DBRS Morningstar Confirms Ratings on GS Mortgage Securities Corporation Trust 2017-STAY, Removes from Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) confirmed the ratings on the following classes of the Commercial Mortgage Pass-Through Certificates, Series 2017-STAY issued by GS Mortgage Securities Corporation Trust 2017-STAY:

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

All trends are Negative because the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic. The ratings have been removed from Under Review with Negative Implications, where they were placed on March 27, 2020.

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 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.

As it reviewed the ratings for 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 stress 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 $200.0 million trust loan is a floating-rate, interest-only mortgage with an initial term of three years and two one-year extension options. The loan is secured by the fee interest in a portfolio of 40 extended-stay hotels totalling 5,195 keys, an average of 132 keys per location, located in 14 states across the United States. Although somewhat concentrated in the southeast region, the portfolio is geographically diverse and relatively granular as no single hotel represents more than 4.7% of the allocated loan balance. All hotels operate under the InTown Suites flag, which is owned by the loan sponsor, Starwood Capital Group Global L.P. (Starwood). The sponsor has substantial experience in the hotel sector and acquired the collateral in 2013 from Kimco Realty Corporation as part of the acquisition of the InTown Suites platform for $735.0 million. Loan proceeds were used to refinance $174.5 million of existing portfolio debt, return $19.0 million of equity to the sponsor, and cover closing costs. The borrower exercised its first of two one-year extension options with a new loan maturity date of July 2021. The loan is currently on the servicer’s watchlist for a deferred maintenance issue. DBRS Morningstar does not consider this watchlist item to be a credit concern.

The portfolio’s performance has improved since issuance as the loan reported a YE2019 debt service coverage ratio (DSCR) of 3.18 times (x) and YE2018 figure of 3.19x, compared with the DBRS Morningstar Term DSCR of 2.57x derived at issuance. The most recent reporting based on a trailing twelve-month period ended June 30, 2020, the DSCR was reported at 3.00x. DBRS Morningstar does expect the financial performance to deteriorate further once the full impact of the coronavirus is captured. However, even though the portfolio has seen a small decline in its DSCR, the DSCR remains above issuance. In addition, the low average daily rate price point of the portfolio should be a positive aspect during the coronavirus pandemic as the properties provide medium- to long-term housing solutions for contract workers such as those in construction and an affordable alternative housing solution for individuals experiencing financial difficulty who may be unable to meet monthly rent obligations at traditional multifamily properties.

All of the properties are well-established within their respective markets and the sponsor has continued to further invest in the collateral since acquisition. Since 2013, the sponsor has spent approximately $24.1 million ($4,639 per key) on capital improvements across the portfolio. There are no franchised locations, so a property improvement plan is not required for any of the hotels. Because the average age of the portfolio assets is more than 20 years and because the rates are generally lower that at traditional hotels, the borrower is required to deposit 5.0% of the portfolio’s operating income into the furniture, fixtures, and equipment reserve on a monthly basis.

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 $25.0 million and DBRS Morningstar applied a cap rate of 10.7%, which resulted in a DBRS Morningstar Value of $233.2 million, a variance of 29.9% from the appraised value of $333.0 million at issuance. The DBRS Morningstar Value implies an LTV of 85.8% compared with the LTV of 60.0% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the higher end of the range of DBRS Morningstar Cap Rate Ranges for lodging properties, reflecting the tertiary and suburban locations of the portfolio and the property quality of the portfolio assets, while still providing some credit for the strong sponsorship of Starwood.

DBRS Morningstar made negative qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totalling 2.0% to account for property quality and market fundamentals.

CORONAVIRUS IMPACT ANALYSIS
DBRS Morningstar overlaid various scenarios incorporating MVDs consistent with the projections in the “Global Macroeconomic Scenarios: September 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.

The DBRS Morningstar rating assigned to Class E had a variance that was higher than those results implied by the LTV sizing benchmarks when market value declines are assumed under the Coronavirus Impact Analysis. This Class carries a Negative trend as DBRS Morningstar continues to monitor the evolving economic impact of coronavirus-induced stress on the transaction.

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.

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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577