DBRS Assigns Provisional Ratings to CFCRE 2015-RUM Mortgage Trust

DBRS, Inc. (DBRS) has today assigned provisional ratings to the following classes of CFCRE 2015-RUM Mortgage Trust. The trends are Stable.

-- Class A at AAA (sf)
-- Class X-CP at AAA (sf)
-- Class X-EXT at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (high) (sf)

The loan is secured by the Ritz Carlton Grand Cayman, a 300-room luxury hotel resort located along West Bay Road on the largest of the Cayman Islands. The collateral includes the leasehold interest in the hotel and amenities, which include, but are not limited to, six restaurants and bars, a 20,000-sf spa, 59,032 sf of meeting space, 9,600 sf of retail space, two pools and a kids’ waterpark, as well as a five-court tennis center. Improvements are situated on land owned by the government of the Cayman Islands, under a ground lease extending through November 2104. Ground lease payments for the entire term have been prepaid. The resort also includes 69 luxury residential condo units, which do not serve as collateral for the loan. There are also 24 hotel-condo units that participate in the hotel’s unit rental program, and the corresponding rental agreements serve as security for the loan. The condo-hotel unit owners are allowed to split their units, yielding a maximum of 65 keys, for a total of 365 rooms across the subject hotel at any given time.

The loan sponsor is a joint venture between Five Mile Capital Partners (FMCP) and the Marvin M. Schwan Foundation. Established in 2003, FMCP is an investment and asset management firm that has been involved with the property since it purchased the underlying B-note participation interest in a prior loan in 2008. When it opened in December 2005, the hotel was owned by four entities largely consisting of private investors who retained ownership for seven years, but who encountered financial troubles when the global recession hit. In October 2012, the entire asset was sold at a foreclosure auction to the current owners for $190.0 million. Since acquisition, the sponsors have invested approximately $23.6 million in capex across the hotel. Much of the investment was allocated toward value-add upgrades to increase the property’s cash flow. Renovations have included refurbishing all 365 guestrooms for $11.9 million ($32,500 per key), expanding the ballroom and upgrading the meeting space for $2.6 million, and redeveloping the lagoon pool and adding a children’s waterpark for $2.1 million in addition to many others. FMCP is also investing $2.5 million on lobby, poolside and common area updates, which are underway and will convert a portion of meeting and group space into two additional retail outlets, La Boutique and luxury jeweler Kirk Freeport Plaza, LTD (Kirk Freeport). The sponsors’ current cost basis in the resort totals $268.9 million, $209.5 million of which was invested in the collateral (or the hotel portion of the resort). The remaining equity was invested in non-collateral sections of the resort, including the golf course, 69 condo units, the marina, the secret harbor and deckhouses. Such investment has resulted in an increase of operating income by over 60.0% since the owners’ acquisition in 2012.

The $140.0 million loan along with $35.0 million of mezzanine debt served to refinance existing debt of $130.0 million and return $48.7 million of equity to FMCP. The $130.0 million of previously existing debt was interest-only for the full term and securitized via the COMM 2013-FL3 floating rate transaction.

As a result of the high-quality, luxurious resort property, irreplaceable beachfront location and moderate leverage financing, the certificates backed by the $140.0 million of first mortgage debt are provisionally assigned ratings of between AAA and BB (high). The resulting DBRS Net Cash Flow (NCF) was $20,488,155, a variance of -0.8% to the Issuer’s NCF. Additionally, the DBRS underwritten (UW) NCF represents a -5.0% variance from the trailing 12-month period ending April 30, 2015, which does not fully recognize the positive cash flow impact from the sponsor’s $25.2 million of capital investment in the subject since 2013, including $5.7 million worth of renovations in 2015. DBRS applied a 9.75% cap rate to the DBRS UW NCF, resulting in a DBRS value of $210.1 million. This cap rate utilized by DBRS is equivalent to the cap rate used for the Atlantis resort that was securitized in August 2014, and is greater than the 9.00% cap rate DBRS applied to the Fontainebleau Resort Hotel in Miami Beach in the 2012 securitization, in order to account for its location outside of the United States in the Cayman Islands. This cap rate allows for significant reversion to the mean in lodging valuation metrics, as it is likely at least 200 basis points wide of the current market cap rate. DBRS Value represents a 28.5% discount to the appraiser’s as-is value of $294.0 million and a notable 30.6% discount to the appraiser’s stabilized value of $303.0 million.

Notes:
All figures are in U.S. dollars unless otherwise noted.

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

The applicable methodology is North American CMBS Rating Methodology, which can be found on our website under Methodologies.

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains the description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not require due diligence services outlined in Form-15E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.