LAQ 2022-LAQ Mortgage Trust — Moody’s assigns provisional ratings to three CMBS classes of LAQ 2022-LAQ Mortgage Trust

Rating Action: Moody’s assigns provisional ratings to three CMBS classes of LAQ 2022-LAQ Mortgage TrustGlobal Credit Research – 09 Mar 2022New York, March 09, 2022 — Moody’s Investors Service has assigned provisional ratings to three classes of CMBS securities, to be issued by LAQ 2022-LAQ Mortgage Trust, Commercial Mortgage Pass-Through Certificates, Series 2022-LAQ: Cl. A, Assigned (P)Aaa (sf) Cl. B, Assigned (P)Aa3 (sf) Cl. C, Assigned (P)A3 (sf) RATINGS RATIONALE The certificates are collateralized by a first-lien mortgage on the fee simple and/or leasehold interests in 107 La Quinta flagged hotels, one Baymont flagged hotel, and one pledge of cash flow from one La Quinta flagged hotel (the “Portfolio”). Our ratings are based on the credit quality of the loans and the strength of the securitization structure.The Portfolio is comprised of 108 La Quinta branded select-service hotels and one Baymont select-service hotel that collectively offer 15,507 guestrooms. The hotels were acquired by the sponsor in connection with the acquisition and privatization of CorePoint Lodging Inc. Most of the Portfolio is midscale to upper-midscale segmented (71.1% of the year-end 2019 NCF) and located in suburban or airport markets (70.7% of the year-end 2019 NCF).Each of the properties are of similar build with an average hotel room count of 142 (ranges from 97 to 347) and each is owned fee simple, with the exception of six leasehold properties that represent 7.1% of guestrooms and 6.6% of ALA. The properties provide limited amenities and focus on providing clean and convenient hotel lodging at lower price points. The properties generally offer limited food offerings (free buffet style breakfast), free internet access, free parking, swimming pools, fitness centers, and laundry services.The Portfolio has a weighted average year built of 1991 (~31 years old), as the individual hotels were constructed at various points between 1965 and 2009. Since 2016, the Portfolio has benefited from $343.1 million ($22,124 per key) of capital investment, with expenditures per hotel ranging from a low of $1,770 per key to a high of $87,084 per key. As part of the capital investment since 2016, there were 36 hotels (5,187 guestrooms) repositioned with approximately $190.4 million ($36,709 per key) of capital. We consider the effective age of the Portfolio (accounting for noted capital investments) as approximately 23 years old, which is a weighted average effective vintage of 1999.The properties are located in 39 markets across 22 states and over 80 cities. The top 10 properties represent 20.8% of ALA, and the largest asset represents only 3.3% of the total ALA. The three largest state concentrations based on ALA are California, Texas, and Florida, which represent approximately 19.6%, 18.5% and 16.2% respectively.Moody’s approach to rating this transaction involved the application our Large Loan and Single Asset/Single Borrower Commercial Mortgage-Backed Securitization methodology. The rating approach for securities backed by a single loan compares the credit risk inherent in the underlying collateral with the credit protection offered by the structure. The structure’s credit enhancement is quantified by the maximum deterioration in property value that the securities are able to withstand under various stress scenarios without causing an increase in the expected loss for various rating levels. In assigning single borrower ratings, we also consider a range of qualitative issues as well as the transaction’s structural and legal aspects.The credit risk of loans is determined primarily by two factors: 1) Moody’s assessment of the probability of default, which is largely driven by each loan’s DSCR, and 2) Moody’s assessment of the severity of loss upon a default, which is largely driven by each loan’s loan-to-value ratio, referred to as the Moody’s LTV or MLTV. As described in the CMBS methodology used to rate this transaction, we make various adjustments to the MLTV. We adjust the MLTV for each loan using a value that reflects capitalization (cap) rates that are between our sustainable cap rates and market cap rates. We also use an adjusted loan balance that reflects each loan’s amortization profile.The Moody’s first mortgage actual DSCR is 1.86X and Moody’s mortgage actual stressed DSCR is 0.84X. Moody’s DSCR is based on our stabilized net cash flow.Moody’s LTV ratio for the first mortgage balance of $1,040,200,000 is 150.9%. Moody’s LTV ratio is based on our Moody’s value. We did not adjust Moody’s value to reflect the current interest rate environment as part of our analysis for this transaction.Moody’s also grades properties on a scale of 0 to 5 (best to worst) and considers those grades when assessing the likelihood of debt payment. The factors considered include property age, quality of construction, location, market, and tenancy. The portfolio’s property quality grade is 2.75.Notable strengths of the transaction include portfolio diversity, historical capital expenditures, multiple property pooling, acquisition financing, and strong sponsorship.Notable concerns of the transaction include the effects of coronavirus on recent portfolio performance, age of properties, property type volatility, floating-rate and interest-only loan profile and credit negative legal features.Moody’s rating approach considers sequential pay in connection with a collateral release as a credit neutral benchmark. Although the loans’ release premium mitigates the risk of a ratings downgrade due to adverse selection, the pro rata payment structure limits ratings upgrade potential as mezzanine classes are prevented from building enhancement. The benefit received from pooling through cross-collateralization is also reduced.The principal methodology used in the ratings was “Large Loan and Single Asset/Single Borrower Commercial Mortgage-Backed Securitizations Methodology” published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1250766. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Moody’s approach for single borrower and large loan multi-borrower transactions evaluates credit enhancement levels based on an aggregation of adjusted loan level proceeds derived from our Moody’s loan level LTV ratios. Major adjustments to determining proceeds include leverage, loan structure, and property type. These aggregated proceeds are then further adjusted for any pooling benefits associated with loan level diversity, other concentrations and correlations.Factors that would lead to an upgrade or downgrade of the ratings:The performance expectations for a given variable indicate Moody’s forward-looking view of the likely range of performance over the medium term. Performance that falls outside the given range may indicate that the collateral’s credit quality is stronger or weaker than Moody’s had previously anticipated. Factors that may cause an upgrade of the ratings include significant loan pay downs or amortization, an increase in the pool’s share of defeasance or overall improved pool performance. Factors that may cause a downgrade of the ratings include a decline in the overall performance of the pool, loan concentration, increased expected losses from specially serviced and troubled loans or interest shortfalls.Today’s action has considered how the coronavirus pandemic has reshaped U.S. economic environment and the way its aftershocks will continue to reverberate and influence the performance of commercial real estate. We expect the public health situation to improve as vaccinations against COVID-19 increase and societies continue to adapt to new protocols. Still, the exit from the pandemic will likely be bumpy and unpredictable and economic prospects will vary.We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.Further information on the representations and warranties and enforcement mechanisms available to investors are available on http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1321381.The analysis includes an assessment of collateral characteristics and performance to determine the expected collateral loss or a range of expected collateral losses or cash flows to the rated instruments. As a second step, Moody’s estimates expected collateral losses or cash flows using a quantitative tool that takes into account credit enhancement, loss allocation and other structural features, to derive the expected loss for each rated instrument.Moody’s quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody’s weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Joseph Podvarney, CFA VP – Senior Credit Officer Structured Finance Group Moody’s Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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