DBRS Morningstar Changes Trend on One Class, Confirms All Ratings on BBCMS Trust 2018-BXH

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

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

DBRS Morningstar changed the trend on Class F to Stable from Negative, reflecting the continued performance gains of the underlying collateral as further discussed below. All other trends remain Stable.

At issuance, the collateral for the trust was a $257.0 million first-mortgage, floating-rate, interest-only (IO) loan with an initial two-year term with five one-year extension options, secured by the fee-simple (16) and leasehold (one) interests in a portfolio of 17 hotels comprising 2,189 guest rooms in seven states. The borrowers’ interests in each property are cross collateralized and cross defaulted. The hotels operate under franchise flags affiliated with three major brands—Marriott, Hyatt, and Hilton—with franchise agreements that extend no less than five years beyond the fully extended loan term. The trust loan proceeds were used to recapitalize the portfolio, with the sponsor retaining more than $176.0 million of equity at close. The loan benefits from strong sponsorship through BREIT Operating Partnership, an affiliate of The Blackstone Group.

To date, no relief or assistance has been requested as a result of the Coronavirus Disease (COVID-19) pandemic. However, the loan was added to the servicer’s watchlist in July 2022 for the upcoming maturity of its second extension option in October 2022. The servicer’s watchlist commentary reports that the servicer has reached out to the borrower regarding its plans for the upcoming maturity, but a response is pending. The servicer also notes that a Cash Trap Event occurred because of low debt yield; however, the borrower has executed an excess cash guaranty in lieu of a cash trap, as permitted under the loan terms. As of July 2022, the principal balance remained unchanged from the last review at $241.1 million after being reduced by approximately $15.9 million in June 2019, with that month’s remittance report classifying it as a prepayment and the $15.9 million prepayment allocated proportionally to each of the collateral properties according to the allocated loan amount (ALA) at issuance. DBRS Morningstar has requested additional information regarding the circumstances surrounding the prepayment but has not received a response. According to the July 2022 reporting, the loan had a total reserve balance of $1.3 million.

The average property age at issuance was 12 years, and nine of the 17 properties are within the top 25 lodging metropolitan statistical areas in the U.S., including Orlando, Atlanta, and San Jose, California. Five hotels (comprising 40.6% of the ALA) are full service, another five (23.5% of the ALA) are select service, five more (22.0% of the ALA) are limited service, and the remaining two (13.6% of the ALA) are extended stay. The properties most recently underwent renovations totaling $13.9 million ($6,350 per key) between 2015 and 2018. The sponsor plans to invest an additional $14.4 million ($6,578 per key) in improvements through 2023. Each of the 17 properties can be released from the mortgage and loan collateral at a release price of 105% of the allocated loan balance for the first 25% of the original principal balance of the loan, and at a release price of 110% for releases thereafter. Allocated principal balances for each hotel range from $21.0 million to $96.4 million.

The portfolio properties have performed well historically. At issuance, on a consolidated basis, the portfolio was 81.7% occupied, with an average daily rate (ADR) and revenue per available room (RevPAR) of $146.14 and $119.42, respectively. DBRS Morningstar did not receive updated STR, Inc. reports; however, according to the servicer-reported figures for the trailing 12 months (T-12) ended March 31, 2022, the consolidated occupancy rate was 71.25% with ADR of $126.70 and RevPAR of $89.26, remaining in line with the competitive sets, which reported a consolidated occupancy rate of 68.2%, ADR of $130.04, and RevPAR of $87.69, implying a RevPAR penetration rate of approximately 102%. Performance has continued to improve when compared with the YE2021 occupancy rate of 68.9%, ADR of $117.62, and RevPAR of $80.01, though it has not yet recovered to the YE2019 occupancy, ADR, and RevPAR of 79.1%, $142.61, and $113.13, respectively. The portfolio’s net cash flow (NCF) also continues to improve from the T-12 period ended March 31, 2021, when it had fallen to approximately -$2.6 million. According to the YE2021 reporting, NCF had improved to approximately $12.2 million and saw further improvement based on the T-12 period ended March 31, 2022, which reported NCF of nearly $16.0 million, though it has not yet recovered to the YE2019 NCF of $31.6 million.

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-NCP 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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