Fitch Ratings – Chicago – 22 Feb 2021: Fitch Ratings has maintained 79 classes from 14 U.S. CMBS single borrower transactions on Rating Watch Negative (RWN). Fitch originally placed the classes on RWN on March 19, 2020.
KEY RATING DRIVERS
The 14 transactions represent the entire portfolio of Fitch-rated single borrower hotel transactions. The transactions were issued in 2019 (four) and 2018 (10). The majority are secured by an individual hotel property; the underlying properties are located in Florida (six deals), Hawaii (four), Arizona (two) and California (one). There is one transaction secured by a portfolio of La Quinta hotels. Three transactions, MSC 2018-SUN (Shutters On The Beach and Casa Del Mar), BAMLL 2018-DSNY (The Swan and Dolphin) and DBWF 2018-GLKS (JW Marriott Grande Lakes and Ritz-Carlton Grande Lakes), are backed by two hotels adjacent to one another.
The majority of the properties that serve as collateral for the 14 transactions remain open; however, some are limiting service at restaurants and other hotel amenities such as gyms, pools and spas. All of the loans remain current.
The RWNs remains in place as Fitch continues to monitor property-level performance and cash flow recovery while hotels look to increase occupancy and revenue in 2021. As vaccine rollout increases in 2021 and travel demand begins to recover to pre-pandemic levels, Fitch will reassess the RWNs on a case-by-case basis, and they may be removed if reporting for 2021 shows improved performance that Fitch deems sustainable.
The La Quinta portfolio (JPMCC 2018-LAQ) is backed by a group of 219 limited service hotels, all of which remain open for business. The transaction has had 95 property releases since issuance resulting in paydown of approximately 31%. To date, limited- service hotels have performed better than full service hotels. However, recent performance data reflects significant stress. As of September 2020, a decline in occupancy to 51% from 65% at year-end (YE) 2019 has caused effective gross income to decline 41% over the same time period. Fitch will monitor the portfolio performance over the next two to three months for signs of a sustained recovery.
Three hotels from three different transactions are currently closed while undergoing renovations, but all are scheduled to reopen in 1H 2021. The Diplomat Beach Resort Hotel (BFLD 2019-DPLO), located in Hollywood, FL, suspended operations starting in March 2020 and is scheduled to reopen in April 2021. The Turtle Bay Resort (CGCMT 2018-TBR) in Kahuku (O’ahu), Hawaii is updating all guestrooms, food and beverage outlets as well as the spa and fitness center; reservations are being accepted starting June 1, 2021. The Arizona Biltmore (BX 2018-BILT) in Phoenix, AZ has also been closed since March 2020 and the hotel website detailed various renovations being undertaken at the property; reopening is scheduled for April 2021.
The loan securitized within the MSC 2018-SUN transaction had transferred to special servicing after the borrower did not make the May and June 2020 payments and requested a forbearance due to the pandemic. However, the borrower and lender executed a modification and reinstatement agreement in December 2020 that cured the defaults and allowed the borrowers (Edward Slatkin and Thomas Slatkin) to exercise the first of five one-year extension options through July 2021. Terms of the agreement also include a replacement interest rate cap agreement, satisfaction of all property protection advances and workout fees and an exclusion of debt yield tests through the first extended maturity date.
Two additional transactions have had COVID-19-related relief granted: Hilton Orlando (HILT 2018-ORL) and Grand Lakes Resort (DBWF 2018-GLKS). For the Hilton Orlando, a consent agreement allowed for the borrower (joint venture between affiliates of RIDA Development Corporation, Ares Management L.P., and Park Hotels & Resorts Inc.) to utilize reserve funds to cover debt service payments; funds have been utilized from April through December 2020. The borrower has also exercised its first extension option through December 2021.
For the Grande Lakes Resort, the borrower (Blackstone) is allowed to commingle FF&E reserves between two collateral hotels (JW Marriot – Grande Lakes and Ritz Carlton – Grande Lakes) to fund property related improvements but not for interest payments. In addition, relief terms were or are in discussion for the following: the Grand Wailea (BX 2018-GW), the Arizona Biltmore Resort (BX 2018-BILT) and the Diplomat Beach Resort (BFLD 2019-DPLO).
Ten transactions had 2020 maturities, though all had the ability to extend the loan without a performance hurdle; extension options were exercised for all 10 transactions. Three transactions have an initial maturity date in 2021 with options to extend: JPMCC 2019-MARG, GSMS 2019-BOCA and BFLD 2019-DPLO.
As expected, many of the hotels are reporting severely depressed property level cash-flows for 2020 (reporting for seven transactions reflects the TTM period ending in September while the others are from June or December). On average, the TTM 2020 net cash flow across all of the collateral hotels is down 79% from the Fitch net cash flow at issuance (this figure does not include the JPMCC 2018-LAQ transaction due to property releases pursuant to provisions in the loan agreement). Fitch believes this recent hotel data reflecting pandemic performance is not a reliable indication of sustainable cash flow when determining a long-term stressed value and maintains that there is inherent value in the collateral assets as evidenced by land and replacement values compared to the debt levels at each rating category.
Fitch expects a slow and uneven recovery path for the lodging sector and forecasts a gradual rebound of revenue per available room (RevPar) in 2021 to around 30% below pre-pandemic levels. This recovery will accelerate from 2H21 supported by leisure demand and the prospect of effective roll-out of vaccines. Fitch also expects the performance recovery for full-service hotels, in particular the upper tier and luxury segments, will initially lag limited-service hotels; much of this difference in performance is expected to moderate by year-end 2022.