DBRS Morningstar Confirms Ratings on BBCMS 2017-DELC Mortgage Trust, Negative Trends; 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-DELC issued by BBCMS 2017-DELC Mortgage Trust:

-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class X-NCP at AA (low) (sf)
-- Class C at A (high) (sf)
-- Class D at A (low) (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 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
This transaction closed in August 2017, at an original trust balance of $507.6 million, with three mezzanine loans totalling $204.4 million held outside of the trust. The collateral for this transaction is the Hotel del Coronado, located on Coronado Island in the greater San Diego area. The underlying trust loan is interest-only (IO) throughout the term, structured with a two-year initial term with five one-year extension options. The servicer confirmed that the sponsor has exercised its second extension option, which extended the maturity date to August 2021. The loan is sponsored by Blackstone Real Estate Partners VIII L.P., an affiliate of The Blackstone Group Inc., the world’s largest alternative asset manager and real estate advisory firm. The hotel previously operated as an independent hotel but is now managed by Hilton Worldwide Holdings Inc. (Hilton) under the Curio Collection flag, one of Hilton’s upscale brands. The hotel management agreement with Hilton began in July 2017 and runs through July 2027, containing two five-year extension options.

The loan is currently on the servicer’s watchlist for an increased level of risk stemming from the coronavirus pandemic and the ensuing business disruptions. The hotel was forced to close in mid-March and was reopened to the public in mid-June. DBRS Morningstar also notes that the Borrower has alerted the Master Servicer about potential cash flow problems arising in the future. To date there has been no forbearances granted but the Master Servicer continues to monitor the situation at the collateral.

The sponsor has exhibited a strong commitment to maintaining and upgrading the property since acquiring an ownership interest in 2011. Since 2004, roughly $106.2 million ($156,363 per key on owned rooms) has been invested into the property. As of a June 2020 property inspection report, there was reportedly $330.0 million of capital expenditure budgeted for improvements through YE2021. The massive project will be completed in two phases over the next few years and will include a complete refresh of all guest rooms by 2021 in addition to various upgrades and additions throughout the collateral. As of the June 2020 report, updates have been completed for the following areas: outdoor meeting space, three-level parking structure, front restaurant, cabana, and adjoining guest suites. The planned completion date for the new spa and fitness facilities is the end of October 2020. The construction on the new 149 guest suites began in June 2020 but has been delayed by the pandemic. The overall project was under consideration at issuance but had not been finalized at the time of the loan’s closing; as such, there were no reserved funds structured for these renovations.

Per the trailing 12 months ended March 30, 2020, the subject reported an occupancy rate, average daily rate (ADR), and revenue per available room (RevPAR) of 65.6%, $436.71, and $286.51, respectively. The subject is outperforming its competitive set only in the ADR category while seeing the only positive increase of a marginal 1.0%. The occupancy rate and RevPAR declined by 14.7% and 13.8% year over year, respectively. In addition, with its unique historic status and highly desirable location with over 1,400 linear feet of ocean frontage and a relatively substantial meeting and event space footprint of over 135,000 square feet, the hotel has no true direct competition in the vicinity or even in the larger Southern California market. According to the June 2020 reporting and YE2019 financials, the servicer’s calculated debt service coverage ratio (DSCR) for the trust portion of the loan was 0.52 times (x) and 1.22x, respectively, and compared with the YE2018 DSCR of 1.81x.

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 $49.9 million and DBRS Morningstar applied a cap rate of 8.0%, which resulted in a DBRS Morningstar Value of $624.0 million, a variance of 39.6% from the appraised value of $1.0 billion at issuance. The DBRS Morningstar Value implies an LTV of 81.3% compared with the LTV of 49.1% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the middle of the range of DBRS Morningstar Cap Rate Ranges for lodging properties, reflecting the luxury nature of the collateral, lack of true competition in the immediate vicinity, as well as the strong sponsorship and significant commitment of capital to the collateral in the form of upgrades and renovations since issuance.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totalling 6.50% to account for cash flow volatility, 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 25.0% 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.

Class X-NCP is an 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.

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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