DBRS Morningstar Downgrades Ratings on Four Classes of BX Trust 2017-CQHP

DBRS, Inc. (DBRS Morningstar) downgraded the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2017-CQHP (the Certificates) issued by BX Trust 2017-CQHP:

-- Class D to A (low) (sf) from A (sf)
-- Class E to BB (high) (sf) from BBB (low) (sf)
-- Class F to B (low) (sf) from B (high) (sf)
-- Class X-EXT to A (sf) from A (high) (sf)

DBRS Morningstar also confirmed the ratings on all other classes of Certificates as follows:

-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (high) (sf)

DBRS Morningstar maintains all classes Under Review with Negative Implications, given the negative impact of the Coronavirus Disease (COVID-19) 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 is collateralized by a single loan secured by a portfolio of hospitality properties in four cities. The portfolio comprises four Club Quarters brand-managed boutique hotels totaling 1,228 keys located across four major U.S. cities: San Francisco (346 keys; 39.4% of allocated loan amount), Chicago (429 keys; 26.4% of allocated loan amount), Boston (178 keys; 18.2% of allocated loan amount), and Philadelphia (275 keys; 16.0% of allocated loan amount). The underlying trust loan is interest-only (IO) throughout the term and was structured with a two-year initial term with three 12-month extension options. The borrower exercised the first of its three extension options, extending the maturity date to November 2020.

The sponsor for this loan is Blackstone Real Estate Partners VII, L.P. (Blackstone), which purchased the portfolio in February 2016 from Masterworks Development Corporation, an affiliate of Club Quarters. Blackstone, one of the largest real estate private equity firms in the world with roughly $167 billion in real estate assets under management, has a current real estate–owned portfolio that consists of office, retail, hotel, industrial, and residential properties, according to the company’s website.

The loan transferred to special servicing in June 2020 due to imminent monetary default. The borrower ceased making debt service payment effective April 2020 and requested coronavirus-related relief. The borrower’s request for a modification was declined by the special servicer. Blackstone is now attempting to transition the properties to the mezzanine lender, which is currently marketing the mezzanine note for sale. The hotels, which rely heavily on commercial segmentation due to the brand’s focus on business travel and member-driven corporate demand, has severely been impacted by coronavirus pandemic that caused an economic shutdown both domestically and internationally.

According to the YE2019 financials, the loan reported a debt service coverage ratio (DSCR) of 2.44 times (x), compared to the YE2018 DSCR of 2.47x and DBRS Morningstar Term DSCR at issuance of 2.50x. The YE2019 net cash flow (NCF) decline was mainly attributed to an increase in capital expenditure but when comparing the net operating income (NOI), the YE2019 figure was $32.3 million, which is slightly above the DBRS Morningstar NOI of $32.2 million. In terms of the performance metrics, the portfolio reported a YE2019 occupancy rate of 87.0%, average daily rate (ADR) of $182.41, and revenue per available room (RevPAR) of $159.53. At issuance, the portfolio reported an occupancy rate of 90.9%, ADR of $166.42, and RevPAR of $151.23. However, when examining each individual property, some reported RevPAR declines from issuance, including the Chicago property (the second-largest property by allocated loan balance). At issuance, that property reported an occupancy rate of 82.5%, ADR of $148.08, and RevPAR of $122.12. In comparison, the YE2018 RevPAR declined to $103.17 because of a decrease in occupancy to 69.3%. By YE2019, occupancy rebounded to 78.5% with an ADR of $146.73 and RevPAR of $115.19.

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 $29.3 million and DBRS Morningstar applied a cap rate of 9.04%, which resulted in a DBRS Morningstar Value of $323.6 million, a variance of 27.1% from the appraised value of $444.0 million at issuance. The DBRS Morningstar Value implies an LTV of 84.6% compared with the LTV of 61.6% 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 portfolio’s geographic diversity across four primary markets.

DBRS Morningstar made a negative qualitative adjustment for cash flow volatility and positive qualitative adjustment for market fundamentals totaling 0.75% to the final LTV sizing benchmarks used for this rating analysis.

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 A, B, 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-EXT is IO certificate 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 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.

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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