DBRS Finalizes Provisional Ratings on Ashford Hospitality Trust 2018-KEYS

DBRS, Inc. (DBRS) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-KEYS issued by Ashford Hospitality Trust 2018-KEYS:

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

All trends are Stable. The Class X-CP and X-EXT balances are notional.

The subject transaction is collateralized by six loans, which are not cross-collateralized, that contain a total of 34 hotels, of which 24 operate under various Marriott flags, seven are affiliated with Hilton, one is flagged by Hyatt and two operate as independent hotels. The hotels have a combined total room count of 7,270 keys, consisting of 19 full-service hotels with 4,767 keys, ten select-service hotels with 1,160 keys and five extended-stay hotels containing 893 keys. Furthermore, the portfolio is diversified across 16 states, with the largest concentration by allocated loan amount in California (34.7%), Texas (11.9%) and Florida (9.5%). Sponsorship for the loan is Ashford Hospitality Trust, Inc. (Ashford), a well-established owner and operator of approximately 120 hotel assets across the United States. Management for the hotels is provided by five proven firms: Remington Lodging and Hospitality, LLC (Remington), an affiliate of the borrower; Marriott International (Marriott); Hyatt; Starwood; and Hilton Worldwide Holdings Inc. (Hilton). Remington manages more than 90 hotels across 27 states under 16 different brands, including 21 hotels in this portfolio. Marriott, which manages ten hotels in this portfolio, is a global lodging firm with more than 6,500 properties located in 127 countries and over 90 years of experience. The sponsor has displayed consistent commitment to the subject properties, investing roughly $227.7 million ($29,256 per key) between 2013 and 2017, with $26.7 million ($3,677 per key) budgeted to be spent in 2018. All but three hotels were previously securitized in either the MSCI 2015-XLF1, MSCI 2015-XLF2 or JPMCC 2016-ASH transactions and have paid as agreed with no delinquencies. Senior mortgage loan proceeds of $982.0 million plus $288.2 million of mezzanine financing will refinance prior existing debt of $1,067.0 million, fund $29.8 million of upfront reserves and closing costs and facilitate a $163.4 million cash-equity distribution. The portfolio’s appraised value is $1,587.8 million ($218,404 per key) on a single-asset basis, or $1,683.0 million ($231,499 per key) on a portfolio basis, with a net cash flow (NCF) of $127.1 million as of the trailing 12 months (T-12) ending February 28, 2018. The loan is a two-year floating-rate interest-only (IO) loan (one-month LIBOR plus 2.85%, subject to an interest rate cap, with a 12.5-basis point (bps) extension fee or rate increase on the fourth and fifth extension options) with five one-year extension options.

Overall, DBRS considers the properties to be in established suburban or peripheral urban areas with generally stable demand sources. Occupancy has averaged 75.9% since 2013, increasing every year through the T-12 ending February 28, 2018, albeit at a decreasing rate. The average daily rate (ADR) has also been solid, increasing every year since 2013 at an average rate of 4.0%; however, the T-12 ending February 28, 2018, ADR is only 0.8% greater than the 2016 figure. These figures produced strong annual revenue per available room (RevPAR) growth of 10.7% in 2014, 8.1% in 2015, 6.6% in 2016 and 1.8% as of the T-12 ending February 28, 2018, reflecting an overall tightening of the national lodging market. To mitigate this downside risk of declining RevPAR once the cycle turns, DBRS concluded to individual property RevPAR assumptions that were generally between the 2015 and 2016 actual figures.

The as-is portfolio’s appraised value is $1,587.8 million, assuming individual sales, based on an average cap rate of 8.4%, which equates to a high appraised loan-to-value (LTV) of 80.0%, based on total debt, or 62.1% based on the mortgage. Based on a portfolio valuation of $1,683.0 million, the LTV drops to 75.5%. The DBRS-concluded value of $1,082.0 million ($148,835 per key) represents a significant 31.9% discount to the individual appraised value and results in a DBRS total financing LTV of 117.4%, which is indicative of high-leverage financing; however, the DBRS value is based on a blended reversionary cap rate of 10.95%, which represents a significant stress over the current prevailing market cap rates. According to the PWC Q3 2017 report, residual cap rates for full-service hotels ranged from 7.0% to 10.0% with an average of 8.44%. Based on total financing, the DBRS Debt Yield and DBRS Term debt service coverage ratio (DSCR) at 9.3% and 1.58 times (x), respectively, are considered somewhat weak considering the portfolio is primarily securitized by suburban to urban full-service hotels.

The portfolio is geographically diverse, as the 34 hotel assets are located across 16 states and 21 metropolitan statistical areas. Furthermore, the portfolio represents three different hotel brands spread across ten different flags, plus two unflagged hotels. The sponsor acquired or constructed the hotels between 1998 and 2015, with most assets acquired between 2003 and 2007. The loan sponsor invested substantial capital between 2013 to 2017, totaling $212.7 million ($29,256 per key). The cumulative investment-grade-rated proceeds per key exposure is $115,089 – well below the estimated replacement cost of the underlying assets (excluding land value), which is closer to $205,000 per key overall. In addition, the associated DBRS Debt Yield through the investment-grade level is very attractive at 14.0%.

The portfolio is concentrated by property type, as all properties are hotels. Hotels have the highest cash flow volatility of all property types because of the short lease/length of stay compared with commercial properties and their higher operating leverage. These dynamics can lead to rapidly deteriorating cash flow in a declining market, and with nationwide RevPAR in its seventh consecutive year of growth, relatively easy RevPAR gains appear to be gone. The portfolio’s lowest reported annual NCF was $25.7 million at YE2013, which is 33.6% lower than the T-12 ending February 2018 NCF. Performance was rebounding in 2013 from the overall poor lodging environment following the Great Recession. If cash flows were to decline to the YE2013 level, the DBRS Term DSCR on the senior mortgage debt would still be 1.33x, based on the DBRS-stressed interest rate of 6.07%. Furthermore, given that a substantial portion of the mortgage is rated below investment grade or unrated, the portion of the loan considered to be investment grade would have an effective DSCR of 1.42x based on this extremely low NCF level.

Based on the DBRS-concluded value of $1,082.0 million ($148,835 per key), the portfolio’s leverage based on the senior mortgage loans is considered high, with a DBRS LTV of 90.8%. Furthermore, the DBRS LTV increases to 117.4% with the addition of the mezzanine financing. While the DBRS LTV is high, it is based on a stressed valuation that assumes a significant increase in market cap rates. The DBRS cap rate for the portfolio allows for significant reversion to the mean in the lodging valuation metrics, as it is approximately 251 bps higher than the current market cap rate for full-service hotels (per the PwC Real Estate Investor Survey) and 251 bps above the appraiser’s concluded bulk-sale portfolio cap rate. Additionally, the last dollar of debt that reflects the 90.8% DBRS LTV is rated below investment grade at B (low), whereas the BBB-rated exposure reflects a much more modest 78.0% DBRS LTV.

Lodging industry revenues have been trending upward for eight years, and RevPAR gains have generally been very robust since the bottom of the market in 2010. The length of recovery, combined with substantial new supply nationwide, could signal a cyclical downturn in the near future. The relatively high cap rates applied to the hotel properties by DBRS reflect the substantial cash flow volatility inherent in the asset class. In addition, the DBRS RevPAR for the portfolio is 4.3% lower than the T-12 ending February 28, 2018, and 2.5% lower than YE2016. Furthermore, the concluded DBRS NCF is between the YE2015 and YE2016 levels, which represents a more normalized stage in the lodging cycle.

Of the 32 flagged hotels, eight hotels, representing 15.6% of the total financing, have franchise agreements that expire within the fully extended loan term. The loan is not structured with any cash flow sweep or covenant to guarantee future capital funds are available prior to the franchise expiration. If a franchise agreement expires, and the borrower fails to enter into a replacement franchise agreement with a qualified franchisor, this would cause an event of default and would create several limitations, including limiting Ashford’s ability to extend the loan term. Ashford Hospitality Limited Partnership, the main operating partnership through which Ashford (a public real estate investment trust with a market capitalization of $625.4 million, according to Bloomberg) owns its assets. Ashford has generally owned the assets for over ten years and has invested approximately $212.7 million in improvements since 2013. Furthermore, on the first Payment Date of every year, the borrower is required to deposit the aggregate amount of all approved property improvement plan (PIP) expenses for a calendar year. Furthermore, $5,126,176 for required PIPs are included in the upfront reserves at closing.

Classes X-CP and X-EXT are IO certificates that reference 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 will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

For more information on this transaction and supporting data, please log into www.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.

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains the description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not require due diligence services outlined in Form-15E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

The principal methodology is 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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

The full report providing additional analytical detail is available by clicking on the link un 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.