DBRS Upgrades Three Classes and Confirms Three Classes of SCG 2013-CWP Hotel Issuer Inc., Series 2013-CWP

DBRS Limited (DBRS) has today upgraded the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2013-CWP issued by SCG 2013-CWP Hotel Issuer Inc., Series 2013-CWP:

-- Class B to AAA (sf) from AA (sf)
-- Class C to A (high) (sf) from A (sf)
-- Class D to BBB (high) (sf) from BBB (sf)

Additionally, DBRS has confirmed the following classes:

-- Class A-2 at AAA (sf)
-- Class X at A (sf)
-- Class E at BBB (low) (sf)

All trends are Stable.

The rating upgrades reflect the increased credit support to the bonds as a result of significant unscheduled principal repayment to the securitized debt since issuance. The transaction originally consisted of a single-loan secured by five full-service Westin hotel properties located throughout Canada; however, The Westin Bayshore property located in Vancouver sold in November 2015 and the The Westin Harbour Castle property located in Toronto sold in April 2017. Sale proceeds were used to pay down the allocated loan balances, respectively, which are located in the downtown core markets of Calgary, Edmonton and Ottawa.

As of July 2017 remittance, the first-mortgage loan has a current balance of $179.0 million with subordinate mezzanine debt totalling $41.9 million after the sale of the Toronto property closed in April 2017. The transaction benefits from strong sponsorship and management by Starwood Capital Group and Westin Hotel Management, L.P., 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 property represents 47.1% of the allocated loan balance as of July 2017. The performance of the hotel has suffered in recent years because of the decline in oil prices and the energy market that the Calgary economy is dependent upon. According to the HVS Canadian Lodging Outlook, in 2016, the Calgary hotel market experienced declines in occupancy, average daily rate (ADR) and revenue per available room (RevPAR) to 58.1% from 63.5%, to $144.44 from $155.74 and to $83.91 from $98.97, respectively. In comparison to the market, according to the Smith Travel Research (STR) report, the subject reported trailing 12 month (T12) ending May 2017 occupancy, ADR and RevPAR of 66.0%, $208.09 and $137.36, respectively. Comparatively, the T12 ending April 2016 figures were reported at 62.6%, $223.76 and $140.12, respectively. Although occupancy has increased year over year, the ADR has declined, resulting in an overall 2.0% decrease in RevPAR. Despite the continued decrease, the property is performing in line with its competitive set, which reported an occupancy rate of 63.3%, ADR of $210.47 and a RevPAR of $133.25. Additionally, the borrower continues to invest in the property and perform renovations with the most recent being completed in June 2016, when approximately 126 rooms were renovated. The borrower expects that these rooms will be able to charge a premium over the standard room rates going forward.

The Westin Ottawa represents 34.8% of the current allocated loan balance and is secured by a 496-key full-service hotel located in Ottawa. Of the remaining properties within the transaction, this property has consistently performed above expectations. As of the T12 ending May 2017 reporting, the subject reported an occupancy rate of 81.0%, an ADR of $221.92 and RevPAR of $179.78. This compares with the T12 April 2016 figures of 81.6%, $208.32 and $170.03, respectively. The subject has also outperformed its competitive set, which reported an occupancy rate, ADR and RevPAR of 73.2%, $199.47 and $145.92, respectively.

The remaining property is The Westin Edmonton, which represents 18.2% of the allocated loan amount and is a 416-key full-service hotel located in Edmonton. Similar to the Calgary property, this property has seen a decline in performance because of the downturn of the energy market. As of the T12 ending May 2017 STR report, the subject reported an occupancy rate of 64.5%, an ADR of $172.99 and RevPAR of $111.61. Comparatively, the T12 ending April 2016 figures were 70.4%, $170.54 and $120.01, respectively. As a result, RevPAR decreased by 7.0%; however, the subject continues to outperform its competitive set despite the decline. The competitive set reported an occupancy rate of 56.2%, an ADR of $159.88 and a RevPAR of $89.80. The decline is also attributable to the introduction of a new Hyatt hotel that opened in November 2016. The borrower expected that the hotel would compete with the subject, mostly in the transient business demand segment; however, performance at the subject would rebound after a six- to eight-month period.

The loan reported a YE2016 debt service coverage ratio (DSCR) on the whole-loan of 1.70 times (x), compared with the YE2015 DSCR of 1.89x. The decrease is because of the Calgary property, which has seen the largest decline in performance; however, this is partially offset by the strong performance of the Ottawa property. The annualized May 2017 DSCR was 1.71x.

The ratings assigned to Classes C and E notes materially deviate from the higher ratings implied by the quantitative results. DBRS considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by the quantitative results that is a substantial component of a rating methodology. The deviations are warranted, given the uncertain loan level event risk.

The rating assigned to the Class X note materially deviates from the lower ratings implied by the quantitative results. Consideration was given for the actual loan, transaction and sector performance, where a rating based on the lowest rated notional class may not reflect the observed risk.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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

The principal methodology is CMBS North American Surveillance (March 2017), which can be found on www.dbrs.com under Methodologies.