DBRS Assigns Provisional Ratings to BX Trust 2018-GW

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-GW to be issued by BX Trust 2018-GW:

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

All trends are Stable.

All classes will be privately placed. The Class X-CP and Class X-EXT balances are notional, with the notional balances referencing the Class A, Class B, Class C and Class D certificates.

The subject property is a Four-Diamond oceanfront luxury resort located on Wailea Beach on the island of Maui. Originally developed in 1991, the property features 776 hotel keys, seven food and beverage outlets, 100,000 square feet (sf) of meeting/event space, a 50,000 sf spa and a 20,000 sf recreation outlet center for children. The resort also features 120 third-party-owned villas, 61 of which are currently enrolled in the hotel’s rental program. Loan proceeds are being used to facilitate the acquisition of the subject as part of a three-property portfolio transaction that also includes the Arizona Biltmore and the La Quinta Resort & Club. The subject financing package totals $800.0 million, with $510.5 million structured as first mortgage debt and $289.5 million structured as mezzanine debt. The sponsor, Blackstone Real Estate Partners VIII-NQ L.P. (Blackstone), is acquiring the portfolio for an aggregate purchase price of $1.635 billion, $980 million of which is allocated to the Grand Wailea. Inclusive of $20.0 million in closing costs, the sponsor will have a total cost basis of $1.0 billion in the subject property. The seller of the portfolio, The Government of Singapore Investment Corp. (GIC), acquired the portfolio out of bankruptcy in 2013 for approximately $1.5 billion when the prior ownership, made up of a group of junior mezzanine lenders, took over the property in a debt-to-equity swap in January 2011. Up to that point, Morgan Stanley Real Estate Fund had historically owned the property after acquiring it in 2007 but struggled during the financial crisis and ultimately lost control when the loan transferred to special servicing in October 2009. The prior $1.0 billion portfolio mortgage debt, which was securitized in COMM 2006-CNL2, was fully repaid with no loss incurred.

The property has performed well over the past several years as compared with its competitive set of luxury properties Maui, with overall revenue per available room (RevPAR) penetration falling below 100.0% only in 2015 but averaging 110.0% since 2008. The underperformance in RevPAR penetration in 2015 can largely be attributed to the $22.6 million ($28,182 per key) guest room and suite renovation that took place between 2014 and 2015. Since the renovation, the average daily rate (ADR) has climbed 36.0% from $413.19 in 2013 to $561.86 as of the trailing 12 months (T-12) ended January 2018. The considerable rate lift corresponds with net cash flow growth of 60.4% over the same period. Since bottoming out in 2009 and excluding the renovation years, the subject has seen consistent year-over-year RevPAR growth, reporting a T-12 January 2018 RevPAR 76.5% above the 2009 low. While the overall luxury hotel market was severely affected by the Great Recession, the subject fared well against its competitive set, reporting average RevPAR penetration of 116.7% over the three-year period between 2008 to 2010. The overall increase in RevPAR since 2009 can largely be attributed to a combination of property renovations, which have averaged $12.2 million ($15,743 per key) annually over the past five years, and general market recovery.

Given the high barriers to entry on Maui, which are reflected in the lack of new supply and projects under construction, there is minimal threat of over-building despite the very high RevPAR figures achieved on the island. The two most recently delivered hotels carry Residence Inn and Westin flags, while the only project under construction is a 388-key Hilton Grand Vacations Club in Kihei. None of these are expected to be directly competitive with the subject property. Maui is served by three airports: the Kahului, the Kapalua and the Hana airports. The island further benefits from the increased airlift to the island, as seat capacity to Kahului airport rose 2.8% to 2.3 million in 2016. In addition to the increase in airline flights, total visitor expenditures in Maui grew 5.2% to $4.8 billion in 2017. In addition to the senior mortgage and mezzanine debt, the sponsor will be contributing $200.0 million of fresh equity to close. At 0.90 times (x), the DBRS refinance debt service coverage ratio (DSCR) on the mortgage debt is low for a hotel loan, even one with an excellent location and flag such as the subject. Term default risk, is considered modest, as reflected in a DBRS Term DSCR of 1.59x, which assumes a 2.72% loan margin that will contractually increase by 25 basis points during the fourth of five one-year extension options and a LIBOR of 3.07% based on the DBRS Unified Interest Rate Model for Rating U.S. Structure Finance Transactions, which is lower than the 3.1% LIBOR strike of the interest rate cap in place at closing.

At a discount of 55.6%, the DBRS value of $470.2 million is considerably below the as-is appraised value of $1.06 billion. Further, the appraiser concludes to an as-stabilized value of $1.23 billion, which indicates further upside as the recent renovations continue to enhance property performance. While the leverage on the full $510.5 million mortgage loan is high at a DBRS loan-to-value (LTV) of 108.6%, the last $25.5 million is unrated, and the cumulative investment-grade-rated proceeds of $383.0 million have a more modest DBRS LTV of 81.5%. Additionally, the appraiser concluded to a land value of $232.8 million, which is well in excess of AAA proceeds. As a result of the property’s excellent location and brand affiliation, continued increase in ADR due to recent renovations, lack of competitive new supply and strong value-add upside potential, DBRS anticipates that the mortgage loan will perform well during its fully extended seven-year term. At refinance, the irreplaceable location, which drives extremely high investor appetite for an asset such as the subject, should greatly insulate the property value from volatility in the overall market.

Class X-CP and Class X-EXT are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated reference tranche adjusted upward by one notch if senior in the waterfall.

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

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

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

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 principal methodology is North American Single-Asset/Single-Borrower Methodology, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance-related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. Please note that not every related methodology listed under a principal Structured Finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

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

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

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