DBRS Morningstar Confirms All Classes of JPMCC 2018-ASH8, Removes Five Classes From Under Review With Negative Implications

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2018-ASH8 issued by J.P. Morgan Chase Commercial Mortgage Securities Trust 2018-ASH8:

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

With this review, DBRS Morningstar removed Classes C, D, E, F, and X-EXT from Under Review with Negative Implications where they were placed on March 27, 2020. Classes C, D, and X-EXT now carry Stable trends and Classes E and F have Negative trends. DBRS Morningstar also changed the trends on Classes A and B to Stable from Negative.

The Negative trends reflect DBRS Morningstar’s concerns with the portfolio, which continues to face performance challenges as it begins to rebound after the relaxation of travel restrictions related to the Coronavirus Disease (COVID-19) pandemic.

The loan is secured by eight full-service hotels (totaling 1,964 keys), seven of which are affiliated with Hilton, IHG, or Starwood and operate under four flags (Embassy Suites by Hilton, Crowne Plaza, Hilton, and Sheraton) while one operates as an independent hotel. Loan proceeds of $395.0 million refinanced existing debt of $378.9 million, returned equity of $2.4 million, and funded upfront reserves of $5.8 million. The sponsor for this loan is Ashford Hospitality Trust, Inc. (Ashford), a publicly traded real estate investment trust that focuses on investing in upper-upscale, full-service hotels in the top 25 metropolitan statistical areas. Per Ashford’s Q2 2021 earnings call, hotels are exhibiting positive EBITDA, and revenue per available room (RevPAR) for all hotels in the portfolio increased approximately 372% compared with Q2 2020. Additionally, across its portfolio of 100 hotels (22,286 net rooms), the company foresees strong momentum in Q3 2021 as July 2021 numbers looked likely to outperform June 2021 numbers, particularly in RevPAR.

The portfolio is largely concentrated in California (two hotels, 743 keys; 33.7% of the total loan amount), Florida (two hotels, 334 keys; 22.4% of the total loan amount), and Oregon (one hotel, 276 keys; 22.2% of the total loan amount) with the remaining collateral in Virginia, Minnesota, and Maryland. The properties were built between 1727 and 1999; however, they all underwent renovations between 2013 and 2015. Between 2013 and November 2017, $60.2 million ($30,124 per key) of improvements were made on the various properties. Since the hotels were acquired, approximately $85.5 million ($43,534 per key) has been invested in improvements. The upfront reserves included a $2.5 million allowance for capital expenditures and a property improvement plan for the Embassy Suites Crystal City asset. According to the September 2021 loan-level reserve report, the replacement reserve has a balance of approximately $1.0 million.

The loan had transferred to special servicing in April 2020 for monetary default and the borrower had requested coronavirus relief. A loan modification agreement was executed in January 2021, which included the suspension of FF&E monthly deposits between April and December 2020 and reduced future debt yield extension tests.

The loan is currently being monitored on the servicer’s watchlist following its return from special servicing. Although the hotel produced negative cash flow as of YE2020 and for the trailing 12 months (T-12) ended June 30, 2021, the sponsor continues to support the loan and has funded any debt service and operating shortfalls without disruption. As of YE2020 the portfolio was 36% occupied, increasing slightly to 40% as of the T-12 ended June 2021. Prior to the pandemic, the portfolio reported YE2019 occupancy, average daily rate (ADR), and RevPAR of 77.5%, $191, and $152, respectively. Since issuance, however, occupancy has decreased 5.3% across the portfolio while net cash flow (NCF) has declined 9.4% year over year a result of a decrease of 9.6% in other departmental revenue and an increase of 3.1% in food and beverage expenses. The YE2019 NCF of $33.7 million is 5.9% below DBRS Morningstar’s NCF of $35.8 million at issuance, driven by a substantial increase in total operating expenses to $51.5 million at YE2019 versus DBRS Morningstar’s estimate of $41.0 million.

According to the STR reports for the T-12 ended June 2021, the portfolio’s three largest hotels by allocated loan amount (ALA)—the Embassy Suites Portland Downtown, Embassy Suites Santa Clara, and Hilton Orange County Costa Mesa—all reported RevPar penetration exceeding 100%. The portfolio’s largest property by ALA, Embassy Suites Portland Downtown (22.4% of ALA), reported the strongest performance among its competitors with penetration rate in excess of 100% for occupancy, ADR, and RevPar for both the trailing three months (T-3) and T-12 ended June 2021. The Sheraton Minneapolis West (5.3% ALA) reported the worst performance in the portfolio among its competitors with penetration rates below 100% for all three categories for both the T-3 and T-12. The property had experienced a sharp decline in NCF pre-pandemic after the hotel lost its top account.

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.

The DBRS Morningstar ratings assigned to Classes C, D, E, and F each had a variance that was higher than those results implied by the loan-to-value ratio (LTV) Sizing Benchmarks from the October 9, 2020, review, when market value declines were assumed under the Coronavirus Impact Analysis. The DBRS Morningstar ratings did not have any variances other than those results implied by LTV Sizing Benchmarks considered with this year’s review, when a baseline valuation scenario was used. For additional information on these scenarios, please see the DBRS Morningstar press release dated October 9, 2020, in respect of the subject transaction. DBRS Morningstar maintains Negative trends on certain classes as outlined in this press release as a reflection of its ongoing concerns with the coronavirus impact to the subject transaction.

Class X-EXT 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.

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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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.

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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