DBRS Morningstar Confirms Ratings of Hamlet Securitization Trust 2020-CRE1

DBRS Limited (DBRS Morningstar) confirmed the ratings of the following classes of Commercial Mortgage Pass-Through Certificates, Series 2020-CRE1 issued by Hamlet Securitization Trust 2020-CRE1:

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

The ratings confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar expectations. At issuance, the transaction consisted of 23 fixed-rate loans secured by 48 commercial and multifamily properties, four of which are transitional loans. The transitional loans represent 27.9% of the current pool balance and include the largest loan, 20 Broad Street (Prospectus ID #1; 11.7% of the pool). Most of the properties securing the transitional loans are of recent construction and the business plans generally consist of plans to lease up space to market occupancy levels. The pool is concentrated with loans secured by office and multifamily properties, which represent 46.3% and 19.3% of the current pool balance, respectively. The transaction is also concentrated by geographic location, with 32.2% of the pool secured by properties located in New York and the next-highest concentrations being 12.5% in Illinois and 11.0% in Connecticut.

As of the May 2021 remittance, there has been a marginal collateral reduction of 0.20% since issuance with a current pool balance of $1.9 billion. Two loans on the servicer’s watchlist were flagged for performance-related issues; these loans combine for 8.5% of the current pool balance. There are no delinquent or specially serviced loans in the pool.

The largest loan on the servicer’s watchlist, Westin Nashville, represents 5.5% of the current trust balance and is secured by a newly constructed 456-key full-service hotel located in Nashville’s South of Broadway (SoBro) submarket. The hotel is well located in proximity to a variety of demand drivers. The loan was added to the servicer’s watchlist in January 2021 after the sponsor submitted a relief request related to the ongoing Coronavirus Disease (COVID-19) pandemic. The servicer granted a modification that allowed for the waiver of furniture, fixture, and equipment (FF&E) reserve deposits for six months and allowed the borrower to utilize those funds to cover debt service shortfalls. Any funds drawn from the FF&E reserve for debt service are to be reimbursed by December 2022. In addition, seasonality reserve deposit requirements will be based on the availability of excess cash flow and monthly debt service payments were waived from November 2020 to April 2021, with 11 interest-only payments to follow the deferral period and all deferred debt service to be paid back over a 12-month period following the deferral period. As of the May 2021 remittance, the servicer reports the loan is current.

The trailing twelve months (T-12) ended September 2020 Smith Travel Research report for the property noted that the T-12 occupancy, average daily rate (ADR), and revenue per available room (RevPAR) at the subject were 42.1%, $251.77, and $106.12, respectively. Year over year occupancy has declined by 48.9% while ADR and RevPAR saw a decline of 10.0% and 54.0%, respectively. These trends aren’t necessarily surprising and, given recent reports that Nashville has removed all indoor capacity restrictions on bars, restaurants, music venues, sporting events, and all other businesses and gatherings, travel to the city is expected to continue to increase over the summer travel season, which should benefit the subject property and incentivize the sponsor to continue supporting the trust loan.

The second loan on the servicer’s watchlist, 545 & 555 North Michigan Avenue, represents 3.0% of the current trust balance and is secured by two adjacent low-rise buildings in Chicago’s Magnificent Mile district. At issuance, the 545 building was leased to luxury watch boutique retailer, Tourbillon, whose parent company is Swatch. However, the space was sublet to UGG, with the end date of the sublease coterminous with Swatch’s original lease expiry in December 2022. The 555 building was leased to The Gap, with the site serving as the retailer’s flagship store in Chicago and housing all four of the company’s product lines. However, the location was closed a few months after the retailer’s lease expiry in November 2020 and remains vacant as of May 2021. With the closure of The Gap, the combined occupancy rate across the two buildings fell to 74.0%. The Gap was paying a rate of approximately $82.00 per square foot (psf) at issuance, which was determined to be below market. As of May 2021, the space is being marketed for lease at an asking rate of $100.00 psf. Given the upheaval for retailers that was building even before the onset of the coronavirus pandemic, with several noteworthy closures in the Magnificent Mile district in the last year, the borrower could be faced with an extended lease-up period for the vacant space and the 2022 lease expiry for the remaining tenant could also present a challenge given the market dynamics. In its analysis for this review, DBRS Morningstar increased the probability of default for this loan, significantly increasing the expected loss.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the North American CMBS Surveillance Methodology (March 26, 2021), which can be found on 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 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.

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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