DBRS Assigns Provisional Ratings to InTown Hotel Portfolio Trust 2018-STAY

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-STAY to be issued by InTown Hotel Portfolio Trust 2018-STAY (the Issuer):

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

All trends are Stable.

The Class X-CP, Class X-FP and Class X-NCP balances are notional.

The $471.0 million mortgage loan is secured by the fee interest in a portfolio of 85 economy, extended-stay hotels, totaling 10,764 keys, located in 18 different states across the United States. All of the hotels in the portfolio operate under the InTown Suites flag. The brand is owned by the loan sponsor, Starwood Capital Group Global LP (Starwood), which has substantial experience in the hotel sector and maintains considerable financial wherewithal. Starwood acquired the collateral assets in 2013 when it purchased the InTown Suites platform for $770.0 million from Kimco Realty Corporation, and in 2015 when it acquired the remaining 50 extended-stay properties from Mount Kellett Capital Management. Today, Starwood owns all 189 InTown Suites. The assets are entirely operated by affiliates of the loan sponsor, and as such, they do not incur management or franchise fees. Although there is a licensing agreement in place, it does not stipulate a separate fee.

Since acquiring the portfolio in 2013 and 2015, Starwood has invested roughly $75.0 million ($7,010 per key) of capex across the collateral portfolio; of that, $42.5 million ($3,435 per key) was spent in 2015 and 2016 across 42 properties. The remaining assets have only received light updates as needed. As the full effect of the renovations at the 42 properties is realized, Starwood will determine if the remaining 43 should receive the same, partial, or none of the same upgrades. The portfolio has an average age of 20 years, and many of the properties inspected by DBRS were generally dated, with some exhibiting deferred maintenance, resulting in low curb appeal. Such results can be attributed to the lack of investment across the portfolio as well as the consistently high occupancies at which the properties have operated. Since the hotels are not subject to formal franchise agreements, there will not be any required property improvement plans during the loan term. The loan is structured with ongoing furniture, fixtures and equipment reserves that will be collected at 5.0% of gross revenue on a monthly basis and are available for planned maintenance throughout the term. The collateral portfolio reports an average occupancy rate of 84.1% dating back to 2007, dropping to 78.7% in 2009, which was the trough of the Great Recession; however, the collateral represents one of the lowest price points in each respective market, offering value to its blue-collar guests and local demographic. While such high occupancy is likely unsustainable, many guests stay on-site for several months, as evidenced by the average length of stay across the portfolio of 92 days; this provides some additional stability compared with traditional limited- and full-service hotels.

Although somewhat concentrated in the Southeast region, the portfolio is geographically diverse and relatively granular, as the 85 hotel assets are located across 18 states. Texas has the highest concentration by allocated loan balance and number of hotels at 30.3% and 27, respectively. The next-largest state concentration is Florida, with eight hotels, which represents 12.7% of the total loan amount by allocated balance. No single hotel represents greater than 2.1% of the allocated loan balance. The loan sponsor, Starwood, has considerable experience in the hotel sector and is the sole owner of the InTown Suites brand as of 2015. The properties are wholly operated by sponsor affiliates, which allows for increased economic efficiencies, given the firm’s vertical integration.

The portfolio is concentrated by property type, as all properties are extended-stay hotels. Hotels have the highest cash flow volatility of all property types because of the relatively short lease/length of stay compared with commercial properties, as well as higher operating leverage. These dynamics can lead to rapidly deteriorating cash flow in a declining market and, with nationwide revenue per available room (RevPAR) in its eighth consecutive year of growth, relatively easy RevPAR gains appear to be gone. The portfolio also has a long historical background of high occupancy, with a ten-year average of 83.7% and a ten-year average RevPAR of $26.78.

The portfolio consists solely of extended-stay hotels, which have a much more stable cash flow profile than traditional hotels. By virtue of offering limited housekeeping services and limited to essentially non-existent food and beverage outlets, keeping common areas small and not offering more than just basic amenities, the expense ratios of this product type are relatively low. As of the trailing 12 months to October 2017, the portfolio’s net cash flow (NCF) margin was 54.8%. NCF margins for extended-stay hotels generally compare very favorably with traditional hotel properties, as high cash flow margins result in lower cash flow volatility, allowing the subject portfolio to withstand greater revenue declines than traditional lodging assets.

The ratings assigned to the Certificates by DBRS are based exclusively on the credit provided by the transaction structure and underlying trust assets. All classes will be subject to ongoing surveillance, which could result in upgrades or downgrades by DBRS after the date of issuance.

For more information on this transaction and supporting data, please log into viewpoint.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS Viewpoint platform.

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

The principal methodology is the North American Single-Asset/Single-Borrower Methodology, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. 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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrs.com.

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