NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded eight classes and affirmed five classes of Extended Stay America Trust (ESA) commercial mortgage pass through certificates series 2013-ESH. A detailed list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The upgrades reflect the significant pay down and deleveraging since Fitch's last rating action due to voluntary prepayment and collateral releases. As of the December 2015 distribution date the pool's certificate balance was $1.989 billion, a 21% decline from $2.520 billion at issuance. Approximately $500 million (19.8% of the original pool balance) of the pay down was from voluntary prepayments and $32 million (1.3%) from the release of 55 assets since issuance. The majority of collateral releases occurred in December 2015 for 53 assets at a release amount of $86.1 million, of which $29.3 million fully repaid the B-FL, C-FL, D-FL certificates which was reflected in the December 2015 remittance; pay down from the outstanding $56.8 million will be reflected in the January 2016 remittance.
The original mortgage loan was secured by a first priority, mortgage loan with three components: a $350 million, two-year floating rate component (Component A) which has since been reduced to zero from principal prepayments; a $350 million five-year fixed rate component (Component B), which has been reduced to $168 million from prepayments with an additional $56.8 million of prepayment in suspense from the December 2015 collateral releases; and a $1.82 billion seven-year fixed rate component (Component C) with the total balance still outstanding. The certificates follow a sequential-pay structure on a pro rata basis among three components, with voluntary prepayment ability for a portion of each of the components.
Based on the outstanding certificates and class priority in the capital structure, prepayments are currently being applied to the reduction of the outstanding principal balance of Component B (classes B-5, C-5, D-5) on a sequential basis. The loan has strong structural features, including a hard lock-box and cash management agreement and monthly reserve deposits. Total reserves as of December 2015 reported at $57.2 million. At issuance, the portfolio was encumbered with an additional $1.08 billion in mezzanine financing, which was not part of the original trust and has since paid in full.
The current collateral is 625 hotels ESA brand hotels, totalling 68,952 rooms. This single borrower transaction was originally secured by 680 owned extended-stay hotels with the majority under the ESA brand. Since acquisition of the portfolio in 2010, the sponsors invested significant capital towards property renovations as part of a portfolio rebranding strategy. Renovations were 100% completed in 2014, and 633 hotels were under the ESA brand, and 47 under the Crosslands Economy Studios brand (economic-priced target segment). All 47 of the Crosslands Economy Studios have since been released as collateral, in addition to six ESA brand hotels.
The collateral has demonstrated an upward trend in cash flow since the sponsor's acquisition in 2010, which parallels the U.S. lodging industry's performance over the same time period. As of trailing twelve month (TTM) September 2015, occupancy reported at 73.69%, average daily rate (ADR) reported at $61.34, and revenue per available room (RevPAR) at $45.20. This compares with the year-end (YE) December 2014 at 74.26% occupancy, $57.96 ADR, and $43.04 RevPAR. Net cash flow (NCF) debt service coverage ratio (DSCR) improved to 6.50x for TTM September 2015, compared to 5.69x at YE December 2014 and 5.34x at YE December 2013.
The Rating Outlooks on classes A-1-7, A-2-7, and B-5 are Stable and reflect the stable to improving performance of the portfolio, the class positions in the capital structure, and sufficient credit enhancement to withstand losses. The Positive Outlooks on classes B-7 through D-7 reflects the potential for future upgrades should portfolio performance continue to improve, market fundamentals remain stable, and net cash flows are considered sustainable over the course of the loan term.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
Fitch has upgraded the following ratings:
--$62.0 million class B-5 to 'AAAsf' from 'AA-sf'; Outlook Stable;
--$325.0 million class B-7 to 'AAsf' from 'AA-sf'; Outlook Positive from Stable;
--$52.0 million class C-5 to 'Asf' from 'A-sf'; Outlook Positive from Stable;
--$269.0 million class C-7 to 'Asf' from 'A-sf'; Outlook Positive from Stable;
--$54.0 million class D-5 to 'BBBsf' from 'BBB-sf'; Outlook Positive from Stabel;
--$280.0 million class D-7 to 'BBBsf' from 'BBB-sf'; Outlook Positive from Stable;
--$61.5 million class X-1-5 to 'AAAsf' from 'AA-sf'; Outlook Stable;
--$61.5 million class X-2-5 to 'AAAsf' from 'AA-sf'; Outlook Stable.
Fitch has affirmed the following ratings:
-- $157.5 million class A-1-7 at 'AAAsf'; Outlook Stable;
-- $788.5 million class A-2-7 at 'AAAsf'; Outlook Stable;
-- $157.5 million class X-A-7 at 'AAAsf'; Outlook Stable;
-- $688.4 million class X-1-7 at 'AAAsf'; Outlook Stable;
-- $688.4 million class X-2-7 at 'AAAsf'; Outlook Stable;
The class A-1FL, A-1-5, A-2FL, A-2-5, B-FL, C-FL, D-FL, X-A-5, X-1FL, and X-2FL certificates have paid in full.
Additional information is available at www.fitchratings.com.
Criteria for Analyzing Large Loans in U.S. Commercial Mortgage
Transactions (pub. 27 Aug 2015)
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)
Extended Stay America Trust 2013-ESH - Appendix
Dodd-Frank Rating Information Disclosure Form