DBRS Assigns Provisional Ratings to BBCMS 2017-DELC Mortgage Trust

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2017-DELC (the Certificates) to be issued by BBCMS 2017-DELC Mortgage Trust. The trends are Stable.

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

All classes will be privately placed.

The Class X-CP and X-NCP balances are notional.

The subject property is an iconic resort hotel that has been in operation for nearly 130 years in an irreplaceable beachfront location in Coronado, California. With its unique historic status and highly desirable location with over 1,400 linear feet of ocean frontage as well as a relatively substantial meeting and event space footprint of over 135,000 square feet of indoor and outdoor space, the hotel has no true direct competition in the vicinity or even in the larger Southern California market overall. The sponsor, The Blackstone Group L.P. (Blackstone), initially acquired a 60% equity interest in the property in 2011 as part of a joint venture (JV) with Strategic Hotel Funding, L.L.C, and later acquired the full interest as part of its acquisition of the Strategic Hotels and Resorts, Inc. REIT in late 2015. The sponsors’ combined basis in the property was approximately $642.6 million in 2013 and the allocated acquisition price in 2015 was approximately $1.0 billion. Debt on the property has been securitized several times, most recently in the DEL 2013-HDC and DEL 2013-HDMZ transactions, which represented $285 million in senior mortgage debt and $115 million in senior mezzanine debt, respectively, issued as part of a $475 million whole loan that also included a $75 million junior mezzanine loan. That CMBS debt was refinanced in early 2016 and the subject transaction will refinance the debt that was placed on the property at that time. The subject transaction represents $507.6 million in senior mortgage debt with a total of $204.4 million held across three mezzanine loans. The whole-loan proceeds paid off $702.9 million of existing debt and paid closing costs while the sponsor contributed approximately $586,981 in cash equity to close.

Property performance has historically been quite stable with healthy year-over-year revenue per available room (RevPAR) growth between 2010 and 2016. In 2014, hotel management shifted its rate strategy away from a discount approach to a focus on maintaining rate integrity for transient guests and achieving an increase in event and group bookings for the hotel. As a result of this shift, average daily rate (ADR) grew to $382.93 by 2016 and again to $388.90 for the trailing 12 months (T-12) ending June 30, 2017, from $330.75 in 2013. Transient ADR increased to $605.96 for the T-12 period from $458.70 in 2013. Over that same period, occupancy declined slightly in 2014 to 64.2%, down from 66.1% in 2013, but recovered to 69.6% by 2015 and has since held relatively steady at 68.1% for 2016 and 67.5% for the T-12 period. RevPAR for 2016 and the T-12 period was $260.88 and $262.48, respectively, up from $218.61 in 2013, the year before the discount focus was scrapped. As hotel management also sought to increase group demand and increase food and beverage (F&B) revenue at the hotel, several upgrades were completed in the last several years that included the installation of artificial turf at the property’s outdoor event spaces and the expansion of the Sheerwater restaurant by 70 seats. These and other efforts contributed to an average increase of 21,000 group room nights over the last three years with group rooms sold for the T-12 period representing 56.0% of rooms sold, up from 45.5% in 2013. It is noteworthy that group revenues are forecast down by approximately $4.1 million for 2017 from 2016, a decline of approximately 2.9%. The sponsor and property management attribute this trend to a record year for group bookings in 2016 and lower group demand in the San Diego overall metropolitan statistical area in 2017. In addition, this loss in revenue has been offset by gains in transient room and F&B revenues. Total revenue for the T-12 period represents an increase of 2.4% over the YE2016 figure.

Although the total loan proceeds of $712.0 million, $507.6 million of which is held in this trust, represent a substantial increase over the previously issued CMBS mortgage and mezzanine debt in 2013 of $475.0 million, Blackstone and the previous JV interest holders have spent over $20.0 million in upgrades and improvements to the property since that time. The T-12 net cash flow (NCF) figure of $51.5 million represents an increase of 31.8% over the Issuer’s NCF figure in 2013. The subject loan amount is generally in line with the existing debt load of approximately $702.9 million and compares well with the sponsor’s allocated price of $1.0 billion for the 2015 acquisition. The low DBRS Refinance (Refi) debt service coverage ratio (DSCR) of 0.94 times (x) on the senior mortgage debt indicates that leverage is quite high for a hotel. Additionally, although the DBRS Term DSCR of 1.63x (assuming a 3.64% loan margin that will contractually increase by 0.125% during the fourth of five one-year extension options and a LIBOR of 2.41% based on the DBRS “Unified Interest Rate Methodology”) suggests relatively low term default risk, the coverage drops substantially to 1.16x when accounting for the full debt load.

The appraiser estimated an as-is value of $1.03 billion and an as-stabilized value of $1.15 million. The DBRS value of $512.0 million represents a significant 50.5% discount to the as-is appraised value. The appraiser’s stabilized value estimate includes projections for cash flow increases resulting from market improvements and the new franchise agreement with Hilton Hotels & Resorts (Hilton), to be achieved by 2019. DBRS gives little to no consideration to any prospective revenue increases or expense savings expected to be achieved with the Hilton affiliation in its NCF assumptions. In addition, the DBRS cap rate of 9.75% is well above the range of cap rates between 2.2% and 5.0% in the appraiser’s sales comparabless and likely at least 400 basis points above a current market cap rate for the subject. This allows significant breathing room for market disruptions in the near term that could result in cap rate expansion and lower trading activity. The implied DBRS loan-to-value (LTV) ratio on the full $712.0 million debt load is very high at 139.1%, falling to a still-high 99.1% when based on the senior mortgage debt of $507.6 million; however, the cumulative investment-grade-rated proceeds of $408.9 million reflect a more reasonable LTV of 79.9% and the high leverage on the whole loan is mitigated by the healthy DBRS Term DSCR on the senior debt (which is based on a stressed interest rate), the property’s irreplaceable location and strong historical performance as well as the sponsor’s planned investment in room upgrades and other property improvements to be completed over the next four years at an estimated cost of approximately $48.0 million. Given these factors and the strong sponsorship in Blackstone, DBRS expects the loan to perform well over the fully extended seven-year term. The refinance profile is also expected to be strong, given the iconic status and high desirability of the asset for investors, which should provide an effective buffer against potential market disruptions over the life of the loan.

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.

For more information on this transaction and supporting data, please log into www.ireports.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS CMBS IReports platform.

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

The principal methodology is North American Single-Asset/Single-Borrower Methodology, which can be found on dbrs.com under Methodologies.

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

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.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.

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