DBRS Morningstar Confirms Ratings on JPMCC 2018-ASH8, Maintains Five Classes Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) confirmed the ratings on the following classes of the Commercial Mortgage Pass-Through Certificates, Series 2018-ASH8 issued by J.P. Morgan Chase Commercial Mortgage Securities Trust 2018-ASH8:

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

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

DBRS Morningstar has also maintained Classes C, D, E, F, and X-EXT Under Review with Negative Implications, given the negative impact of the coronavirus on the underlying collateral.

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 transaction’s loan is secured by eight full-service hotels (totalling 1,964 keys), seven of which are affiliated with Hilton, IHG, or Starwood, and operate under four flags (Embassy Suites by Hilton, Crowne Plaza, Hilton, and Sheraton), with one operating as an independent hotel. Loan proceeds of $395.0 million refinanced existing debt of $378.9 million, returned equity of $2.4 million, and funded upfront reserves of $5.8 million. Sponsorship for this loan is provided by Ashford Hospitality Trust, Inc. (Ashford), a publicly traded real estate investment trust, recognized as a well-established owner and operator of approximately 116 hotels across the United States. Per Ashford’s Q2 2020 earnings release, the company reported a decline of 88.3% to $16.60 in comparable revenue per available room (RevPAR) for all hotels during the quarter given the ongoing effects of the pandemic. Additionally, the average daily rate (ADR) across their portfolio of 116 hotels decreased 36.4% and occupancy decreased 81.6%.

The portfolio is largely concentrated in California (two hotels; 743 keys; 33.7% of the total loan amount), Florida (two hotels; 334 keys; 22.4% of the total loan amount), and Oregon (one hotel; 276 keys; 22.2% of the total loan amount),with the remaining collateral in Virginia, Minnesota, and Maryland. The properties were built between 1727 and 1999; however, they have all undergone renovations between 2013 and 2015. Between 2013 and November 2017, $60.2 million ($30,124 per key) of improvements were made on the various properties. Since the hotels were acquired, approximately $85.5 million ($43,534 per key) has been invested in improvements. The upfront reserves included a $2.5 million allowance for capital expenditures and a property improvement plan for the Embassy Suites Crystal City asset. According to the September 2020 loan-level reserve report, the replacement reserve has a balance of approximately $1.2 million.

According to the most recent servicer update, the loan transferred to the special servicer in April 2020 for imminent monetary default. The borrower requested forbearance relief, which is currently in process and expected to be resolved in October 2020. Prior to the effects of the coronavirus pandemic, the portfolio reported a YE2019 occupancy, ADR, and RevPAR of 77.5% (+0.3% year over year (YOY)), $191 (no change YOY), and $152 (+1.0% YOY), respectively. Since issuance, however, occupancy has decreased 5.3% across the portfolio while net cash flow (NCF) has declined 9.4% from 2018 to 2019 as a result of a decrease in other departmental revenue of 9.6% and 3.1% increase in food and beverage expenses. The YE2019 NCF of $33.7 million is 5.9% below DBRS Morningstar’s NCF at issuance of $35.8 million, driven by a substantial increase in total operating expenses to $51.5 million at YE2019 versus DBRS Morningstar’s estimate of $41.0 million

DBRS Morningstar reanalyzed the 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 $34.0 million and DBRS Morningstar applied a cap rate of 9.22%, which resulted in a DBRS Morningstar Value of $372.8 million, a variance of 28.7% from the appraised value of $523.1 million at issuance. The DBRS Morningstar Value implies an LTV of 106.0% compared with the LTV of 75.5% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is in the middle of the range of DBRS Morningstar Cap Rate Ranges for lodging properties, reflecting the geographic diversity of the collateral as the assets are located across six states and eight metropolitan statistical areas in addition to substantial capital investment into the portfolio since 2013.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totalling 1.00% to account for cash flow volatility, property quality, and market fundamentals. DBRS Morningstar also made other negative adjustments to account for the partial pro rata pay structure within the trust.

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 45% 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 through Class F exceeded the value under the Coronavirus Impact Analysis and therefore DBRS Morningstar presumes that the economic stress from coronavirus had affected the Class.

The DBRS Morningstar ratings assigned to Classes C, D, E, and F had variances that were generally higher than those results implied by the LTV sizing benchmarks when MVDs are assumed under the Coronavirus Impact Analysis. These classes remain Under Review with Negative Implications 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.

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 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.

DBRS Morningstar’s North American CMBS analytical team will continue to monitor the transaction to evaluate the increased risk factors related to the coronavirus pandemic. As information (e.g., updated property-level financials, Smith Travel Research Reports, new valuations for specially serviced loans, and workout and/or modification specifics, if applicable) becomes available, DBRS Morningstar will address the Under Review with Negative Implications rating actions over the near to moderate term. DBRS Morningstar typically endeavors to resolve an Under Review rating action within 90 days, but the circumstances surrounding these rating actions (i.e., the unknown length of the pandemic-related downturn) may result in a prolonged resolution period.

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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