DBRS Morningstar Confirms Ratings on AHPT 2018-ATRM, Maintains Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-ATRM issued by Atrium Hotel Portfolio Trust 2018-ATRM

-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (high) (sf)
-- Class D at BBB (high) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)
-- Class X-NCP at A (low) (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-NCP 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 $635.0 million mortgage loan is secured by the fee and leasehold interests in a portfolio of 24 limited-service, extended-stay, and full-service hotels, totalling 5,734 keys across 12 different states in the United States. The 24 collateral assets were acquired by the sponsor, Atrium, as part of a 35-hotel portfolio and with other various assets, out of a bankruptcy reorganization. The subject financing of $635.0 million and $112.4 million of equity from the sponsor retired approximately $672.2 million of existing debt and established an upfront reserve of $61.9 million. The upfront reserve includes a $16.0 million ($2,790 per key) upfront property improvement plan (PIP) reserve and a $44.6 million delayed advance holdback for the allocated loan amount (ALA) of the Embassy Suites – San Marcos. The delayed advanced holdback is in relation to a $1.5 million mortgage loan held by the City of San Marcos, Texas, and secured by the property. The sponsor for this loan is Atrium Hotels, one of the largest private owners and operators of full-service hotels in the United States.

The subject portfolio of 16 full-service hotels, four extended-stay hotels, and four limited-service hotels are all cross-collateralized and cross-defaulted and operate under franchise agreements with either Hilton Hotels & Resorts or Marriott International, except for one property that operates independently. The portfolio benefits from its granularity as only one property represents more than 10.0% of the ALA, while the largest concentration of collateral resides in Texas (three hotels; 948 keys; 22.3% of the ALA), with no other state having more than 20.0% of the ALA. Prior ownership had invested $119.5 million ($20,836 per key) of capital expenditures across the collateral portfolio since 2011, including $29.2 million ($5,099 per key) and $30.4 million ($5,308 per key) injected in the portfolio in 2016 and 2017, respectively. The majority of assets will be required to go through PIP renovations as a result of the change in ownership that is estimated at $101.0 million for the portfolio. In addition to the $16.0 million upfront PIP reserve, the sponsor will be required to make monthly deposits equal to $40.0 million ($3.3 million per month) for the first year of the loan term and is required to make further deposits thereafter.

According to the June 2020 reporting, the portfolio reported a year-to-date occupancy, average daily rate, and revenue per available room (RevPAR) of 50.0%, $128, and $65, respectively. In comparison, the portfolio reported YE2019 operating figures of 68.3%, $132, and $91 and YE2018 operating figures of 70.4%, $130, and $93, respectively. In May 2020, the borrower entered into a standstill agreement that allowed for the use of reserve funds for debt service payments beginning in May 2020 and was granted a waiver of deposits into the reserve funds. Both accommodations were set to continue through July 2020; however, the borrower requested and was granted an additional 30-day extension period. Following the end of the accommodation period, the borrower is required to repay the amounts used from the reserve funds for debt service and operating expenses in 12 equal monthly installments. The loan has been extended beyond its initial maturity date to June 2021 as the borrower provided an interest rate cap agreement to the lender that was established at issuance as a maturity extension provision.

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 $72.9 million and DBRS Morningstar applied a cap rate of 10.02%, which resulted in a DBRS Morningstar Value of $$728.0 million, a variance of 27.6% from the appraised value of $1,005 million at issuance. The DBRS Morningstar Value implies an LTV of 87.2% compared with the LTV of 63.2% 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 portfolio’s track record of achieving strong RevPAR penetration figures over 100% and the geographic diversity of the portfolio across multiple states.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis totalling 1.50% to account for cash flow volatility, property quality, and market fundamentals. DBRS Morningstar also made other negative adjustments to account for the weak release price of 105% for the first 10% of the pool.

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 DRS 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 market value declines 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.

Classes X-NCP 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.

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