DBRS Assigns Provisional Ratings to SCG 2013-CWP Hotel Issuer Inc.

DBRS has today assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2013-CWP (the Certificates), to be issued by SCG 2013-CWP Hotel Issuer Inc. The trends are Stable.

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class X at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (sf)
-- Class E at BBB (low) (sf)

The $400 million mortgage loan is secured by a portfolio of five full-service hotels located in five distinct Canadian urban markets: Westin Calgary, Westin Harbour Castle (Toronto), Westin Ottawa, Westin Bayshore (Vancouver) and Westin Edmonton. In addition to the mortgage loan, there is $80 million of subordinate, co-terminus mezzanine debt outside of the trust. The mortgage loan has a five-year term and amortizes on a 30-year schedule with an estimated 4.59% interest rate, while the mezzanine is interest only at a fixed interest rate estimated at 7.00%. The proceeds of the subject financing will be used, along with approximately $310.9 million of new cash equity, to purchase the assets for $765 million, pay closing costs and fund working capital. The loan’s sponsor, Starwood Capital Group, L.P., has served as the asset manager of the properties since 2005 and oversaw approximately $180 million of capital expenditures between 2005 and 2012.

The portfolio overall benefits from relatively strong locations in five of the six largest urban markets in Canada, with generally stable to strong growth patterns. Due to the property’s location in major urban markets, the hotels are primarily marketed to corporate, group and convention travelers. All five properties have a significant amount of meeting space, ranging from 24,000 sf to 70,000 sf, and several of the hotels are proximate to larger convention centres. Minimal new supply is anticipated in the next few years in all five markets.

While portfolio performance has improved significantly over the past few years, RevPAR has shown signs of stalling in the past several months. In the six months since YE2012, the T-12 RevPAR for the portfolio has only increased by 0.1%. This compares unfavourably to the PKF Hotel Horizons (PKF) estimate (June-August 2013 Edition) of RevPAR growth for the U.S. upper upscale segment during the same period of 5.7%. However, the 2009 PKF RevPAR growth was -17.6%, versus -12.9% for this portfolio, which may imply that the subject portfolio is more volatile than the U.S. upper upscale segment. While Toronto RevPAR growth was strong during this period, at 3.7%, the Ottawa and Vancouver properties’ RevPAR growth was -5.3% and -2.2%, respectively. The borrower’s 2013 budgeted RevPAR indicates growth of just 1.9% compared to YE2012; this is less than the 2011 and 2012 RevPAR growth rates of 2.5% and 4.3%, respectively, and compares very unfavourably to PKF’s projection of 6.6% RevPAR growth during each of those same periods for this segment. Due to the relatively stable forecasts for the subject properties, DBRS underwrote portfolio RevPAR to a level 0.5% greater than YE2012 and 1.3% lower than the borrower’s 2013 budget.

The loan has minimal default risk during the five-loan term, as the DBRS Term DSCR is high at 2.18x. DBRS value, a 19.9% discount to the appraised value, results in a DBRS LTV of 70.0%. DBRS also considers the likelihood of default at maturity to be low, given the DBRS refinance DSCR of 1.53x, utilizing a 9.66% constant allowing for a 5.07% interest rate increase over the current coupon of 4.59%.

The ratings assigned to the Certificates by DBRS are based exclusively on the credit provided by the transaction structure and underlying trust assets. All classes will be subject to ongoing surveillance, which could result in upgrades or downgrades by DBRS after the date of issuance.

Notes:
All figures are in Canadian dollars unless otherwise noted.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is CMBS Rating Methodology (January 2012), which can be found on our website under Methodologies.