DBRS Morningstar Confirms All Classes of BX Trust 2017-CQHP

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

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

All trends are Stable, excluding Class F, which has a rating that does not generally carry a trend in commercial mortgage-backed securities (CMBS). The rating confirmations reflect minimal changes to the overall performance of the underlying collateral, which remains in line with DBRS Morningstar’s expectations since the last rating action.

The transaction is collateralized by a single loan secured by a portfolio of four Club Quarters Hotels totaling 1,228 keys across four major U.S. cities: San Francisco (346 keys; 39.4% of allocated loan amount (ALA)), Chicago (429 keys; 26.4% of ALA), Boston (178 keys; 18.2% of ALA), and Philadelphia (275 keys; 16.0% of ALA). The collateral has been challenged since the onset of the Coronavirus Disease (COVID-19) pandemic in early 2020. Since that time, DBRS Morningstar has taken several rating actions to reflect the increased risks, including three consecutive downgrade actions in 2020, 2021, and 2022, given the sustained performance declines and a sponsor who has suggested a willingness to walk away from the properties and subject loan. The portfolio was most recently appraised in October 2022 with a combined value of $360.0 million, reflecting a slight increase over the May 2021 combined appraised value of $330.2 million, but a -14.8% variance from the issuance value of $422.5 million. While collateral performance continues to show signs of recovery, the loan reports $31.1 million in outstanding servicer advances as of the May 2023 remittance, increasing the loan’s total exposure to $304.8 million. In its analysis for this review, DBRS Morningstar considered a hypothetical stressed value scenario, as further described below, that suggested an implied loan to value (LTV) figure in excess of 100%, based on the total loan exposure.

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 sponsor for this loan is Blackstone Real Estate Partners VII, L.P. (Blackstone). 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. While there were discussions about the potential purchase of the mezzanine loan and media sources previously indicated that the collateral had been listed for sale, the servicer has confirmed neither of these strategies are actively being pursued. As of the date of this publication, a resolution strategy has not been finalized.

For the trailing 12-month (T-12) period ended February 28, 2023, the portfolio reported weighted-average (WA) occupancy rate, average daily rate, and revenue per available room (RevPAR) figures of 63.4%, $186, and $119, respectively. The WA RevPAR for the prior T-12 period was reported as $65. The WA RevPAR penetration rate for the T-12 period was 77.0%, compared with 69.0% for the prior T-12 period, suggesting the properties continue to underperform relative to their competitive sets. Although performance metrics have been trending positively year over year since bottoming out in 2020, it is unlikely the portfolio will stabilize to pre-pandemic figures in the near to medium term. The subject properties rely heavily on commercial segmentation because of the brand’s focus on business travel and member-driven corporate demand, which has seen a longer recovery period than other demand segmentations. According to the financials for the nine months ended September 30, 2022, all four properties reported positive net cash flows (NCF) for the first time since 2019; however, all NCFs were still below breakeven, with a consolidated trust loan debt service coverage ratio of 0.68 times.

Given the loan being in default, the borrower’s unwillingness to fund shortfalls, and the likelihood of an extended resolution timeline, DBRS Morningstar’s analysis for this review is based on the updated appraised values for the collateral hotels as those generally represent a more market-based value. Although the as-is appraised value for the portfolio has increased since the last review, DBRS Morningstar considered a stressed scenario based on a haircut to the most recent appraised values to reflect potential volatility that could be experienced over the remainder of the workout period. The results of that analysis suggested an as-is LTV of 105.8% on the total loan exposure. The stressed LTV is largely in line with DBRS Morningstar’s expectations from the last review, supporting the rating confirmations and Stable trends.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or 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 (May 17, 2022).

Class X-EXT is an interest-only (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.

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

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023) https://www.dbrsmorningstar.com/research/410912.

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

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 rating was initiated at the request of the rated entity.

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

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

This is a solicited credit rating.

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.

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

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

North American Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023)
https://www.dbrsmorningstar.com/research/410191

Rating North American CMBS Interest-Only Certificates (December 19, 2022)
https://www.dbrsmorningstar.com/research/407577

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022; https://www.dbrsmorningstar.com/research/402153)

Legal Criteria for U.S. Structured Finance (December 7, 2022;
https://www.dbrsmorningstar.com/research/407008)

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.