DBRS Morningstar Downgrades Ratings on Three Classes, Changes Trends to Stable on Six Classes of BX Trust 2017-CQHP

DBRS Limited (DBRS Morningstar) downgraded the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2017-CQHP issued by BX Trust 2017-CQHP:

-- Class X-EXT to BBB (sf) from BBB (high) (sf)
-- Class D to BBB (low) (sf) from BBB (sf)
-- Class E to B (high) (sf) from BB (low) (sf)

In addition, DBRS Morningstar confirmed the ratings on the remaining classes as follows:

-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (low) (sf)
-- Class F at CCC (sf)

DBRS Morningstar changed the trends on all classes to Stable from Negative with the exception of Class F, which has a rating that does not typically carry a trend. Class F continues to have Interest in Arrears.

The rating downgrades reflect the continued performance challenges for the underlying collateral hotels and the increased risks in the last few years with sustained negative cash flows and a sponsor who has suggested a willingness to walk away from the properties and subject loan. Although the collateral’s as-is value increased to $330.2 million, representing a 6.1% increase from the September 2020 value of $312.5 million, the trust balance of $273.7 million and the $18.5 million of outstanding advances as of the May 2022 remittance mean the implied loan-to-value ratio is approaching 100%, putting the $51.9 million Class F (rated CCC (sf)) at risk of loss should the assets be liquidated. The collateral has been challenged since the onset of the Coronavirus Disease (COVID-19) pandemic in early 2020 and since that time, DBRS Morningstar has taken several rating actions to reflect the increased risks, including downgrades for four classes in 2020 and downgrades for six classes in 2021. Given the expectation that the cash flows have bottomed out for the collateral hotels and the appraisals obtained since the loan’s transfer have been generally stable, the change in trends to Stable from Negative is supported with this review.

The $273.7 million loan, along with $61.3 million of mezzanine debt and $8.1 million of sponsor equity, refinanced $336.1 million in existing debt and paid closing costs. The transaction is collateralized by a single loan secured by a portfolio of four hotel properties. The portfolio comprises four Club Quarters Hotels totalling 1,228 keys across four major U.S. cities: San Francisco (346 keys; 39.4% of allocated loan amount), Chicago (429 keys; 26.4% of allocated loan amount), Boston (178 keys; 18.2% of allocated loan amount), and Philadelphia (275 keys; 16.0% of allocated loan amount). The sponsor for this loan is Blackstone Real Estate Partners VII, L.P. (Blackstone), which purchased the portfolio in February 2016 from Masterworks Development Corporation, an affiliate of Club Quarters. The loan is interest only (IO) throughout the term and is structured with a two-year initial term and three 12-month extension options. The borrower exercised one of the extension options, extending the maturity date to November 2020.

The loan transferred to special servicing in June 2020 for imminent monetary default and is currently flagged as a nonperforming matured balloon loan. According to the servicer, Blackstone has advised that it is not willing to inject additional capital to fund operating expenses or debt service payments. There are ongoing negotiations to purchase the mezzanine loan, and as a result, a resolution strategy has not been reached. As of March 2022, the portfolio reported weighted-average trailing 12-month (T-12) occupancy, average daily rate, and revenue per available room (RevPAR) figures of 49.7%, $128, and $65, respectively. The weighted-average RevPAR penetration rate for the T-12 period ended March 31, 2022, was 69.0%.

Individual property performance has improved from YE2020 but remains far below pre-pandemic levels. As of September 2021, all four properties reported below breakeven debt service coverage ratios and negative net cash flows. Both the Club Quarters San Francisco and Club Quarters Boston properties have shown signs of recovery, increasing their respective RevPAR figures for the T-12 period ended March 31, 2022, by 155% and 89%, respectively. Club Quarters Philadelphia reported a RevPAR of $37 for the T-12 period ended March 31, 2022, flat from the June 2021 figure, while Club Quarters Chicago saw its RevPAR fall 39% during the same period. Club Quarters Boston was the only property of the four that outperformed its competitive set, reporting a RevPAR penetration rate of 100.6% for the T-12 period ended March 31, 2022. Club Quarters San Francisco, Club Quarters Chicago, and Club Quarters Philadelphia reported RevPAR penetration figures of 56.5%, 58.3%, and 81.6%, respectively.

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

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 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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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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