DBRS Morningstar Upgrades One Class, Changes Trends to Positive From Stable on Two Classes of Braemar Hotels & Resorts Trust 2018-PRME

DBRS Limited (DBRS Morningstar) upgraded its rating on the Commercial Mortgage Pass-Through Certificates, Series 2018-PRME issued by Braemar Hotels & Resorts Trust 2018-PRME as follows:

-- Class B to AAA (sf) from AA (high) (sf)

DBRS Morningstar confirmed all other classes as follows:

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

DBRS Morningstar changed the trends on Classes C and D to Positive from Stable. All other trends remain Stable. The rating upgrade and confirmations, as well as the trend changes for Classes C and D, reflect the increased credit support provided to the bonds following the partial principal pay down of the loan and improving performance for the underlying collateral hotel portfolio, as further outlined below.

The subject transaction is secured by a loan collateralized by four full-service hotels, managed under two different brands and three different flags in four different cities: Seattle (361 keys; 31.0% of the allocated loan amount (ALA)), San Francisco (410 keys; 26.7% of the ALA), Chicago (415 keys; 22.9% of the ALA), and Philadelphia (499 keys; 19.4% of the ALA). The sponsor for this loan is Braemar Hotels & Resorts, formerly known as Ashford Hospitality Prime, which is a publicly traded real estate investment trust that was spun off from the larger Ashford Hospitality Trust.

The portfolio has a combined room count of 1,685 keys with management provided by Marriott International (Marriott) and AccorHotel Group (Accor). The portfolio operates under three flags: Courtyard by Marriott (two hotels; 46.2% of the total loan amount), Marriott (one hotel; 31.0% of the total loan amount), and Sofitel (one hotel; 22.8% of the total loan amount). Each property was renovated within two years prior to issuance. In 2019, the two Courtyard by Marriott hotels also underwent major renovations that converted them to one of Marriott’s luxury brands, the Autograph Collection.

At issuance, the $370.0 million subject loan was primarily used to refinance existing debt. In addition to the mortgage loan, there was a $65.0 million mezzanine loan, held outside of the trust. As of the July 2023 reporting, the current pool balance was $249.4 million, following an approximately $120.6 million principal curtailment in June 2023, which was made in conjunction with the borrower exercising the loan’s fourth maturity extension option. The servicer confirmed that the mezzanine loan was also paid down by approximately $43.6 million. The subject transaction had an initial two-year term with five one-year extension options. The fourth extension option pushes the loan’s current maturity out to June 2024, with a fully extended maturity in June 2025.

According to the trailing 12-month (T-12) financial reporting dated May 31, 2023, the portfolio reported a net cash flow (NCF) of $29.3 million, compared with negative cash flow at YE2021. While cash flows have been improving, it remains below the issuer’s underwritten NCF of $38.8 million, a contributing factor to the requirement that a principal curtailment be made as part of the maturity extension in June 2023. According to the most recent STR, Inc. (STR) reports on file, dated April 2023 (with the exception of Courtyard Philadelphia Downtown, which has a March 2023 STR report), the Seattle Marriott Waterfront and Courtyard San Francisco Downtown properties were outperforming their competitive sets and reported T-12 revenue per available room (RevPAR) penetration rates of 115.1% and 110.3%, respectively. The Sofitel Chicago Water Tower and Courtyard Philadelphia Downtown properties were underperforming the competitive sets, with the hotels reporting T-12 RevPAR penetration rates of 99.1% and 88.5%, respectively. The portfolio reported T-12 ended May 31, 2023, occupancy, average daily rate (ADR), and RevPAR figures of 66.3%, $269.03, and $178.27, respectively. This compares with the YE2021 figures of 44.2%, $193.44, and $85.81, respectively. Additionally, the debt service coverage ratio for the T-12 period ended May 31, 2023, was 1.59 times (x), compared with -0.53x at YE2021.

While the underlying collateral has seen improvements in operating performance since the lows reported during the Coronavirus Disease (COVID-19) pandemic, overall performance remains below issuance expectations. Mitigating some of this risk is the sponsor’s commitment to the portfolio, which was most recently demonstrated through the principal curtailment described above. In addition the sponsor has also made significant investments toward capital improvements across the portfolio since issuance. Prior to the pandemic, the portfolio historically reported strong financial metrics, with the hotels benefiting from prime locations within their respective submarkets and brand affiliations with Marriott and Accor.

In the analysis for this review, DBRS Morningstar updated the sizing to reflect the principal paydown and the in-place cash flows as reflected in an updated DBRS Morningstar value. The cash flows were stressed to account for future volatility given performance continues to lag pre-pandemic figures. A DBRS Morningstar value of $270.2 million was derived based on a 20% haircut to the in-place cash flows and a capitalization rate of 8.7%. The stressed DBRS Morningstar value analyzed for this review implies a loan-to-value (LTV) ratio of 92.3%, compared with the LTV of 36.4% based on the appraised value at issuance and the current pool balance. In addition, DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks, totalling 2.75% to account for property quality, and market fundamentals. The resulting LTV sizing benchmarks indicated upgrade pressure for the majority of the rated classes in the capital stack, supporting the rating upgrades and Positive trends with this review.

The DBRS Morningstar ratings assigned to Classes C and D are lower than the results implied by the LTV sizing benchmarks by three or more notches. These variances are warranted given (1) that the in-place cash flows continue to lag pre-pandemic levels overall and (2) the general uncertainty surrounding the final maturity in 2025, when interest rates are expected to remain elevated, and the borrower will likely be required to contribute additional equity for a successful takeout barring continued improvement in the collateral hotel portfolio’s performance.

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 (July 4, 2023) https://www.dbrsmorningstar.com/research/416784.

All credit ratings are subject to surveillance, which could result in credit 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 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.

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 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and credit ratings are monitored.

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The credit 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)

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)

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

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