DBRS Morningstar Changes Trends on All Classes of HMH Trust 2017-NSS to Stable from Negative

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2017-NSS issued by HMH Trust 2017-NSS as follows:

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

DBRS Morningstar also changed the trends on all classes to Stable from Negative. The trend changes reflect the easing pressure from the initial phases of the Coronavirus Disease (COVID-19) pandemic and improving performance of the underlying collateral as further discussed below.

The $204.0 million trust mortgage loan is secured by the fee-simple interest in one hotel and leasehold interests in 21 hotels across nine different states, with the largest concentrations in California, Florida, and North Carolina. The capital stack includes a $25.0 million mezzanine loan held outside of the trust, and the trust permits an additional $26.0 million mezzanine loan; however, additional mezzanine debt has not been obtained. The mezzanine loans are co-terminous with the trust mortgage loan, which matures in July 2022. The properties have solid brand affiliation, with either Hilton Worldwide Holdings Inc., Hyatt Hotels Corporation, Marriott International, Inc., or Choice Hotels International, Inc. flags on each hotel. All franchise agreements expire subsequent to loan maturity. Nearly half the pool operates as extended-stay hotels, with the remaining operating as either limited-service or select-service hotels. The sponsor for the loan is Jay H. Shidler, founder of The Shidler Group, which was founded in 1972 and is headquartered in Honolulu.

The loan has been in special servicing since May 2020 as a result of imminent monetary default after the borrower stopped making debt service payments and subsequently requested coronavirus-related relief. While there were initial discussions of the mezzanine lender taking title through a loan assumption and modification, terms were not reached. Amid the workout negotiations, the controlling class representative exercised its right to replace the special servicer, appointing Midland Loan Services to take over for AEGON USA Realty Advisors, LLC. The borrower has since consented to a court-appointed receiver. According to the special servicer, the receiver has entered into a listing agreement with JLL and began marketing the portfolio for sale in May 2022. No update regarding the sales process has been received to date, and given the July 2022 loan maturity, a short-term extension could be required.
At issuance, the collateral portfolio was valued at $356.6 million ($123,690 per key). Since that time, the servicer has obtained two rounds of updated appraisals, valuing the collateral portfolio on an as-is basis of $173.2 million ($60,076 per key) in November 2021 and $295.8 million ($102,601 per key) in February 2021. According to the servicer, updated appraisals have been ordered, but are not yet finalized. Based on the February 2021 value, the mortgage trust reflected an adequate loan-to-value ratio of 69.0%, increasing to 76.3% when factoring in the $21.8 million of outstanding servicer advances. Despite the increasing advances year over year (YOY), the trust mortgage loan is well supported by the recent valuations. In addition, the February 2021 appraisal reports also indicated value-add potential to the portfolio, projecting a stabilized value of $396.9 million ($137,669 per key), with stabilization periods in a two- or three-year time frame, beyond loan maturity.

Per the YE2021 financials, the portfolio reported a trailing twelve months (T-12) net cash flow (NCF) figure of $431,000 (reflecting a debt coverage service ratio (DSCR) of 0.04 times (x)), in comparison to the YE2020 NCF figure of $1.1 million (reflecting a DSCR of 0.38x). While these figures are both well below the DBRS Morningstar reanalyzed NCF figure of $19.9 million, performance continues to improve, and as such, DBRS Morningstar anticipates the improvement will be reflected in updated financial reporting. According to the most recent STR report, the portfolio reported T-12 ended March 31, 2022, occupancy, average daily rate (ADR), and revenue per available room (RevPAR) figures of 61.6% (+59.6% YOY), $124 (+19.0% YOY), and $79 (90.2% YOY), respectively, reflecting penetration rates of 107.6%, 109.9%, and 120.6%, respectively.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance (ESG) factors 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.

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.

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.

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

The principal methodology is North American CMBS Surveillance Methodology (March 4, 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 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.

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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