Morningstar DBRS Confirms Credit Ratings on HIT Trust 2022-HI32

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2022-HI32 (the Certificates) issued by HIT Trust 2022-HI32 as follows:

-- 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 credit rating confirmations reflect the overall stable performance of the transaction, which remains in line with Morningstar DBRS' expectations at issuance. The aggregate portfolio net cash flow (NCF) increased by a little more than 4.0% as of YE2023 from YE2022 while the occupancy rate has remained unchanged at about 75% over the same period. In addition, the transaction continues to benefit from granularity by allocated loan amount (ALA), geographic diversity, experienced management companies, and strong brand affiliation from nationally recognized hospitality brands with national reservation systems.

At issuance, the two-year, interest-only (IO), floating-rate loan was collateralized by a portfolio of 32 limited-service, extended-stay, select-service, and full-service hotels comprising 4,168 keys across 18 states. As of the April 2024 reporting, two properties had been released from the pool, resulting in a nominal collateral reduction of 3.1% since issuance. The loan is structured with a pro rata/sequential pay structure that allows for pro rata paydowns of the first 20.0% of the original principal balance, subject to a relatively weak release premium of 105.0% of the ALA, which increases to 110.0% thereafter.

The transaction is sponsored by an affiliate of Hospitality Investors Trust, Inc. (HIT). HIT owns or has an interest in nearly 100 hotels across more than 25 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. The $465.0 million loan, along with a $5.3 million equity of sponsor equity, was used to refinance $455.3 million of existing debt, establish $8.0 million of upfront property improvement plan (PIP) reserve, and cover closing costs. The loan has an initial maturity in July 2024 with three one-year extension options. According to the servicer, the borrower intends to exercise the first extension option.

The hotels were constructed between 1979 and 2013 and operate under 10 different brands, with the majority of the properties operating under Marriott and Hilton flags. Approximately $79.8 million of capital expenditures (capex) were invested in the properties between 2015 and 2021. At issuance, the sponsor planned to contribute an additional $92.7 million of capex, of which $74.3 million was part of brand-mandated PIPs and was partially funded by $8.0 million of upfront PIP reserve. At the last review, approximately $40.0 million of capex had been completed, was in progress, or was in the initial planning phase. According to the servicer, approximately $20.0 million has been spent on renovations in the past year.

Operating performance remains relatively in line with Morningstar DBRS' expectations, with the financial reporting for YE2023 reflecting a NCF and debt service coverage ratio (DSCR) of $46.5 million and 1.0 times (x), respectively, an increase from the YE2022 NCF of $45.0 million and the Morningstar DBRS NCF of $42.5 million. Given the floating-rate nature of the loan, the YE2023 reported DSCR remains above the Morningstar DBRS figure of 0.96x, but represents a slight decrease from the YE2022 figure of 1.18x as a result of an increase in interest rates. To mitigate the exposure to this risk, the borrower was required to enter into an interest rate cap agreement for the initial loan period with a strike rate of 4.25%, and any replacement interest rate cap agreement purchased in connection with the exercise of any extension option must have a strike price equal to the greater of 4.25% and the rate, yielding a DSCR of 1.05x.

At issuance, Morningstar DBRS derived a value of $440.6 million based on a Morningstar DBRS NCF of $42.5 million and a capitalization rate of 9.50%. Morningstar DBRS made a total qualitative adjustment of 5.50% by increasing the loan-to-value (LTV) thresholds to account for strong revenue growth, sponsorship investment, and geographic diversity along with a strong presence in the high-growth sunbelt region. Given the nominal collateral reduction, limited seasoning, and stable performance, Morningstar DBRS did not update the LTV sizing benchmarks with this review and the expectations for ongoing performance are largely unchanged.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS 
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

All credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

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

The principal methodology is North American CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798.

Other methodologies referenced in this transaction are listed at the end of this press release.

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-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428799

Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023), https://dbrs.morningstar.com/research/420982

North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592

Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.