DBRS Morningstar Changes Trends on Four Classes, Confirms Ratings on All Classes of BBCMS Trust 2018-CBM

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-CBM issued by BBCMS Trust 2018-CBM as follows:

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

With this review, DBRS Morningstar changed the trends on Classes A, B, C, and D to Stable from Negative. Classes E and F continue to carry Negative trends. The rating confirmations and the trend changes on four classes to Stable from Negative reflect DBRS Morningstar’s generally stable outlook for this transaction, given the loan modification and return to master servicer, as well as the recent transfer of ownership, as further outlined below. The Negative trends on Classes E and F were maintained as a reflection of the potential lasting residual effects of the Coronavirus Disease (COVID-19) pandemic, particularly for hotel property types such as those that back the underlying loan.

The $415,000,000 mortgage loan that was contributed to the subject transaction is backed by a portfolio of 30 Courtyard by Marriott select-service hotels. Additional financing includes two mezzanine loans totaling $135.0 million, which are both held outside the trust. The mortgage loan had an initial two-year term with five one-year extension options. The floating-rate loan pays interest only throughout the fully extended loan term.

The loan transferred to special servicing in April 2020 following the borrower's request for relief as a result of the decreased revenue caused by the coronavirus pandemic. The borrower failed to make the loan payments due between April 2020 and June 2020, and a notice of default was issued. In addition, the initial maturity date of July 7, 2020, was looming when the default notice was issued. Ultimately, the special servicer and borrower agreed to a loan modification that extended the maturity date to July 9, 2022 (exercising the first two extension options simultaneously), and the loan was returned to the master servicer as of March 30, 2021, as a corrected loan. Other terms of the modification included a deferral of debt service between April 2020 and September 2020; an abatement of contributions to the furniture, fixture, and equipment (FF&E) reserves for nine months; and a deferral of interest payments on the mezzanine loans until the senior loan was brought current. A cash sweep will remain in place until the trust loan is repaid.

The servicer has reported new valuations for all of the underlying properties as of July 1, 2020. On a weighted-average (WA) basis, the updated appraisals show that valuations were down 20.9% from the issuance appraisals. The issuance appraised value for the portfolio as a whole was $675.0 million, compared with the July 2020 portfolio value of $533.7 million. At issuance, the loan-to-value (LTV) ratio on the senior loan was 61.5%, and the July 2020 appraisals obtained by the servicer imply that the LTV has increased to 77.8% on the trust loan. The DBRS Morningstar value derived at issuance of $524.9 million resulted in an LTV of 79.1%.

DBRS Morningstar also notes that the original loan sponsor, Colony Capital, Inc. (Colony), transferred 100% of its interests in the borrowers to a joint venture (JV) between Highgate Capital Investments, L.P. (Highgate) and Cerberus Real Estate Capital Management, LLC (Cerberus) in March 2021. As part of the transfer, the guarantor was changed from Colony Capital Operating Company, LLC to CRE Credit Holdco II, LP. The transfer was part of a larger sale of six select-service hotel portfolios that Colony agreed to sell to the JV between Highgate and Cerberus. The sale included 197 properties, which were reportedly valued at more than $2.7 billion, for an aggregate sale price of $67.5 million and the assumption of the outstanding mortgage debt of $2.7 billion. There was no breakdown provided of the sale price by portfolio, or ultimately by individual asset.

The reporting shows an outstanding interest shortfall on Class F, which was a nominal amount of $0.02 prior to January 2021, when it increased to $705.81, and it increased again to $2,950.16 in April 2021. As of the most recent August 2021 remittance, the figure stood at $2,961.96. The servicer attributed the shortfall to Libor-related work in response to a DBRS Morningstar inquiry as to the source of the charge. Although the amount has increased significantly in the last nine months, the figure remains very small in comparison with the size of the bond in question.

The servicer provided Smith Travel Research (STR) reports as of June 2021 for 24 of the 30 collateral properties, which represent 68.6% of the pool by allocated loan amount. STR reports were not provided for the six largest properties. For the properties included in the provided reports, the trailing-three-month WA occupancy, average daily rate (ADR), and revenue per available room (RevPAR) were 60.8%, $102.64, and $63.25, respectively. The aggregate figures for the portfolio have all been trending upward but still remain below the servicer’s reported YE2019 occupancy rate, ADR, and RevPAR of 68.6%, $133.14, and $91.68, respectively, and the issuer’s figures of 73.5%, $134.64, and $99.70, respectively. Despite the decline in performance, relative to the competitive sets, RevPAR penetration rates have remained over 100% for each of the reported periods, including the trailing 12 months ended June 30, 2021, indicating that the subject properties are outperforming their competitors.

The servicer has not provided an updated operating statement analysis report since YE2019, which showed a consolidated portfolio net cash flow and debt service coverage ratio (DSCR) of $32.7 million and 2.79 times (x), respectively; however, commentary on the servicer’s watchlist notes that the analysis of the YE2020 reporting resulted in a DSCR of -0.78x.

DBRS Morningstar’s rating on Class C had a variance that was generally lower than the results implied by LTV Sizing Benchmarks, which were based on a baseline valuation scenario. Given the low in-place cash flows and uncertain timeline for the collateral hotels’ stabilization, the variances were warranted.

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.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer 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 methodology is 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.

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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