document. The global macroeconomic scenarios include a moderate decline of 15% for all commercial real estate (CRE), which acts as an average for all CRE property types. However, DBRS Morningstar expects a higher stress for hospitality properties, ranging from 25% to 45% based on the type of demand segmentation and asset location, and expects corporate demand and remote fly-to locations to be at the higher end of the value decline.

LOAN/PROPERTY OVERVIEW
The Certificates are collateralized by a $179.0 million floating-rate loan, supported by the payment stream from a mortgage secured by a portfolio of four full-service hotels with 1,265 rooms across four states. The loan has an initial term of 36 months with two one-year extension options, subject to the payment of an extension fee and a debt yield test. Release of individual properties is permitted, subject to a release price that is the higher of 80% of the net sale proceeds from the property sale and 115% of the allocated loan amount for the applicable individual property (as outlined in the loan documents). The sponsor used loan proceeds of $179.0 million, subordinate debt of $40.0 million, and sponsor equity of $115.3 million to facilitate the acquisition of the portfolio for $329.9 million and to fund a seasonality reserve totalling $1.3 million. The sponsor for this loan is Junson Capital, a Hong Kong-based real estate investment company. At issuance, the sponsor and loan guarantor was Apollo Bright LLC, an affiliate of Junson Capital. According to information provided at issuance, the guarantor reported a net worth exceeding $350.0 million and liquidity of higher than $18.0 million as of September 2017.

The portfolio comprises four hotels with a total of 1,265 rooms in Newport, Rhode Island; Alexandria, Virginia; Chicago; and Scottsdale, Arizona. Three of the four hotels operate under Marriott International, Inc. (Marriott) and Hilton Worldwide Holdings Inc. flags. Marriott manages the Newport Marriott and Westin Alexandria Old Town hotels, which are not subject to franchise fees. Both of the existing Marriott management agreements for these hotels expire over the fully extended loan term. Similarly, Hilton Management LLC directly manages the Hilton Rosemont/Chicago O’Hare hotel under a management agreement that is set to expire in December 2020, and the hotel is not subject to franchise fees. Finally, Destination Hotels, the largest independent hospitality management company in the United States, manages the Scottsdale Resort at McCormick Ranch, the lone independent hotel in the portfolio.

The portfolio has benefitted from approximately $78.9 million in capital expenditure improvements since 2012, including $58.8 million from 2015 to issuance. The hotels, with the exception of the Hilton Rosemont/Chicago O’Hare, have all undergone a recent guest-room renovation. The Newport Marriott received the highest capital improvement expenditure at $47.7 million, followed by the Scottsdale Resort at McCormick Ranch at $17.0 million since 2012. At issuance, the top-performing hotel in the portfolio was the Newport Marriott, which ranked first among its competitive set and reported an occupancy of 118.0%, average daily rate of 106.5%, and revenue per available room of 125.6%.

Because of the coronavirus pandemic, the lodging sector has experienced a unprecedented decline in demand across multiple revenue segments, which will likely put substantial stress on the collateral in the short to medium term. The loan transferred to the special servicer in April 2020; however, per the most recent reporting, the subject loan is current. The sponsor initially requested a loan modification because of coronavirus’ negative impact, but withdrew its request. Per servicer commentary, the borrower will request a loan extension beyond its maturity in February 2021. Additionally, the lender approved the borrower’s receipt of Small Business Administration Paycheck Protection Program funds.

DBRS Morningstar reanalyzed the net cash flow (NCF) derived at issuance for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The resulting NCF figure was $21.5 million and DBRS Morningstar applied a cap rate of 9.0%, which resulted in a DBRS Morningstar Value of $238.9 million, a variance of 34.4% from the appraised value of $363.9 million at issuance. The DBRS Morningstar Value implies a trust LTV of 74.9% compared with the LTV of 49.2% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the middle end of the range of DBRS Morningstar Cap Rate Ranges for lodging properties, reflecting the portfolio’s significant recent capital investment and the strong locations of three portfolio hotels within major metropolitan markets.

CORONAVIRUS IMPACT ANALYSIS
DBRS Morningstar overlaid various scenarios incorporating MVDs consistent with the projections in the “Global Macroeconomic Scenarios: September 10 Update” (https://www.dbrsmorningstar.com/research/366542) to estimate the impact of coronavirus-related changes in asset performance on a tranche-by-tranche basis for the subject transaction. The scenarios included subjecting the most recent appraised collateral value to generalized CRE asset value decline projections with an assumption of approximately 25% under the moderate scenario. In cases where the rated debt exceeded the scenario value, DBRS Morningstar assumed that a principal writedown had occurred to account for the difference. Because of the reverse-sequential allocation of losses in commercial mortgage-backed security (CMBS) transactions, DBRS Morningstar’s analysis considered the most subordinate certificate first and, if a complete principal writedown of the certificate had occurred during the scenario, DBRS Morningstar repeated the analysis for the second-most subordinate certificate and so on until the rated debt no longer exceeded the scenario value.

Under the moderate scenario, the cumulative rated debt was insulated from loss.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Classes X-EXT and X-F 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 adjusted upward by one notch if senior in the waterfall.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2020) and North American CMBS Surveillance Methodology (March 6, 2020), which can be found on www.dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on www.dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that 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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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