Morningstar DBRS Confirms Credit Ratings on All Classes of HIT Trust 2022-HI32, Stable Trends

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2022-HI32 issued by HIT Trust 2022-HI32 as follows:

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

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction, which remains in line with Morningstar DBRS' expectations at issuance. The aggregate portfolio net cash flow (NCF) decreased slightly as of Q3 2024 compared with YE2023, while the occupancy rate remained unchanged at about 75% over the same period. In addition, the transaction continues to benefit from granularity in terms of the allocated loan amount (ALA), geographic diversity, experienced management companies, and strong brand affiliation from nationally recognized hospitality brands with national reservation systems.

At issuance, the two-year, interest-only, floating-rate loan was collateralized by a portfolio of 32 limited-service, extended-stay, select-service, and full-service hotels comprising 4,168 keys across 18 states. As of the April 2025 reporting, five properties had been released from the pool, three of which were released since the last credit rating action in May 2024, resulting in a collateral reduction of 9.0% since issuance. The loan is structured with a pro rata/sequential pay structure that allows for pro rata paydowns of the first 20.0% of the original principal balance, subject to a relatively weak release premium of 105.0% of the ALA, which increases to 110.0% thereafter.

The transaction is sponsored by an affiliate of Hospitality Investors Trust, Inc. (HIT). HIT owns or has an interest in nearly 100 hotels across more than 25 states, all of which are operated under franchise or license agreements with a national brand owned by one of Hilton Worldwide, Inc.; Marriott International, Inc.; Hyatt Hotels Corporation; or one of their respective subsidiaries or affiliates. The $465.0 million loan, along with $5.3 million of sponsor equity, was used to refinance $455.3 million of existing debt, establish an $8.0 million upfront property improvement plan (PIP) reserve, and cover closing costs. The loan had an initial maturity in July 2024 with three one-year extension options. After successfully exercising the first extension option last year, two remain, with a current maturity date in July 2025. The servicer confirmed that the borrower has expressed its intent to exercise the second extension option.

The hotels were constructed between 1979 and 2013 and operate under 10 different brands, with the majority of the properties operating under the Marriott and Hilton flags. The sponsor invested approximately $79.8 million of capital expenditures (capex) in the properties between 2015 and 2021. At issuance, the sponsor planned to contribute an additional $92.7 million in capex, of which $74.3 million was part of brand-mandated PIPs partially funded by an $8.0 million upfront PIP reserve. At the last review, approximately $20.0 million of capex had been completed, with an additional $20.0 million that was either in progress or in the initial planning phase. According to the servicer, five hotels have undergone renovations totaling $30.2 million since the loan closed.

Operating performance remains relatively in line with Morningstar DBRS' expectations, with the financial reporting for the trailing 12-month (T-12) period ended September 30, 2024, reflecting an NCF of $39.2 million, compared with the YE2023 NCF of $39.6 million and the Morningstar DBRS NCF of $34.6 million for the remaining 27 properties in the portfolio. The loan reported a debt service coverage ratio (DSCR) of 0.98 times (x) as of the T-9 period ended September 30, 2024, in line with the YE2023 figure of 1.00x and the Morningstar DBRS figure of 0.96x. The borrower was required to enter into an interest rate cap agreement for the initial loan period with a strike rate of 4.25%, and any replacement interest rate cap agreement purchased in connection with the exercising of any of the extension options must have a strike price equal to the greater of 4.25% and the rate, yielding a DSCR of 1.05x.

For the purposes of this review, Morningstar DBRS updated its sizing benchmarks to account for the five released properties to date. Morningstar DBRS derived a value of $357.6 million based on a Morningstar DBRS NCF of $34.6 million, which represents a haircut of 11.7% to the T-12 NCF for the period ended September 30, 2024, and a capitalization rate of 9.50%. In addition, Morningstar DBRS maintained a total qualitative adjustment of 5.50% by increasing the loan-to-value (LTV) thresholds to account for strong revenue growth, sponsorship investment, and geographic diversity along with a strong presence in the high-growth Sun Belt region.

The Morningstar DBRS credit ratings assigned to Classes F and G are higher than the results implied by the LTV sizing benchmarks by three or more notches. Given the notable reserve balance and continued performance of the remaining collateral, the variances are warranted.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS   
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

All credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

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

The principal methodology is North American CMBS Surveillance Methodology (February 28, 2025) https://dbrs.morningstar.com/research/448963.

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

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.

Morningstar DBRS 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.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

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

DBRS, Inc.
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The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- North American Single-Asset/Single-Borrower Ratings Methodology (February 28, 2025),
https://dbrs.morningstar.com/research/448962
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- Legal Criteria for U.S. Structured Finance (December 3, 2024),
https://dbrs.morningstar.com/research/444064
-- Interest Rate Stresses for U.S. Structured Finance Transactions (March 27, 2025),
https://dbrs.morningstar.com/research/450750
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024),
https://dbrs.morningstar.com/research/438283

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.