Hyatt Hotel Portfolio Trust 2015-HYT

Transcription

1 Presale: Hyatt Hotel Portfolio Trust 2015-HYT Primary Credit Analyst: Natalka H Chevance, New York (1) ; natalka.chevance@standardandpoors.com Secondary Contact: James C Digney, New York (1) ; james.digney@standardandpoors.com Table Of Contents $340.0 Million Commercial Mortgage Pass-Through Certificates Series 2015-HYT Rationale Transaction Overview Strengths Risk Considerations Collateral Characteristics Loan Characteristics Third-Party Reviews Structural And Legal Issues Overview Of The U.S. Lodging Market And Limited-Service And Extended-Stay Segments Collateral Summary Brands JANUARY 16,

2 Table Of Contents (cont.) Historical Cash Flow And Standard & Poor's Cash Flow Notes Property Evaluation Details Scenario Analysis Transaction Level Credit Enhancement Standard & Poor's 17g-7 Disclosure Report Related Criteria And Research JANUARY 16,

3 Presale: Hyatt Hotel Portfolio Trust 2015-HYT $340.0 Million Commercial Mortgage Pass-Through Certificates Series 2015-HYT This presale report is based on information as of Jan. 16, The ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings. Information in this report is based on historical property level information as of September Updated information as of October 2014 was subsequently provided and did not materially differ from the prior period's performance data. Preliminary Ratings As Of Jan. 16, 2015 Class Preliminary rating(i) Preliminary amount ($) LTV (%) Market value decline (%)(iii) Debt yield (%)(iv) A AAA (sf) 110,070, (80.4) 31.1 X-CP B- (sf) 289,000,000(ii) N/A N/A N/A X-EXT B- (sf) 340,000,000(ii) N/A N/A N/A B AA- (sf) 40,130, (73.3) 22.8 C A- (sf) 29,800, (68.0) 19.0 D BBB- (sf) 43,000, (60.4) 15.4 E BB- (sf) 62,100, (49.3) 12.0 F B- (sf) 54,900, (39.6) 10.1 (i)the rating on each class of securities is preliminary and subject to change at any time. The issuer will issue the certificates to qualified institutional buyers in line with Rule 144A of the Securities Act of (ii)notional balance. The notional amount of the class X-CP and X-EXT certificates will be reduced by the aggregate amount of principal distributions and realized losses allocated to certain portions of the class A certificates and the class B, C, D, E, and F certificates. (iii)reflects the approximate decline in the $562.8 million appraised value that would be necessary to experience a principal loss at the given rating level. (iv)based on Standard & Poor's NCF and the mortgage balance. LTV--Loan-to-value ratio based on Standard & Poor's values. NCF--Net cash flow. N/A--Not applicable. Profile Expected closing date Feb. 6, Collateral Payment structure Underwriters Borrower Servicer/special servicer Trustee/certificate administrator One two-year floating-rate commercial mortgage loan totaling $340.0 million, with three one-year extension options, secured by cross-collateralized and cross-defaulted mortgages on the borrower's and operating lessee's fee and leasehold interests in 38 limited-service and extended-stay hotels. Principal payments will be made sequentially, first to the class A, then B, then C, then D, then E, and then F certificates. The issuer will make interest payments on the certificates to classes A, X-CP, and X-EXT, pro rata, based on the interest due and then sequentially to the class B, then C, then D, then E, and then F certificates. Realized losses are allocated in reverse sequential order. J.P. Morgan Securities LLC and Goldman, Sachs, and Co. LSREF3/AH Chicago LLC, which is a special-purpose entity indirectly owned by Lone Star Funds and Aimbridge Hospitality LLC. The properties are leased to LSREF3/AH Chicago Tenant LLC, the operating lessee, which is a party to the mortgage but not to the loan agreement. Under the mortgage, the operating lessee has mortgaged all of its rights in the properties as security for the mortgage loan. The operating lessee must observe certain single purpose entity covenants. KeyBank N.A. Wells Fargo Bank N.A. JANUARY 16,

4 Rationale The preliminary ratings assigned to Hyatt Hotel Portfolio Trust 2015-HYT's $340.0 million commercial mortgage pass-through certificates reflect Standard & Poor's Ratings Services' view of the collateral's historic and projected performance, the sponsors' and manager's experience, the trustee-provided liquidity, the loan's terms, and the transaction's structure. We determined that the loan has a beginning and ending loan-to-value (LTV) ratio of 95.8% based on Standard & Poor's value. Transaction Overview An overview of the transaction's structure, cash flows, and other considerations follows (see chart 1). JANUARY 16,

5 Strengths The transaction exhibits the following strengths: The trust loan balance has a debt service coverage (DSC) of 1.91x, calculated using the 2.45% spread plus the 2.75% LIBOR cap and the Standard & Poor's NCF for the portfolio, which is 12.8% lower than the issuer's NCF. The loan's actual DSC based on the current 0.17% LIBOR plus the spread and Standard & Poor's NCF is 3.79x. However, the DSC including the $167.0 million mezzanine loan is 0.99x based on the LIBOR cap plus the spread and Standard & Poor's NCF, or 1.60x based on the current LIBOR plus the spread and Standard & Poor's NCF. The portfolio is geographically diverse with 38 hotels located in 21 states. After New Jersey and Tennessee, which represent 19.0% and 8.2% of the trust balance by allocated loan amount, respectively, no state accounts for more than 8.0% of the trust balance. The properties are located in 25 metropolitan statistical areas (MSAs) with Newark, N.J., the largest MSA, representing 10.7% of the trust balance. The hotels are affiliated with Hyatt Place and Hyatt House, nationally recognized brands with 223 U.S. hotels. In addition to name recognition, the brand affiliations enable the hotels to benefit from Hyatt's national brand-wide reservation system, marketing campaigns, and the Hyatt Gold Passport frequent-stay program. There are 32 properties that have a revenue per available room (RevPAR) penetration rate--which measures the RevPAR of the hotel relative to its competitors, with 100% indicating parity with competitors--exceeding 100% as of the trailing-12-month (TTM) period ended September 2014 based on each hotel's Smith Travel Research (STR) report. One of the remaining six properties (Hyatt Place Omaha; 4% by allocated loan amount) only recently opened in 2013, and the remaining five properties had RevPAR penetration rates between 81.2%-95.0% during the same period, two of which were under renovation in Similar to the U.S. lodging sector overall, the portfolio performance has improved significantly over the past three years, as RevPAR increased by 6.0% in 2012, 3.8% in 2013, and 3.8% in the TTM period ended September Net cash flow (NCF) also improved by 2.4%, 6.7%, and 6.8% each year, respectively. The transaction has an in-place lockbox with springing cash management, and there is an NCF sweep in the event that the debt yield (based on the loan and mezzanine loan balances) falls below 7.0% prior to the second extension term, 7.25% during the second extension term, and 7.5% during the third extension term. In addition, there are ongoing reserves for taxes, ground rent, and furniture, fixtures, and equipment (FF&E). The transaction structure holds the borrower responsible for expenses in connection with the special servicing or work-out of the loan or enforcement of the loan documents, such as special servicing, work-out, and liquidation fees. To the extent it is deemed recoverable from the liquidation proceeds, the servicer must make administrative advances (provided the collateral has sufficient value) to cover interest shortfalls that might otherwise arise from these expenses if the borrower does not pay them on time, which we believe will help avoid or mitigate shortfalls to the certificateholders. Risk Considerations The risks we considered for this transaction include: The trust loan balance is high-leveraged with a 95.8% LTV ratio, based on Standard & Poor's valuation, which is higher than the LTV ratio for most single-borrower transactions we have recently rated. The LTV ratio based on the appraiser's valuation is 60.4%. Our estimate of long-term sustainable value is 36.9% lower than the appraiser's valuation, or 42.2% lower than the appraiser's value assuming the hotels transact as a portfolio. JANUARY 16,

6 The mortgage loan is interest-only for its entire five-year extended term, meaning there will be no scheduled amortization during the loan term. Compared with an amortizing loan, an interest-only loan bears a higher refinance risk because of the higher loan balance at maturity. Moreover, the first-mortgage loan has high leverage with a 95.8% Standard & Poor's LTV ratio. We considered the loan as interest-only in our transaction analysis. In addition to the first mortgage, there are two mezzanine loans totaling $167.0 million, which increases the Standard & Poor's LTV ratio to 142.8% from 95.8%. The transaction is subject to an intercreditor agreement between the mortgage and mezzanine lenders that limits the mezzanine lender's ability to foreclose without satisfying certain conditions. There is a lockbox in place to ensure that during a cash sweep event, interest on the mortgage and property-related expenses are paid before the mezzanine debtholders receive distributions. The transaction is concentrated by sponsor and property type. The collateral consists of one loan secured by 38 limited-service and extended-stay lodging properties. However, the transaction benefits from geographic diversity as the properties are located throughout 21 states. Furthermore, the portfolio is granular because no property contributes more than 5.8% of NCF based on the TTM ended September 2014 NCF, or 4.9% by allocated loan amount. The previous owner spent $36.9 million on capital improvements between Approximately 82% of the total was spent between Nevertheless, based on our site visits, many of the guestrooms need upgrades, and the new franchise agreements with Hyatt require renovations to the properties in order to comply with current brand standards. The outstanding brand mandated property improvement plans (PIPs) total $56.9 million ($11,524 per guestroom) and have to be completed in most cases by mid-year There is an upfront reserve for $21.0 million and a letter of credit for $19.0 million to fund these future projects, and there is an ongoing FF&E reserve equal to 4.0% of total revenue during the initial loan term. There are 25 properties (60.8% by allocated loan amount) located in markets that we consider to be secondary or tertiary. These markets have historically exhibited greater default and loss rates relative to primary markets. Favorably, 13 of the properties (39.2%) are located in primary markets. Despite the improving RevPAR and NCF performance of the portfolio in the past few years, several of the subject properties' operating expense ratios are higher than industry standards. As such, the portfolio's NCF margin of 23%-24% during the past four years is below the typical range (25%-30%) for limited service and extended-stay hotels. Aimbridge Hospitality LLC, the new property manager, plans to operate the properties more efficiently to better control expenses than Hyatt Hotels Corp., the previous owner and operator, which had traditionally focused mainly on operating large full-service hotels. The loan permits individual properties to be released upon a release premium payment of 115% of the allocated loan amount, which is below the 125% minimum that we generally look for. However, additional restrictions on property releases apply, so releases do not have the effect of reducing the loan's debt yield below the greater of the 7.7% current debt yield and the debt yield immediately prior to the release. Also, the LTV ratio subsequent to the release must not exceed 75.5%. Furthermore, the loan would still deleverage from a release because the release price is greater than the allocated loan amount. The transaction exhibits concentration in the lodging sector because the loan is secured by the fee and leasehold interests in 38 hotels. Standard & Poor's considers lodging properties to be among the riskiest property types due to the daily nature of the pricing structure, significant operating components, and higher expense ratios relative to other property types. Relative to full-service properties, limited-service and extended-stay hotels have a shorter development timeframe, are less expensive to construct, and are easier to finance, potentially resulting in fewer supply constraints. JANUARY 16,

7 Collateral Characteristics Collateral description The mortgage loan is secured by the fee and leasehold interests in 38 limited-service and extended-stay hotels. Brand distribution The 38 hotels operate under two different national brands, Hyatt Place and Hyatt House. Table 1 Franchise Affiliations Franchise Number of hotels Allocated loan amount ($) Allocated loan amount (%) TTM ended September 2014 NCF ($) TTM Ended September 2014 NCF (%) Hyatt Place ,492, ,843, Hyatt House ,507, ,035, Total ,000, ,878, NCF--Net cash flow. N/A--Not applicable. Geographic distribution The portfolio is geographically diverse as the hotels are located across 21 U.S. states (see table 2). The largest state concentration is in New Jersey (five hotels; 19.0% by allocated loan amount). The second and third largest state concentrations are in Tennessee (three hotels, 8.2%) and Pennsylvania (three hotels, 8.0%). No other state represents more than 7.7% by allocated loan amount. Table 2 Concentrations By State State No. of properties Allocated loan amount ($) % of allocated loan amount New Jersey 5 64,761, Tennessee 3 27,808, Pennsylvania 3 27,327, Virginia 3 26,170, North Carolina 2 17,688, Kentucky 2 17,596, Massachusetts 1 16,763, Michigan 2 16,334, Ohio 2 14,832, Nebraska 1 13,757, Others 14 96,959, Total ,000, For the overall portfolio, the properties are located in 25 MSAs, and no single MSA accounts for more than 10.7% of the trust balance. The top three MSAs by allocated loan amount are Newark (three hotels; 10.7%), New York (two hotels; 7.1%), and Nashville and Pittsburg (each with two hotels; 5.8%). In total, the five- and 10-largest MSAs represent 34.5% and 56.0% of the trust balance, respectively, and four properties (9.3%) are located in nonmetropolitan areas. JANUARY 16,

8 The properties are concentrated within the New York-Newark-Jersey City (15.2%) MSA. Standard & Poor's U.S. Public Finance Group provides credit ratings on Morris County and Hudson County, which participate within these MSAs. For more information on each of these counties, see the rating reports listed under Related Research. Standard & Poor's U.S. Public Finance Snapshot Morris County in the New York-Newark-Jersey City MSA: We consider Morris County's (AAA/Stable, general obligation debt rating) economy to be strong with projected per capita effective buying income at 187% of the U.S. The total market value of all real estate within the county reached $91 billion for 2014, up 2% from the prior year. The county's per capita real estate market value was $182,297 for With a population of 0.5 million, the county participates in the New York-Newark-Jersey City MSA in New York, New Jersey, and Pennsylvania, which we consider to be strong. The county's unemployment rate for calendar year 2013 was 6%. Hudson County in the New York-Newark-Jersey City MSA: We consider Hudson County's (AA/Stable, general obligation debt rating) economy to be strong with projected per capita effective buying income at 121% of the U.S. The total market value of all real estate within the county reached $60 billion for 2014, up 6% from the prior year. The county's per capita real estate market value was $92,859 for With a population of 0.6 million, the county participates in the New York-Newark-Jersey City MSA in New York, New Jersey, and Pennsylvania, which we consider to be strong. The county's unemployment rate for calendar year 2013 was 9%. Management agreements The hotels in the portfolio will be managed by Aimbridge Hospitality LLC, an independent hotel management company that currently operates about 250 hotels across 37 states and in the Caribbean. The management agreement covers all of the portfolio properties. It was executed in November 2014 with a three-year term and one three-year extension option. The base management fee will equal 3.0% of total revenue, and there is no incentive management fee. The manager is also entitled to a monthly accounting fee of $2,000 per property and a revenue management fee of $1,000 per property. Hyatt was the previous manager for the hotels in the portfolio. The management agreement may not be terminated unless the borrowers have entered into a replacement management agreement with a qualified manager, subject to rating agency confirmation. A qualified manager can be the current manager or a reputable and experienced management company that manages properties similar in size, scope, use, and value as the subject properties and is subject to rating agency approval. There is also an asset management agreement with Hudson Advisors, an affiliate of Lone Star Funds. The asset management fee as defined in the asset management agreement is the cost for such services plus 15%. The fee is payable after debt service and operating expenses. Franchise agreements Each of the properties is operated under separate franchise agreements with either Hyatt Place Franchising LLC or Hyatt House Franchising LLC, which grant the franchisee the right to use the franchisor's name in the hotel's operations, as well as the right to use certain reservation and other systems for a fee. The franchise fee consists of a monthly royalty fee equal to 5.0% of room revenue and a 3.5% monthly marketing, central reservations, and technology fee. The franchise agreements were executed in 2014 and have 20-year terms. JANUARY 16,

9 The franchise agreements may not be terminated unless the borrowers have entered into a replacement franchise agreement with a qualified franchisor, subject to rating agency confirmation. A qualified franchisor can be the current franchisor or a reputable and experienced franchisor with experience flagging hotels similar in size, scope, use, and value as the subject properties and is subject to rating agency approval. Property improvement plans Under the terms of the new franchise agreements, about $56.9 million ($11,524 per guestroom) in required PIPs must be completed, in most cases, by mid-year The loan is structured with a $21.0 million upfront PIP reserve and a $19.0 million letter of credit to fund the PIPs. We assumed the balance would be funded in the loan's first and second years by the 5.0% FF&E reserve we assumed in our NCF analysis. Each of the 38 properties is scheduled to receive some level of improvements, ranging from $127,870-$4,106,551 per property with an average of $1.5 million per property. Table 3 Scheduled PIP Hotel Budgeted PIP cost ($) PIP per room Hyatt Place 34,424,404 10,094 Hyatt House 22,463,964 14,721 Total/average 56,888,368 11,493 PIP--Property improvement plan. Borrowers/sponsor The transaction's borrower is LSREF3/AH Chicago LLC, a bankruptcy-remote special-purpose entity (SPE). The borrower's sponsor is a joint venture between Lone Star Funds and Aimbridge Hospitality LLC. Lone Star Funds is a private equity firm that invests globally in real estate, equity, credit, and other financial assets. Since 1995, Lone Star Funds has organized 13 private equity funds with aggregate capital commitments totaling more than $52 billion. Lone Star Global Acquisitions Ltd., an investment adviser registered with the U.S. Securities and Exchange Commission, advises the funds. Aimbridge Hospitality LLC manages about 250 hotels in 37 states and the Caribbean and has invested in 154 hotels alongside capital partners. The company is an independent management company and is recognized as an approved operator for all of the industry's leading brands. Lone Star Real Estate Fund III (U.S.) L.P. is the loan's guarantor. The sponsor is purchasing the hotels from Hyatt Hotel Corp. for $590.0 million or $119,192 per guestroom, and it contributed $117.7 million of equity for the acquisition. The organizational documents require that the transaction have two independent directors whose votes are required before any borrower may file for bankruptcy. The independent directors must be selected from nationally recognized companies or service providers that provide independent director services as part of their business. The borrowers must provide five business days written notice with a specified cause before removing an independent director. Leasehold interests Three properties, Hyatt Place Secaucus, Hyatt House Richmond-West, and Hyatt Place Lakeland Center (together, 10.1% by allocated loan amount) are subject to ground leases that generally afford the lender standard notice and cure JANUARY 16,

10 rights. The ground leases have extended maturity dates of 2071, 2071, and 2053, respectively. Insurance The borrowers must maintain comprehensive, all-risk insurance for the mortgaged properties (including windstorm coverage) in an amount that at least equals each property's full replacement cost and that contains an ordinance, law coverage, or enforcement endorsement if any improvements or uses of the property at any time constitute legal nonconforming structures or uses. The borrowers must also maintain boiler and machinery insurance, commercial general liability insurance, and terrorism insurance. In addition, the borrowers must have business interruption insurance in effect for at least 24 months after the interruption date. The insurance provisions are generally consistent with Standard & Poor's property insurance criteria. The properties are currently covered by a blanket insurance policy with all-risk coverage that includes losses caused by earthquakes and windstorms. There are two properties in the portfolio (3.1% by allocated amount) located in Florida within hurricane susceptible zones. The properties are currently insured under a blanket policy, which includes a $200 million limit per occurrence for all risks, a $200 million limit per occurrence for wind, $100 million for windstorm, and a $50 million limit for flood with the exception of the Hyatt House Fishkill and Whippany hotels, which have a $20 million annual aggregate limit. There is also a $10 million aggregate annual limit for hotels in special flood hazard areas other than the Fishkill and Whippany hotels. Earthquake risk coverage is $50 million, except for the California locations, which have $25 million of coverage. None of the properties has a probable maximum loss (PML) exceeding 7%. Loan Characteristics Mortgage loan The first-mortgage loan has a $340.0 million principal balance and an initial two-year term maturing on Dec. 9, 2016, with three, one-year extension options. The loan is interest-only for its entire term and has a floating interest rate equal to LIBOR plus % during the initial term, which increases by 0.20% when the second extension period begins. The borrowers have entered into an interest rate cap agreement with a 2.75% strike price during the initial term. Loan extension conditions include extending the mezzanine loans and purchasing a replacement interest rate cap with a strike price equal to the greater of 2.75% and a strike price resulting in a DSC of at least 1.10x, or such other strike price agreed to by the borrower and lenders. With respect to the third extension option, the debt yield based on the prior 12 months NCF must exceed 8.25%; however, the borrower can prepay the loan to satisfy the debt yield test. The Standard & Poor's debt yield is 6.8% based on our NCF and the $340.0 million mortgage and $161.0 million mezzanine loans. The debt yield as of the TTM period ended September 2014 was 7.7%. Secondary financing In addition to the first-mortgage loan, the borrowers obtained two mezzanine loans totaling $167.0 million comprising a $102.0 million mezzanine A loan and a $65.0 million mezzanine B loan. Both loans mature on Dec. 9, 2016, with three, one-year extension options. The mezzanine A loan's interest rate is LIBOR plus 6.25%, and the mezzanine B loan's interest rate is LIBOR plus 8.50%. The mezzanine loans are interest-only for their full terms, and the borrowers have entered into an interest rate cap agreement with a 2.75% strike price for the initial terms. JANUARY 16,

11 To mitigate additional debt risk, the borrower is structured as a bankruptcy-remote SPE with prohibitions on future debt. The transaction also has a lockbox in place that ensures debt service for the first-mortgage, property-related expenses, and FF&E reserve amounts are paid before the mezzanine debtholders receive payments during a cash sweep event. The transaction also includes an intercreditor agreement between the first-mortgage and mezzanine lenders. Generally speaking, the mezzanine lenders must obtain rating agency confirmation before completing any foreclosure under the mezzanine pledge unless certain conditions are satisfied. The mezzanine lender may only transfer their interests to a qualified transferee as defined in the intercreditor agreement. Property releases The borrowers may obtain the release of one or more of the properties subject to a release price equal to 115% of the allocated loan balance. Although the release premium is below the range that we generally look for, partial releases would still have a deleveraging effect on the transaction. Additional restrictions on property releases apply to limit the negative effect on the overall portfolio debt yield. Upon release, the debt yield for the remaining collateral must exceed the greater of the debt yield immediately before release and 7.7%. Also, the LTV ratio subsequent to the release must not exceed 75.5%. Reserves Table 4 Reserves Tax, insurance, and ground rent reserves Replacement reserve fund Upfront: $1.4 million for taxes and insurance; $70,121 for ground rent. Monthly collections equal 1/12 of the estimated annual payments for taxes and ground rent payments due during the next 12 months. Monthly collections for insurance are only required if the properties are not insured as part of a "blanket" policy. FF&E cash deposit: $21.0 million upfront reserve for renovations under any PIP or franchise agreement. FF&E Letter of Credit: $19.0 million to remain in place until it is reduced to zero or the PIP is completed. FF&E reserves: Monthly collections equal to 4.0% of total revenue through the initial maturity date and thereafter, the greater of 3.0% of total revenue and the amount required under the applicable franchise agreements up to 4.0%. Required repair reserve: $451,205 to fund the completion of immediate required repairs. PIP--Property improvement plan. LOC Letter of credit. FF&E--Furniture, fixtures, and equipment. Cash management The transaction has a lockbox in place with springing cash management. Credit card receipts will be deposited directly into the lockbox account, and any amounts that the borrower or manager directly receives must be deposited into the lockbox account within three business days. Funds will be transferred to the borrower weekly (or more frequently if requested) if no cash sweep period exists. During a cash sweep period, funds will be transferred daily to the cash management account, and funds in the account will be applied each business day to the following subaccounts in the following priority: Ground rent; Taxes and insurance; Monthly debt service for the mortgage loan; Any other amounts due to the lender under the loan document; Approved operating expenses and extraordinary expenses and management fees; FF&E reserves; JANUARY 16,

12 Asset management fees; Cash management account fees; If no mortgage event of default has occurred, debt service on the mezzanine A loan; If no mezzanine A event of default has occurred, debt service on the mezzanine B mezzanine loan; and Excess cash flow to the excess cash flow reserve fund during a cash sweep period. A cash sweep event occurs upon an event of default, bankruptcy action of the borrower, operating lessee, or an affiliated manager, a debt yield trigger event, or a mezzanine loan default. A debt yield trigger event occurs if the debt yield on the mortgage and mezzanine loans is less than 7.0% before the second extension term for two consecutive quarters based on the TTM NCF, 7.25% during the second extension term, and 7.5% during the third extension term. The debt yield on the mortgage and mezzanine loans is 7.7% as of the TTM period ended September During a cash sweep period triggered by an event of default, the borrower can apply the funds in the lockbox account in any order in its sole discretion. Third-Party Reviews We reviewed appraisal, environmental, engineering, and seismic reviews prepared within the past three months for the 38 properties. Phase II environmental reports were not recommended for any property. The site of the Hyatt House Branchburg (3.8% by allocated loan amount) is an active Brownfield site and New Jersey Voluntary Cleanup Program hazardous waste site. The responsible party is Branchburg Sierra Associates L.P. The licensed professional supervising the remediation reported that residual soil impacts have been remediated with controls including a cap, fencing, and a deed notice. However, the necessary filings for case closure can't be made until the borrower/sponsor establishes state-required financial assurance of funding for continued cap inspections and maintenance. The environmental report for the Hyatt House Shelton (2.1%) indicates that the property and an adjacent property (828 Bridgeport Avenue) were previously owned by a person (828 Owner) who sold the mortgaged property to the current hotel site owners in Bridgeport Avenue is located adjacent to the subject property and is identified as a CT Property Transfer Act site. Because historical records indicate 15 feet along the western perimeter of the subject property was formerly developed with asphalt paved areas associated with this adjacent parcel, the subject property is tied into these regulatory listings. The 828 Owner certified to the state that he undertook responsibility for investigating and remediating any environmental impacts at the properties; however, the state rejected a filing to close the case with respect to the subject property on the basis that additional information was required regarding issues at 828 Bridgeport Avenue. The environmental report recommends that the owners of the subject property seek legal advice to determine a procedure to separate the mortgaged property case from that of 828 Bridgeport Avenue and that additional state filings and additional investigation might be required. The environmental site assessment estimated that in the event that further investigation does not identify additional contamination, a worst-case cost estimate to obtain case closure for both properties together would be $50,000, and if limited contamination is identified, then the worst-case cost would be $100, JANUARY 16,

13 Structural And Legal Issues We reviewed legal matters that we believe are relevant to our analysis. We analyzed the major transaction documents, including the offering circular, trust and servicing agreement, and other relevant documents and opinions to understand the transaction's mechanics and its consistency with applicable criteria. We also conducted a focused legal review of the mortgage loan, cash management, and intercreditor agreement. Extraordinary trust expenses The borrowers are required to pay special servicing, workout, and liquidation fees, as well as other costs in connection with the special servicing, work-out, or enforcement of the loan documents. Because Standard & Poor's ratings reflect, among other factors, the timely payment of interest, the borrower's obligation to pay these trust fund expenses helps mitigate the risk of interest shortfalls that a monetary or nonmonetary default may cause. Overview Of The U.S. Lodging Market And Limited-Service And Extended-Stay Segments U.S. lodging sector overview After experiencing five consecutive years of RevPAR growth from , the overall U.S. hotel sector's performance started to decline significantly in the second half of 2008 because of the recent recession, which resulted in rising unemployment levels, declining consumer confidence, and weakened corporate profitability. In 2009, the industry experienced unprecedented performance declines as RevPAR decreased by 16.7%, the industry's largest single-year decline on record. The economic downturn most severely strained the luxury and upscale segments, because higher-rate corporate transient and group travel decreased, as did high-end leisure travel because consumers more closely monitored their discretionary spending. However, all lodging segments experienced double-digit RevPAR declines in 2009 because hotel demand typically shows close correlations with overall economic performance. Table 5 U.S. Hotel Sector Historical Performance Occupancy (%) ADR ($) RevPAR ($) RevPAR change (%) N/A (1.7) (16.7) Supply change (%) N/A ADR--Average daily rate. RevPAR--Revenue per available room. N/A--Not applicable. Source: Smith Travel Research. Occupancy increases stemming from strengthened demand, particularly in the corporate transient segment, led to the U.S. hotel sector's improved performance since mid As occupancy levels stabilized, average daily rate (ADR) gains followed. RevPAR increased by 8.2% in 2011, 6.7% in 2012, and 5.4% in 2013 (see table 5). As of year-end 2013, U.S. RevPAR levels exceeded the prior peak RevPAR levels achieved in 2007 by 4.7%. Year-to-date through JANUARY 16,

14 September 2014, U.S. RevPAR increased 8.2% versus the same period last year. In addition to strong demand, constrained lodging supply growth also fueled RevPAR growth. After experiencing rapid growth in 2008 and 2009, new supply growth decelerated to less than 1.0% per year between Year-to-date through September 2014, U.S. supply was up 0.8% versus the same period last year. Limited-service market overview The lodging industry's limited-service segment caters primarily to price-sensitive corporate and leisure-transient demand. These properties offer a limited range of guest services, have minimal public space, and generally do not have significant food and beverage operations. Guestroom amenities are minimal and depending on their age, some properties may feature exterior corridors. Limited-service hotels maintain minimum staffing levels to provide a lower price point while maintaining profitability. The limited amenities offered enable operators to limit expenses, particularly payroll expenses, because of the lower staffing levels required. Gross operating profits for the limited-service segment typically range from 25%-30%, which is significantly higher than the margins of full-service hotels. Of the hotels in the portfolio, 27 (64.9% by allocated loan amount) are Hyatt Place hotels, which are considered limited-service hotels as they lack full-service, three-meal restaurants. Based on their ADRs, the Hyatt Place hotels in the portfolio fall under the upscale chain scale segment, according to STR. The 2009 performance decline and subsequent RevPAR improvement for the upscale segment was generally similar to the declines experienced by the industry overall. Upscale extended-stay market overview In addition, 11 of the hotels in the portfolio (35.1% by allocated loan amount) are considered extended-stay hotels. The extended-stay sector is subdivided into three segments: upscale, mid-price, and economy. Based on the amenities and services provided, the ADRs and lengths of stay vary among these segments. Hyatt House is considered an upscale extended-stay product. In the upscale segment, typical ADR, average length of stay, and NCF margins are more than $90, three nights, and 29%, respectively. The extended-stay hotel sector caters to guests seeking longer-term hotel stays. These properties differ from traditional hotels because the guestrooms are equipped with separate living and sleeping areas and have full kitchens or kitchenettes. They also typically offer fewer guest services, have limited public space, and generally do not have food and beverage outlets. Guestroom amenities are also limited, and housekeeping may not be provided daily. Because guests tend to stay at these hotels for a longer timeframe, the limited guest services may result in lower operating expenses versus those of traditional full- and limited-service hotels. As of year-end 2012, extended-stay hotel rooms represented only about 7.5% of the total U.S. hotel supply. However, the number of U.S. extended-stay hotel rooms has doubled in the past 13 years. The sector experienced rapid supply growth of 23.6% between Although the supply growth rate slowed significantly between , the growth rates (2.5% in 2010, 1.6% in 2011, and 2.5% in 2012) exceeded the U.S. hotel sector's benign overall growth each year during the same periods. The upscale extended-stay segment represents about 39% of the extended-stay market and is the fastest growing JANUARY 16,

15 segment within the sector. Nevertheless, the extended-stay sector's performance has followed a similar RevPAR growth pattern as the U.S. hotel sector overall and the sector consistently experiences strong occupancy levels. Excluding 2009, the upscale extended-stay sector's occupancy has exceeded 65% every year. Table 6 Upscale Extended-Stay Sector Historical Performance Occupancy (%) ADR ($) RevPAR ($) RevPAR change (%) N/A (6.8) (13.0) Supply change (%) N/A Source: The Highland Group. ADR--Average daily rate. RevPAR--Revenue per available room. N/A--Not applicable. Collateral Summary The mortgage loan is secured by the fee and leasehold interests in 38 limited-service and extended-stay hotels operating under the Hyatt Place and Hyatt House national brands. A summary of the portfolio follows (see table 7). Table 7 Hyatt Portfolio Overview No. of hotels Allocated loan amount ($) % allocated loan amount Hyatt Place ,492, Hyatt House ,507, Total ,000, Capital expenditures Approximately $20.3 million ($4,102 per guestroom) was spent on capital expenditures between , and another $16.6 million ($3,364 per guestroom) is budgeted to be spent by year-end The average room count is 130 guestrooms, and the average age of the properties, constructed from , is 15 years. All of the Hyatt House properties were converted from the Hotel Sierra or Summerfield Suites brands in 2012, and most of the Hyatt Place hotels in the portfolio were converted from AmeriSuites in 2007 and Despite the substantial capital expenditures in recent years, based on our property visits, many of the hotels need upgrades, particularly the guestroom soft and hard goods, which appear dated at many of the properties we visited. Franchise inspection reports were not available. The sponsor or a new owner will need to upgrade the properties to maintain the franchise or to obtain a new franchise of a similar caliber. The appraiser deducted $51.1 million or $10,315 per guestroom across the portfolio to account for estimated future PIP costs. Based on the recently executed franchise agreements with Hyatt, brand-required PIPs for the next two years total $56.9 million and there is an upfront reserve for $21.0 million and a letter of credit for $19.0 million. The loan is structured with an ongoing FF&E reserve equal to 4.0% of total revenue. Due to the age and condition of the JANUARY 16,

16 properties, we utilized a 5.0% FF&E expense in our analysis. Table 8 Capital Expenditures By Brand No. of hotels Capital expenditures ($) Capital expenditures per key ($) Hyatt Place 27 27,977,561 8,203 Hyatt House 11 8,932,487 5,853 Total/average 38 36,910,048 7,457 RevPAR penetration The hotels in the portfolio compete primarily with other limited-service and extended-stay brands. Corporate transient and leisure demand primarily drive the demand for limited-service and extended-stay hotels. The hotels in the portfolio generally have limited meeting space; therefore, they generate minimal meeting and group demand. The national brand affiliation with Hyatt and the related brand recognition is favorable considering the sector's reliance on transient demand. Below we summarize the RevPAR penetration rates for the hotels in the portfolio (see table 9). Of the 38 hotels in the portfolio, only six properties (16.5% by allocated loan amount) had RevPAR penetration rates below 100% as of the TTM ended September 2014, two of which were being renovated in We attribute the generally high RevPAR penetration rates to the fact that all of the hotels within the portfolio are associated with the nationally recognized Hyatt brand. However, in certain cases, the hotels identified as primary competitors are limited-service or are of a lower chain scale classification, which may increase the hotel's penetration rate because of a lower average RevPAR for the competitive set. Table 9 RevPAR Penetration Rates(i) RevPAR penetration No. of properties Allocated loan amount ($) % of allocated loan amount Greater than 110% ,799, %-110% 10 81,103, %-99% 4 41,385, %-89% 2 14,711, Total ,000, (i)all figures as of the trailing-12-months ended September RevPAR--Revenue per available room. Source: Smith Travel Research. Brands Hyatt Place Hyatt Place is classified as an upscale product within the STR chain scale. In 2007 and 2008, Hyatt Hotels Corp. purchased most of the properties under the AmeriSuites flag. These properties were renovated and rebranded as Hyatt Place hotels; however, several Hyatt Place hotels were newly constructed as well. As of year-end 2013, there were more than 165 Hyatt Place hotels in the U.S. with more than 35 announced hotels under development throughout the JANUARY 16,

17 world. The hotels have standard guestrooms and provide guests with certain amenities and services including self-service check-in kiosks, lobby workstations with free access to computers and printers, and a kitchen/café and wine bar, which offer food and beverage items for purchase as well as complimentary continental breakfast. Most properties include a pool, exercise room, and a limited amount of meeting space. Guestrooms feature Wi-Fi internet access and 42-inch flat-panel televisions. The hotels generally compete with other upscale limited-service products, such as Courtyard by Marriott and aloft, as well as lower-rated brands, such as Hampton Inn, and cater mainly to corporate and leisure travelers. In 2013, the brand operated at an average occupancy level of 75.1% with an average daily rate (ADR) of $ and an average RevPAR of $ This is similar to the RevPAR achieved by the portfolio Hyatt Place hotels in 2013 of $76.51 (see table 10). There are 27 Hyatt Place hotels in the portfolio representing 64.9% by allocated loan amount. The hotels were built between and have an average age of 17 years. Capital expenditures for the Hyatt Place hotels totaled $28.0 million ($8,203 per guestroom) between and $34.4 million ($10,094 per guestroom) is expected to be spent during the near-term PIP. Table 10 Hyatt Place Hotels Historical Performance TTM 9/2014 Standard & Poor's Guestrooms 3,266 3,266 3,266 3,266 3,266 3,293 3,410 3,424 Occupancy (%) ADR ($) RevPAR ($) RevPAR change (%) N/A (14.7) (3.8) NCF (mil. $) Change (%) N/A (33.9) (14.1) NCF margin (%) Standard & Poor's cap rate (%) 9.70 Standard & Poor's value (mil. $) Standard & Poor's value/key 64,287 TTM--Trailing-12-month. ADR--Average daily rate. RevPAR--Revenue per available room. NCF--Net cash flow. Cap rate--capitalization rate. N/A--Not applicable. Hyatt House Hyatt House is Hyatt's upscale, extended-stay, all-suite product. It is classified as an upscale product within the STR chain scales. The brand was launched in 2012 and there are 58 Hyatt House hotels in the U.S. All of the Hyatt House hotels in the portfolio were converted from either Hotel Sierra or Summerfield Suites branded hotels in A typical Hyatt House property generally contains studios and one- and two-bedroom kitchen suites, a breakfast/dining area (where a complimentary breakfast and nightly social/happy hour are held), 24-hour market pantry, a business center, small meeting room, guest laundry room, an exercise room, and a swimming pool. The hotels generally compete with other upscale extended-stay products, such as Residence Inn and Homewood Suites JANUARY 16,

18 and secondarily with higher-scale limited-service products, such as Courtyard by Marriott and Hampton Inn. In 2013, the brand operated at a 79.5% average occupancy level with a $ ADR and $98.52 RevPAR. This is slightly higher than the $92.60 RevPAR achieved by the Hyatt House hotels in the portfolio in The portfolio includes 11 Hyatt House hotels representing 35.1% by allocated loan amount. The hotels were built between and have an average age of 21 years. According to the property managers with whom we met, the average guest length of stay of two-three days exceeds that of traditional hotels. Depending on the purpose of the stay, which often includes corporate training, company projects, or family relocations, stays often exceed five nights and can occasionally last 30 days or more. During a typical guest stay, a complete guestroom cleaning is done every three days with a limited refresh done on the remaining nights. Due to the lower housekeeping needs, the NCF margin for the Hyatt House portion of the portfolio has historically exceeded that of the Hyatt Place hotels. Capital expenditures for the Hyatt House hotels totaled $8.9 million ($5,854 per guestroom) between and $22.5 million ($14,721 per guestroom) is expected to be spent on the planned PIPs. A summary of the Hyatt House historical performance is provided in table 11. Table 11 Hyatt House Hotels Historical Performance 2008(i) 2009(i) (i) 2013 TTM Sept Standard & Poor's Guestrooms ,523 1,526 1,526 1,526 1,526 1,526 Occupancy (%) ADR ($) RevPAR ($) RevPAR change (%) N/A (20.5) (4.2) (2.4) NCF (mil. $) Change (%) N/A (54.9) (3.7) (8.2) NCF margin (%) Standard & Poor's cap rate (%) Standard & Poor's value (mil. $) Standard & Poor's value/key TTM--Trailing-12-month. ADR--Average daily rate. RevPAR--Revenue per available room. NCF--Net cash flow. Cap rate--capitalization rate. N/A--Not applicable. (i)2008 and 2009 data includes only 267 guestrooms. In 2012, the hotels were converted from Hotel Sierra and Summerfield Suites to Hyatt House hotels ,425 Historical Cash Flow And Standard & Poor's Cash Flow Notes Standard & Poor's reviewed the historical cash flows and the issuer- and appraiser-reported cash flows to determine its view of a sustainable cash flow for the portfolio. We summarize the historical and Standard & Poor's NCF for the portfolio below (see table 12). Room revenue for the portfolio has historically represented approximately 95% of total revenue. We assumed an JANUARY 16,

19 $81.91 RevPAR for the portfolio, reflecting a 3.3% RevPAR decline compared with the RevPAR for the TTM period ended September We estimated total marketing, management, and franchise fees at 16.9% of total revenue for the portfolio, which is based on the newly executed franchise and management agreements. We also utilized an FF&E reserve of 5.0% of total revenue in our analysis. The portfolio generated NCF margins between 23%-24% in the past four years. According to the appraiser and our analysis of other similar hotel portfolios, this is at the low end of the range for limited-service and extended-stay hotels. The portfolio's rooms expense of more than 30% is high as are the repairs and maintenance, as well as administrative and general expenses. According to the sponsor, Aimbridge Hospitality LLC, the new property manager, anticipates operating the properties more efficiently to better control expenses, particularly rooms expense, by better controlling labor costs. It is also expected that repairs and maintenance expenses will decline once the required PIPs are completed. Although we adjusted expenses to conform to the new franchise and management fees, we did not give additional benefit for future expense reductions despite the fact that several expenses exceed industry norms. Table 12 Historical Cash Flow(i) TTM 9/2014 Appraiser (2014/2015) UW Standard & Poor's Occupancy rate (%) ADR ($) RevPAR ($)(ii) Total revenue (mil. $) Total departmental expenses (mil. $)(iii) Departmental profit (mil. $) Total undistributed expenses (mil. $)(iv) Total fixed charges (mil. $)(v) Total capital items (mil. $)(vi) NCF (mil. $) NCF margin (%) NCF haircut (%) (12.8) Cap rate (%)(vii) 9.64 Standard & Poor's value ($) Standard & Poor's value/key ($) 355,054,581 71,728 JANUARY 16,