DBRS Morningstar Assigns Provisional Ratings to HIT Trust 2022-HI32

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2022-HI32 to be issued by HIT Trust 2022-HI32:

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

All trends are Stable.

The HIT Trust 2022-HI32 (HIT 2022-HI32) transaction is secured by the fee-simple and/or leasehold interests in 36 extended-stay, full-service, limited-service, and select-service hospitality properties across 18 states (the Original Properties). The Borrowers are under contract to sell four Original Properties (the Removal Properties), and DBRS Morningstar expects that the Removal Properties will be released from the collateral of the Mortgage Loan in the near term following the Origination Date. The remaining 32 properties are referred to herein as the Properties and collectively as the Portfolio. All calculations in this report are presented without regard to the Removal Properties. The Portfolio consists of 4,168 total keys and the largest portion of the Properties is categorized as select-service, which accounts for 35.6% of the allocated loan allowance (ALA). The Properties operate under various flags under the Hilton (56.2% of the ALA), Marriott (39.6% of the ALA), and Hyatt (4.2% of the ALA) brands, including but not limited to Homewood Suites (four properties comprising 19.4% of the ALA), Hilton Garden Inn (four properties comprising 17.2% of the ALA), Hampton Inn (eight properties comprising 16.7% of the ALA), and Courtyard (five properties comprising 15.9% of the ALA). The properties were constructed between 1979 and 2013 and have a weighted-average (WA) year built of 1999 and WA renovation year of 2012.

The subject financing of $465.0 million, along with a $5.3 million equity infusion from the sponsor, will go to retire $455.3 million of existing debt (includes approximately $33.2 million of debt encumbering the four Removal Properties), establish $8.0 million of upfront property improvement plan (PIP) reserve, and cover closing costs of $7.0 million. The loan is a two-year floating-rate (one-month Secured Overnight Financing Rate (SOFR) plus 5.4% per annum) IO mortgage loan with three one-year extension options. The Borrower is expected to purchase an interest rate cap agreement through July 15, 2024, with a one-month Term SOFR strike price of 4.2500%.

The transaction sponsor is an affiliate of Hospitality Investors Trust, Inc. (HIT). Founded in 2013, HIT currently owns or has an interest in a total of 98 hotels totaling 12,187 rooms across 29 states, all of which are operated under franchise or license agreements with a national brand owned by one of Hilton Worldwide, Inc.; Marriott International, Inc.; Hyatt Hotels Corporation; or one of their respective subsidiaries or affiliates.

A total of approximately $79.8 million ($19,145 per room) in capex has been invested in the subject from 2015 through 2021. There are 23 Properties, representing 70.2% of the Portfolio by ALA, that have undergone substantial renovations since 2016. Future planned capex at the subject totals approximately $92.7 million through 2027, $74.3 million of which is part of brand-mandated PIPs. In addition to the upfront $8.0 million PIP reserve, the loan is structured with a $15.0 million letter of credit and, beginning on the monthly payment date in October 2023 and on each payment date in January, April, July, and October thereafter, an ongoing $2.25 million (less the amount the Borrower has expended on scheduled PIP expenses) quarterly PIP reserve to fund the planned PIPs and ongoing monthly replacement reserves to fund the repair and replacement of furniture, fixtures, and equipment (FF&E) and routine capex. DBRS Morningstar applied a $6.7 million DBRS Morningstar value adjustment to recognize the PIP shortfall during the initial loan term.

The largest two properties by net cash flow (NCF) for the trailing 12-month (T-12) period ended April 30, 2022, are the Courtyard Flagstaff, which represents approximately 10.6% of the T-12 April 2022 NCF, and the Hilton Garden Inn Monterey, which represents approximately 10.2% of the T-12 April 2022 NCF. No other property represents more than approximately 6.0% of the Portfolio NCF. The properties average approximately 130 keys and the largest hotel, Homewood Suites Orlando International Drive Convention Center, contains 252 keys, or approximately 6.0% of the total aggregate keys in the Portfolio. The Portfolio is located across 18 states with the largest concentration by ALA in Washington and California, which account for approximately 13.3% and 13.2% of the ALA, respectively. The third-largest concentration is in Florida, which accounts for approximately 12.8% of the ALA, followed by Arizona at 10.3%, with no other state accounting for more than 9.1%.

In 2019, prior to the Coronavirus Disease (COVID-19) pandemic, the Portfolio averaged 77.3% occupancy and reported WA average daily revenue (ADR) and revenue per available room (RevPAR) of $130.58 and $101.53, respectively. While occupancy has declined, the sponsor has been successful in recovering ADR to above its pre-pandemic historical average. As of the T-12 period ended April 30, 2022, WA RevPAR penetration for the Portfolio was 111.2% based on occupancy of 70.6%, ADR of $128.50, and RevPAR of $90.72. From 2015 to 2019, the Portfolio exhibited WA occupancy, ADR, and RevPAR rates of 77.8%, $127.17, and $98.87, respectively. Based on a stabilized occupancy of 76.5% and ADR of $131.42, DBRS Morningstar’s concluded RevPAR of $100.53 is approximately 1.0% below the Portfolio’s 2019 RevPAR of $101.53. From 2015 to 2019, the Portfolio achieved an average RevPAR of $98.87. DBRS Morningstar’s concluded NCF and value for the Portfolio reflect a stabilized occupancy assumption of 76.5%, which is above the Portfolio’s 70.6% occupancy for the T-12 ending April 30, 2022 period. However, from 2015 to 2019, the Portfolio exhibited an average annual occupancy of 77.8%. Portfolio occupancy has overall been trending upward since March 2021 and, as of April 2022, was 70.6%, the highest since the pandemic began. DBRS Morningstar elected to stabilize the Portfolio and assumed occupancy in line with its pre-pandemic performance given the nationally recognized brand affiliation of the properties as well as steady pre-pandemic operating history, experienced management by nationally recognized management companies, and the sponsorship of Hospitality Investors Trust. Although certain assets in the Portfolio that are more reliant on business and group demand experience a slower recovery, others that are more focused on transient customers continue to see rapid improvement.

There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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.

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is North American Single-Asset/Single-Borrower Ratings Methodology (June 10, 2022), 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.

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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