DBRS Morningstar Downgrades Five Ratings of Ashford Hospitality Trust 2018-KEYS, Maintains Certain Classes Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) downgraded five ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-KEYS issued by Ashford Hospitality Trust 2018-KEYS as follows:

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

DBRS Morningstar confirmed the ratings for Class A at AAA (sf) and Class B at AA (high) (sf). DBRS Morningstar also designated Class F as having Interest in Arrears, reflective of the $544,191.56 in interest shortfalls outstanding as of the September 2020 reporting. DBRS Morningstar has also maintained Classes A, B, C, D, E, and X-EXT 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 subject transaction is collateralized by six loans, which are not cross-collateralized. The senior mortgage loan proceeds of $982.0 million along with mezzanine debt of $288.2 million refinanced existing debt of $1,067.0 million, funded $14.1 million of upfront reserves and $25.6 million in closing costs, and facilitated a $163.4 million cash-equity distribution. The loans are interest only (IO) throughout the 24-month initial terms with five one-year extension options. The loans are secured by a total of 34 hotel properties located across 16 states with the largest concentration by allocated loan balance in California at 34.7%. The hotels are flagged by various brands owned by Marriott International, Hyatt Hotels Corporation, and Hilton Hotels & Resorts with a combined total room count of 7,270 keys, consisting of 19 full-service hotels with 4,767 keys; 10 select-service hotels with 1,160 keys; and five extended-stay hotels with 893 keys.

The loan sponsor is Ashford Hospitality Trust, Inc. (Ashford Hospitality Trust), a well-established owner and operator of approximately 120 hotel assets across the United States. The sponsor acquired or constructed the hotels between 1998 and 2015 with most assets acquired between 2003 and 2007. The sponsor invested approximately $227.7 million ($29,256 per key) between 2013 and 2017 with $26.7 million ($3,677 per key) budgeted for 2018, as noted at issuance. The loan transferred to special servicing on June 17, 2020, for balloon payment/maturity default. According to servicer commentary, the special servicer is in discussions with the borrower regarding the terms of a potential forbearance. The fully extended maturity date is June 2025.

The coronavirus pandemic has been particularly challenging for the sponsor given the impact to travel and corresponding sharp declines in hotel demand. According to its Q2 2020 financials, Ashford Hospitality Trust reported a $215.3 million (or $20.85 per share) loss, which was reported to be far above analysts’ expectations. Financial struggles have contributed to the sharp decline in share value, which has fallen more than 90% since the beginning of the year. Overall, DBRS Morningstar considers the collateral properties for the subject transaction to be in established suburban or peripheral urban areas with generally stable demand sources. However, increased risk factors from issuance are evident and include the sponsor’s outsize exposure to the drop in hotel demand and corresponding financial difficulties, the high DBRS Morningstar LTV derived as part of this review (and further described below), and the sizable interest shortfall on the lowest rated class. As such, downgrades were warranted.

DBRS Morningstar has requested updated figures for occupancy, average daily rate (ADR), and revenue per available room (RevPAR), but to date, not much has been provided beyond the April 2019 reports that showed a trailing 12-month weighted-average occupancy rate, ADR, and RevPAR for the portfolio of 77.9%, $164.83, and $128.37, respectively. The figures at issuance for occupancy, ADR, and RevPAR were 79.1%, $159.73, and $126.35, respectively. The servicer reported a September 2020 occupancy rate for the portfolio of 30.7%. Prior to the pandemic the portfolio displayed healthy performance with a YE2018 debt service coverage ratio of 2.59 times (x) compared with 1.99x at issuance.

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 $117.9 million and DBRS Morningstar applied a cap rate of 9.5%, which resulted in a DBRS Morningstar Value of $1,241 million, a variance of 26.3% from the appraised value of $1,683 million at issuance. The DBRS Morningstar Value implies an LTV of 79.1% compared with the LTV of 62.1% 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 portfolio’s historical performance 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 2.00% 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 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 B, C, D, and E 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 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.

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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