DBRS Morningstar Confirms Ratings on All Classes of Atrium Hotel Portfolio Trust 2018-ATRM

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-ATRM issued by Atrium Hotel Portfolio Trust 2018-ATRM as follows:

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

All trends are Stable.

The rating confirmations reflect the continued stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations since the last review. At that time, DBRS Morningstar changed the trends on all classes to Stable from Negative, given the general improvement in performance of the underlying collateral, which had previously faced disruptions as a result of the Coronavirus Disease (COVID-19) pandemic. The portfolio continues to demonstrate improvements in key performance indicators, as evidenced by the last few reporting periods and as described in more detail below.

The $635.0 million mortgage loan is secured by the fee and leasehold interests in a portfolio of 24 limited-service, extended-stay, and full-service hotels totaling 5,734 keys across the United States, all of which are cross-collateralized and cross-defaulted. The portfolio is geographically diversified across 12 different states with primary concentrations in Texas (22.3% of the total loan amount), Arkansas (16.5% of the total loan amount), and Missouri (12.4% of the total loan amount). The portfolio benefits from its granularity as only one property, Embassy Suites – Northwest Arkansas, represents more than 10.0% of the allocated loan amount. All the hotels operate under franchise agreements with either Hilton Hotels & Resorts (Hilton) or Marriott International (Marriott), except for one that operates as an independent entity. Flags within the portfolio include Embassy Suites by Hilton, Courtyard by Marriott, Residence Inn by Marriott, Renaissance, Marriott, and Sheraton Hotels and Resorts, allowing the hotels to benefit from strong brand recognition as well as brand-wide reservation systems, marketing, and loyalty programs. As part of the sponsor’s acquisition of the portfolio, at issuance all franchise agreements were extended beyond the fully extended loan maturity date, with expirations ranging from 2028 to 2038.

The subject financing, along with $112.4 million of equity from the sponsor, retired $672.2 million of existing debt and established upfront reserves. The interest-only (IO), floating-rate loan had an initial two-year term with five one-year extension options. The borrowers are obligated to provide a replacement interest rate cap agreement for any extension period with a strike price when added to the spread or alternate spread of the mortgage loan that would result in a debt service coverage ratio (calculated in accordance with the Mortgage Loan documents) of not less than 1.10 times. The servicer confirmed that the borrower executed an interest rate cap agreement with SMBC Capital Markets with an effective date of June 1, 2023, and has successfully exercised the fourth extension option, pushing the loan maturity date to June 1, 2024.

The loan was previously in special servicing with a modification approved in late 2020, resulting from a request for relief that was related to the COVID-19 pandemic. The borrower was required to contribute $10.0 million to the reserve accounts as part of the modification and the 18-month repayment period for deferred amounts began in September 2021. The servicer reports the loan is current and the borrower is in compliance with the terms of the modification. As of the June 2023 loan-level reserve report, approximately $43.7 million was held across all reserve accounts.

Since DBRS Morningstar’s last rating action, performance has steadily improved, with the portfolio reporting YE2022 weighted-average (WA) occupancy rate, average daily rate (ADR), and revenue per available room (RevPAR) metrics of 65.9%, $140.0, and $92.30, respectively, which compare favorably with the prior year’s reported figures of 52.1%, $129.10, and $67.20. In addition, the portfolio’s YE2022 occupancy rate, ADR, and RevPAR figures are relatively in line with DBRS Morningstar’s assumed figures at issuance of 68.2%, $134.20, and $91.50, respectively. Likewise, reported net cash flow (NCF) continues to trend upward, with the YE2022 figure of $62.6 million significantly higher than the YE2021 and YE2020 figures of $34.6 million and $5.1 million. Although NCF has improved in recent years, it remains approximately 20.3% below the NCF figure of $78.5 million at issuance.

DBRS Morningstar’s analysis for this review considered a NCF of $61.3 million, which was derived by applying a 2.0% haircut to the YE2022 NCF. A 10.0% cap rate was applied to that value, resulting in a DBRS Morningstar value of $612.0 million. The June 2023 DBRS Morningstar value represents a -15.9% variance from the value derived in March 2020 and a -39.1% variance from the appraised as-is value of $1.0 billion at issuance. The June 2023 DBRS Morningstar value implies a loan-to-value ratio (LTV) of 103.8% compared with an LTV of 63.2% on the as-is appraised value at issuance. The decline in value from the 2020 DBRS Morningstar value is generally reflective of a sustained contraction in cash flow, which remains below pre-pandemic levels. DBRS Morningstar wanted to recognize this contraction, given the relatively near-term final maturity date in 2025. However, the upward trajectory of the portfolio’s performance over the last few years, which DBRS Morningstar expects could continue, supports the rating confirmations and Stable trends with this review. The transaction benefits from a strong, experienced sponsor, Atrium Hospitality, a leading hotel and asset management firm with a portfolio of 83 hotels totaling 21,773 rooms across 29 states.

DBRS Morningstar maintained positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 1.5% to account for cash flow volatility, property quality, and market fundamentals. The DBRS Morningstar ratings assigned to Classes D, E, and F are higher than the results implied by the LTV sizing benchmarks. The variances are warranted, given the general improvement in cash flow trends and key performance indicators over the last several reporting periods that suggest stabilization could be achieved in the near to moderate term, as well as the sponsor’s recent equity infusion as part of the loan modification and continued commitment to the collateral portfolio and the subject loan.

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 (May 17, 2022) at https://www.dbrsmorningstar.com/research/396929.

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.

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 (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

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.