DBRS Morningstar Changes Trends to Stable, Confirms Ratings on All Classes of CSMC Trust 2017-CHOP

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2017-CHOP issued by CSMC Trust 2017-CHOP as follows:

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

In addition, DBRS Morningstar changed the trends on all classes to Stable from Negative. The Stable trends reflect the overall improved performance of the underlying collateral for the hotel portfolio loan that backs this transaction as it is showing steady recovery from the Coronavirus Disease (COVID-19) pandemic, approaching pre-pandemic levels according to the most recent financials and STR, Inc. (STR) reports.

The trust certificates represent the beneficial ownership interest in a $780.0 million, interest-only (IO), floating-rate mortgage loan. The collateral consists of the fee and leasehold interests in a portfolio of 48 select-service, limited-service, and extended-stay hotels, totaling 6,401 keys, located across 31 metropolitan statistical areas in 21 states. Geographically diverse, the greatest concentrations by allocated loan amount (ALA) are in New Jersey (13.9% of ALA), New York (12.6% of ALA), Texas (11.6% of ALA), and North Carolina (10.9% of ALA). The top 15 largest properties by ALA represent 46.3% of the total pool balance, though no single property represents more than 4.2% of the ALA or 3.2% of the total keys. The hotels operate under eight different flags across the Marriott, Hilton, and Hyatt brands. The loan was in special servicing beginning in 2020 and was ultimately resolved when a buyer for all 48 hotels was secured and the new ownership, an affiliate of Kohlberg Kravis Roberts & Co. (KKR), assumed the underlying loan.

The borrower is required to maintain an interest rate cap agreement that had a Libor strike price of 3.0% from issuance through the initial maturity date, and replacement interest rate cap agreements for each extension period with a Libor strike rate that would result in a debt service coverage ratio of at least 1.20 times. Although no properties had been released as of July 2022, the borrower may release properties from the loan by prepayment of a portion of the mortgage loan equal to (1) 105.0% of the applicable ALA with respect to releases up to the first 10.0% of the original principal balance of the loan; (2) 110.0% of the ALA with respect to releases up to 20.0% of the original balance of the loan; or (3) 115.0% of the ALA with respect to further releases, provided that the debt yield with respect to the remaining properties will be equal to or greater than the greater of (A) 8.15% or (B) the debt yield of all properties immediately prior to the consummation of such release.

The loan was modified as part of KKR’s assumption, with terms including an extension of the maturity date to June 2027, a borrower-funded debt service reserve equal to 12 months of payments, the replacement of the current property management team with Schulte Hospitality Group and Hersha Hospitality Management, and the loan remaining in cash management for the life of the extended term. KKR Real Estate Partners Americas III AIV, LP, as the replacement guarantor and environmental indemnitor, also provided a flag loss guaranty and a property improvement plan completion guaranty. KKR is a leading global investment firm with approximately $471.0 billion of assets under management as of YE2021 financials. As of March 31, 2022, its real estate team consisted of more than 150 dedicated investment and asset management professionals across nine countries, with more than $59 billion of assets under management. KKR has a 30-year history of hotel investing through its credit and private equity platforms, and prior to the assumption, KKR partnered with Riller Capital to further grow its hotel investing capabilities.

As of the July 2022 remittance, the loan is current and performing, but it is still being monitored on the servicer’s watchlist after its return from the special servicer in March 2022. According to the trailing 12-month STR reports for each of the 48 properties dated as of March 2022, the portfolio reported a weighted-average (WA) occupancy, average daily rate (ADR), and revenue per available room (RevPAR) of 65.5%, $120.59, and $79.93, respectively. In comparison, the portfolio’s competitive set reported WA occupancy, ADR, and RevPAR of 63.4%, $113.22, and $71.95, respectively, showing the portfolio is outperforming its competitive set, with a WA RevPAR penetration rate of 111.9%. While performance has not yet reached the YE2019 pre-pandemic WA occupancy, ADR, and RevPAR metrics of 76.0%, $124.73, and $95.06, respectively, the portfolio has shown steady improvements since its reported YE2020 operating figures of 46.01%, $103.95, and $47.86, respectively. Furthermore, the STR figures for March 2022 showed the occupancy rate was within 1% of the DBRS Morningstar assumptions at issuance, while ADR and RevPAR were slightly above. As of the July 2022 loan-level reserve report, the total reserves balance was reported at $8.9 million.

The portfolio had performed in line with expectations up until the outbreak of the pandemic, showing a YE2019 net cash flow (NCF) of $68.1 million, an increase of 6.9% from the issuer’s NCF of $63.7 million. The pandemic has had a disproportionate impact on lodging properties, and the portfolio reported a YE2020 NCF of only $3.5 million. The portfolio began to recover in 2021 and reported a YE2021 NCF of $34.6 million, which is still below the DBRS Morningstar NCF of $58.3 million; however, the STR metrics have continued to rebound into 2022, and the NCF is expected to continue to recover as well.

The appraiser at issuance determined the value of the portfolio to be $1.06 billion, based on a bulk sale assumption, and $941.0 million on an individual basis. Appraisals were ordered while the loan was in special servicing; however, the reports were never finalized before KKR assumed the loan for an undisclosed purchase price and brought it current. The servicer has confirmed that the purchase price was in excess of the implied DBRS Morningstar value of $613.3 million. The DBRS Morningstar value suggests a loan-to-value ratio (LTV) of 127.2% compared with the issuer’s value of $1.06 billion, implying a still relatively high LTV of 73.6%. While leverage on the entire loan is high on the DBRS Morningstar value, the LTV on the $480.0 million of rated proceeds is lower at only 78.3%.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance 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.

Class X-EXT is an 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.

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 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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