DBRS Changes Trend on One Class of SCG 2013-CWP Hotel Issuer Inc.

DBRS, Inc. (DBRS) has today confirmed all classes of Commercial Mortgage Pass-Through Certificates, Series 2013-CWP, issued by SCG 2013-CWP Hotel Issuer Inc., Series 2013-CWP, as follows:

-- 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)

All trends are Stable, with the exception of Class E, which has had its trend changed to Negative from Stable.

The rating confirmations reflect the overall continued performance of the transaction. The trend on Class E has been changed to Negative from Stable to reflect the concern about the assets located in Alberta, particularly Calgary, which is described in further detail below. The transaction consists of a single-mortgage loan secured by four full-service Westin hotel properties located in the downtown core in each of the following four markets: Calgary, Toronto, Ottawa and Edmonton. The transaction originally was secured by five hotels; however, in November 2015, The Westin Bayshore property located in Vancouver was sold by the borrower, with $77.0 million of proceeds applied to the trust. In addition to the first-mortgage loan, which has a current balance of $306.4 million, there is also subordinate mezzanine debt in the amount of $64.6 million held outside of the trust. The transaction benefits from strong sponsorship and management by Starwood Capital Group and Westin Hotel Management LP, respectively, both of which are experienced operators in the hospitality industry.

The largest hotel by allocated loan amount is The Westin Calgary, a 525-key full-service hotel located in Calgary. The recent decline in oil prices has negatively affected Calgary’s economy more than any other city in the portfolio. According to Colliers Canada, hotel values in Calgary declined by 6.0% in 2015 and are projected to decline an additional 9.1% in 2016. According to HVS Canadian Lodging Outlook, the Calgary hotel market in 2015 experienced declines in occupancy, average daily rate (ADR) and revenue per available room (RevPAR) to 63.6% from 69.3%, to $157.47 from $163.70 and to $100.12 from $133.41, respectively. These figures are projected to decline further in 2016 to 60.0%, $150.00 and $90.00, respectively, before market-wide performance is expected to stabilize in 2017. In comparison to the market, the subject reported trailing-12-month (TTM) occupancy, ADR and RevPAR of 62.6%, $223.76 and $140.12, respectively, according to the April 2016 Smith Travel Research (STR) report. These figures are representative of year-over-year declines of 19.6%, 4.4% and 23.1%, respectively. The borrower is projecting a further decline in performance, as its projected year-end 2016 (YE2016) net operating income (NOI) is approximately $12.5 million, down significantly from the YE2015 figure of $17.5 million. Despite the downward trends in occupancy, ADR and RevPAR, the subject has maintained its leadership position among its competitive set, reporting penetration in these three metrics of 103.7%, 101.0% and 104.7%, respectively, according to the April 2016 STR report.

Another concern is the threat of oncoming new supply, as the 320-key Hilton East Village is expected to be delivered in September 2016 and the 155-key Alt Hotel is expected to be delivered at some point in 2017. According to the servicer, the borrower confirmed that both hotels will likely compete with the subject given the limited demand in the market. The borrower continues to invest in the property, as all 126 rooms in the Tower building were upgraded to the latest Westin standard in June 2016 at a total cost of $2.9 million, or $23,000 per key. According to the servicer, these rooms are marketed at a 25.0% premium over standard rooms. In addition, the October 2015 site inspection noted the property to be in above-average condition with previous capital expenditures, including a roof replacement, mechanical room upgrades and a full kitchen renovation. Despite the potential upside from the renovations, the borrower’s projected NOI for 2016 represents a 35.2% decline over the original DBRS underwritten figure. As a result, DBRS modeled this loan with a stressed cash flow.

The second-largest loan is The Westin Toronto Harbour Castle, a 977-key full-service hotel located in Toronto, situated directly on the shore of Lake Ontario. The hotel is uniquely located, as it is the only full-service hotel in Toronto south of the Gardiner Expressway on Toronto’s harbourfront. In October 2015, the property suffered flood damage when a major supply-line valve was inadvertently activated while attempting to shut down a sprinkler head. As a result, 287 rooms in the North tower were affected, of which 155 suffered significant damage. The estimated restoration budget is $15.3 million, with $5.5 million in insurance being disbursed to date. Construction is expected to begin in July 2016 with the goal of having all rooms back online by January 2017. All rooms will be upgraded to the latest Westin brand standard. According to the servicer, insurance proceeds are expected to cover 65% to 70% of the total combined project cost, with the borrower to make up the remainder using excess funds from operations. Despite the casualty event, performance at the property has been stable, with a TTM occupancy, ADR and RevPAR of 78.5%, $188.93 and $148.33, respectively. While occupancy declined 2.1% from the previous year, ADR and RevPAR increased by 11.0% and 8.7%, respectively.

As of April 2016 reporting, the TTM portfolio debt service coverage ratio (DSCR) on the first-mortgage loan was 2.58 times (x) and the DSCR on the whole loan was 2.10x. While these figures are down from the YE2015 figures of 2.72x and 2.21x, respectively, the individual properties continue to outperform their respective competitive sets, owing to their positioning in their respective cities’ central business districts and comprehensive amenity packages.

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

The applicable methodologies are North American CMBS Rating Methodology (March 2016) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.

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

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.