Commentary U.S. Conduit Hotel Loans Are More Vulnerable Than Their Single-Borrower Counterparts as the Coronavirus Spreads
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Commentary
U.S. Conduit Hotel Loans Are More Vulnerable Than Their Single-
Borrower Counterparts as the Coronavirus Spreads
DBRS Morningstar DBRS Morningstar Perspective
March 13, 2020 DBRS Morningstar has identified some $2.58 billion in securitized U.S. commercial mortgage conduit
hotel loans that have elevated risk because of the potential for decreased revenue as the Coronavirus
Contents Disease (COVID-19) spreads. Depending on how far and long the outbreak runs, this could lead to a 25-
1 DBRS Morningstar Perspective
basis-point uptick in the commercial mortgage-backed securities (CMBS) overall delinquency rate to
2 Largest Loans Most Sensitive to
Potential Cash Flow Declines 1.38% from February's 1.13% if these loans were to default.
2 Rising Event Cancellations
4 California, New York, and Washington
The pace of diagnosis has quickened in recent days, with more than 700 new cases of coronavirus in the
Are Taking the Hardest Hit
8 Maturity U.S. announced since our March 11 report, which analyzed the more than $34 billion single-asset/single-
8 2020 Class Could be Left Hanging borrower (SASB) hotel loans packaged in CMBS. Unlike the SASB universe, which we believe will hold
up well to a potential 20% decline in net cash flow, the nearly $49 billion in conduit hotel loans could
Steve Jellinek see greater repercussions because of intense competition and higher leverage with lower debt service
Vice President coverage ratios (DSCRs).
+1 312 244-7908
steve.jellinek@dbrsmorningstar.com
Hotels are dealing with cancellations as the spread of the virus has hit demand. They get business from
Gwen Roush
three sources—vacationers, business travelers, and convention/eventgoers—and each group is pulling
Senior Vice President
+1 312 332-9575 back on travel because of coronavirus concerns. The main hotel operating metrics—occupancy, average
gwen.roush@dbrsmorningstar.com daily rate (ADR), and revenue per available room (RevPAR)—all dropped sharply last week when
compared with a year ago, according to STR, as room cancellations prompted by fears of the coronavirus
Russel Dsouza
Senior Analyst mounted. Occupancy fell between March 1 and March 7 by 7.3 percentage points to 61.8% when
+91 022 6121 7100 compared with the same week a year earlier. ADR dropped 4.6% to $126.01, leaving RevPAR down
russel.dsouza@dbrsmorningstar.com
11.6% at $77.82.
Erin Stafford
Managing Director The rush of cancellations has forced hotel companies to rethink their forecasts for the year. Ryman
+1 312 332-3291
erin.stafford@dbrsmorningstar.com Hospitality Properties, Inc., which owns large conference hotels as well as the famous country music
showcase Grand Ole Opry, said that it pulled its 2020 forecast. Pebblebrook Hotel Trust was forced to do
the same amid escalating cancellations from groups and business travelers.
Demand for air travel has decreased greatly recently, as fears surrounding the coronavirus have risen. As
the keynote speaker at the J.P. Morgan Industrial Conference, United Airlines President Scott Kirby said
that domestic gross bookings are down 25%.
Given the uncertainty around the duration and severity of the outbreak, it's difficult to estimate the
effect it would ultimately have on hotel performance. However, we expect the negative effects to quicklyPage 2 of 9 U.S. Conduit Hotel Loans Are More Vulnerable Than Their Single-Borrower Counterparts as the Coronavirus Spreads| March 13, 2020
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fade once the outbreak resolves. STR reports that transient demand seems more resilient after a
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downturn, while group demand takes more time to recover.
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Largest Loans Most Sensitive to Potential Cash Flow Declines
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Like for our SASB analysis, we stressed the most recent annual net cash flow by 10% and 20% to assess
Page 2 of 9 which loans might be vulnerable to term default. Under a scenario in which we cut net cash flow by
10%, about $1 billion would see their DSCRs fall below 1.00x. If we cut net cash flow by 20%, that
balance rises sharply to $2.58 billion.
Exhibit 1 10 Largest Loans Most Sensitive to Potential Cash Flow Declines
DBRS Morningstar Most Recent Year- DSCR (x) @ DSCR (x) @
Rated Loan Name Deal ID Location Balance ($) End DSCR (x) 90% NCF 80% NCF Maturity Date
Yes W Chicago - City Center GSMS 2013-GC14 Chicago 77,764,208 1.11 1.00 0.89 8/6/2023
Yes Wisconsin Hotel Portfolio BANK 2018-BN10 Wisconsin 71,699,591 1.24 1.12 0.99 2/1/2028
Yes JFK Hilton WFRBS 2013-C18 Jamaica, NY 63,131,514 1.22 1.10 0.98 12/1/2023
Yes Redondo Beach Hotel Portfolio BANK 2017-BNK7 Redondo Beach, CA 61,804,680 1.24 1.12 0.99 9/1/2027
No DoubleTree Jersey City CGCMT 2015-GC35 Jersey City, NJ 60,000,000 1.02 0.92 0.82 10/6/2025
No Hyatt Regency Sarasota MSBAM 2016-C31 Sarasota, FL 51,382,120 1.10 0.99 0.88 11/1/2026
No Westin Tysons Corner CGCMT 2018-B2 Falls Church, VA 46,785,431 1.04 0.94 0.83 3/6/2028
Yes Hotel Felix Chicago WFRBS 2013-C18 Chicago 45,485,214 1.14 1.03 0.91 1/1/2024
No The Standard Highline NYC CSAIL 2017-CX10 New York 45,000,000 1.06 0.95 0.85 11/5/2027
Yes Tryp by Wyndham Times Square South WFRBS 2014-C21 New York 42,334,944 1.04 0.94 0.83 6/11/2024
Source: DBRS Morningstar.
The largest loan is the $77.8 million W Chicago - City Center loan, which represents 7.7% of GSMS 2013-
GC14. Net cash flow for 2018 at the downtown Chicago full-service hotel fell about 40% below the
issuer's figure; however, there were renovations that took place at the property, which likely led to some
disruption in performance. Though hotel construction in Chicago has been relatively light compared with
other major markets, new hotels, including the Hyatt Centric The Loop with 257 rooms, a 380-room
Residence Inn one block north, and the Kimpton Gray Hotel in the downtown area, may still have an
effect on rates and occupancy. Any slowdown in the economy could push revenue down further.
Rising Event Cancellations
Fears of the virus' spread have resulted in the cancellation or postponement of a number of events,
including the massive South by Southwest film and music festival in Austin, Texas; Facebook, Inc.'s F8
developers conference in San Jose, California; Google's I/O technology conference in Mountain View,
California; and the Coachella Valley Music and Arts Festival in Indio, California. To date, nearly 100
conferences have either been postponed, cancelled, or moved online, a map of which can be found at
carto.com/blog/coronavirus-tech-event-cancellations.
Northern California has taken the biggest hit to conferences and events, with San Francisco and San
Jose combined seeing 26 events either cancelled, postponed, or moved online, followed by Las VegasPage 3 of 9 U.S. Conduit Hotel Loans Are More Vulnerable Than Their Single-Borrower Counterparts as the Coronavirus Spreads| March 13, 2020
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with 13. Combined, San Francisco and San Jose have nearly $1 billion in conduit hotel exposure. Only
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the DSCR for the $8.0 million San Francisco Boutique Hotel Portfolio loan in COMM 2014-CR19 would
Page 3 of 9 fall below 1.30x after taking a 20% haircut to net cash flow. Year-end 2018 net cash flow for the two
limited-service hotels with 52 combined rooms has fallen more than 25% from the issuer's net cash flow.
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Even after stressing net cash flow by an additional 20%, we believe the loan would likely avoid default
Page 3 of 9 as the DSCR would fall to 1.18x. Further, the loan reported improved performance for the first nine
months of 2019 with a 1.84x DSCR on 92.0% occupancy.
Similarly, just one loan in Las Vegas, which has $234.2 million in conduit hotel loan exposure, would see
its DSCR fall close to, but remain above, break-even. The $9.7 million La Quinta Inn & Suites - Las Vegas
loan in BANK 2017-BNK9, backed by a 140-unit limited-service hotel, saw 2018's net cash flow fall
nearly 40% from the issuer's net cash flow. Taking a 20% haircut to the diminished net cash flow results
in a 1.10x DSCR. In a positive note, net cash flow for the 12-month period ended September 2019
improved significantly, pushing the DSCR up to 2.35x, up from 1.37x at year-end 2018.Page 4 of 9 U.S. Conduit Hotel Loans Are More Vulnerable Than Their Single-Borrower Counterparts as the Coronavirus Spreads| March 13, 2020
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California, New York, and Washington Are Taking the Hardest Hit
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The virus is now spreading within communities on both coasts, including in California, New York, and
Page 4 of 9 Washington, where more than 190 people are confirmed to have the virus in each of those states. As of
March 12, California, New York, and Washington combined account for over half of the nation’s
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coronavirus cases.
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California and New York rank first and fourth, respectively, in terms of exposure to conduit CMBS hotel
loans, while Washington is 11th, displayed in Exhibit 2.
Exhibit 2 Conduit Hotel Loans: Top 15 States
Source: DBRS Morningstar.Page 5 of 9 U.S. Conduit Hotel Loans Are More Vulnerable Than Their Single-Borrower Counterparts as the Coronavirus Spreads| March 13, 2020
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California Exposure
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About $7.40 billion conduit hotel loans in California represent 15.2% of the country's conduit hotel
Page 5 of 9 exposure. Of that amount, just $274.8 million is at risk based on a 20% decline in net cash flow,
displayed in Exhibit 3.
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.
Exhibit
Page 5 of 93 California Conduit Hotel Loans Most Sensitive to Potential Net Cash Flow Declines
DBRS Morningstar Most Recent Year- DSCR (x) @ DSCR (x) @
Rated Loan Name Deal ID City Balance ($) End DSCR (x) 90% NCF 80% NCF Maturity Date
Yes Redondo Beach Hotel Portfolio BANK 2017-BNK7 Redondo Beach 61,804,680 1.24 1.12 0.99 12/1/2025
No Embassy Suites - Santa Ana UBSCM 2017-C3 Santa Ana 37,803,363 1.01 0.91 0.81 8/6/2023
Yes DoubleTree San Diego COMM 2015-CCRE23 San Diego 33,797,641 0.90 0.81 0.72 8/6/2026
Yes DoubleTree - Santa Ana, CA MSBAM 2015-C20 Santa Ana 29,223,465 1.21 1.09 0.97 10/6/2026
Yes Hilton Garden Inn San Leandro CD 2016-CD1 San Leandro 19,800,044 1.21 1.09 0.97 4/6/2025
No Sheraton Garden Grove CSAIL 2017-CX9 Garden Grove 19,730,643 1.23 1.11 0.98 8/1/2027
Yes Radisson - Buena Park, CA MSCI 2015-UBS8 Buena Park 16,396,285 0.12 0.11 0.10 7/5/2028
No Residence Inn by Marriott LAX CFCRE 2016-C7 Los Angeles 12,799,207 1.20 1.08 0.96 5/6/2026
Yes The Bristol Hotel CGCMT 2016-C3 San Diego 11,399,772 0.36 0.32 0.29 1/1/2025
No Martin Resorts - Paso Robles Inn MSCI 2016-UBS11 Paso Robles 8,624,748 0.29 0.26 0.23 7/6/2026
No HIE San Luis Obispo COMM 2012-CCRE1 San Luis Obispo 8,603,076 1.23 1.11 0.98 4/6/2022
No Four Points Sheraton - San Diego JPMBB 2013-C14 San Diego 8,480,971 0.24 0.22 0.19 6/6/2022
No Holiday Inn Express & Suites Jackson UBSCM 2018-C12 Jackson 6,322,943 1.18 1.06 0.94 9/1/2027
Source: DBRS Morningstar.
The $61.8 million Redondo Beach Hotel Portfolio loan in BANK 2017-BNK7 is the largest California
conduit hotel loan most sensitive to a potential decline in net cash flow. The two adjacent sister
properties with 319 combined rooms in Redondo Beach, California, saw 2018's net cash flow slide 22.0%
from the issuer's amount as increased competition cut into the property's revenue. According to a Q4
2019 hotel submarket report from CBRE Group, Inc., inventory rose by 7.3% over the past five years
within the greater market and will increase by 15.5% by 2024. A potential slowdown in corporate travel
could take a bigger bite out of revenue. The hotels have corporate contracts with Northrop Grumman
Corporation, Mattel, Inc., and The Boeing Company. What's more, the loan reported diminished
performance for the 12-month period ended September 2019, with a 1.12x DSCR on 90.0% occupancy.Page 6 of 9 U.S. Conduit Hotel Loans Are More Vulnerable Than Their Single-Borrower Counterparts as the Coronavirus Spreads| March 13, 2020
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New York Exposure
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With $3.14 billion, New York ranks fourth in conduit hotel exposure among the states, and the New
Page 6 of 9 York-Northern New Jersey-Long Island metropolitan statistical area has the bulk of that exposure, with
just over $2.5 billion. For the entire state, just $647.8 million, or 4.8%, is at risk based on a 20% decline in
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net cash flow, displayed in Exhibit 4.
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Exhibit 4 New York Conduit Hotel Loans Most Sensitive to Potential Net Cash Flow Declines
*Specially serviced.
Source: DBRS Morningstar.
The already underperforming $127.5 million Gansevoort Park Avenue loan, split between GSMS 2012-
GCJ9 and CGCMT 2012-GC8, would see its DSCR fall further below 1.00x should travel to New York City
slow. The property, since renamed the Royalton Park Avenue, was sold in 2017 for $200 million. Cash
flow at the 249-room, full-service luxury boutique hotel in Midtown South has dropped steadily over the
past few years, and the New York City hotel market remains weak because of new supply. The debt
yield on the 2018 net cash flow is low at 4.2%, and the loan posted a 0.61x DSCR for the year. The hotelPage 7 of 9 U.S. Conduit Hotel Loans Are More Vulnerable Than Their Single-Borrower Counterparts as the Coronavirus Spreads| March 13, 2020
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continued to underperform into 2019 as the DSCR for the 12-month period ended June was relatively
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unchanged at 0.64x.
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Washington Exposure
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Most of the conduit hotel loans in Washington continue to benefit from conservative underwriting and
Page 7 of 9 stable performance; just two loans totaling $31.3 million, displayed in Exhibit 5, are at elevated risk.
Backed by a 152-unit limited-service hotel, the $19.5 million Hampton Inn & Suites by Hilton - Lynnwood
loan in JPMBB 2016-C1 could survive a 10% hit to net cash flow but would be underwater with a 20%
reduction. The property, which is about 15 miles north of Seattle, is underperforming the issuer's
expectations, with 2018's net cash flow sliding more than 20%.
The other high-risk property is the 120-key, full-service Hilton Garden Inn in the south-central part of the
state, which backs the $11.8 million HGI Kennewick loan in COMM 2015-CR27. The property's 2018 net
cash flow tumbled more than 50% below the issuer's net cash flow because of a drop in ADR rather than
occupancy, which we attribute to a wave of new supply that came to the market over the past few
years. It's also worth noting that the corporate demand segment represents approximately 60% of
bookings, with a large pull from the nearby Hanford nuclear site. Performance through the first nine
months of 2019 has improved, with the property posting a 1.42x DSCR.
Exhibit 5 Washington Conduit Hotel Loans Most Sensitive to Potential Net Cash Flow Declines
Source: DBRS Morningstar.Page 8 of 9 U.S. Conduit Hotel Loans Are More Vulnerable Than Their Single-Borrower Counterparts as the Coronavirus Spreads| March 13, 2020
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Maturity
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About $1.10 billion in conduit hotel loans mature through year-end 2020, and nearly half of that could
Page 8 of 9 face difficulty finding takeout financing if declining cash flow were to hamper borrowers' ability to meet
refinance hurdles. In our analysis, we assumed loans would need to meet a conservative minimum
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stressed DSCR of 1.40x to get refinanced if net cash flow fell 10% and 20%. In the event of a maturity
Page 8 of 9 default, servicers are likely to extend the debt's maturity date, which is typically coupled with an
updated valuation and an equity injection to demonstrate commitment from the borrower.
Exhibit 6 2020 Maturing Conduit Hotel Loans Most Sensitive to Declining Net Cash Flow
Source: DBRS Morningstar.
The largest loan vulnerable to maturity default in our analysis is the $91.2 million Marriott Crystal
Gateway loan in DBUBS 2011-LC1A. While it continues to have an adequate DSCR, net cash flow is
down roughly 26% from the issuer's figure because expenses have more than doubled, most likely
because of ongoing renovations. A 20% hit to net cash flow could leave the loan, backed by a 697-room
full-service hotel in Arlington, Virginia, vulnerable to default when it matures in November.
2020 Class Could be Left Hanging
The true cost of the coronavirus on the hotel industry won’t be fully known for some time but it is
already significant. Conference and events are being canceled, and government efforts to enforce mass
school closures or broader quarantines would have a much more severe effect on activity. With a little
over $1 billion in conduit hotel loans coming due from April through December this year, maturing CMBS
loans could face a lack of financing should investors pull back from the hotel sector amid a prolonged
outbreak.Page 9 of 9 U.S. Conduit Hotel Loans Are More Vulnerable Than Their Single-Borrower Counterparts as the Coronavirus Spreads| March 13, 2020
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