DBRS Upgrades Two Classes of SCG 2013-CWP Hotel Issuer Inc., Series 2013-CWP

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

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

Additionally, DBRS confirmed the ratings for four classes as follows:
-- Class A-2 at AAA (sf)
-- Class B at AAA (sf)
-- Class X at AAA (sf)
-- Class E at BBB (low) (sf)

All trends are Stable.

The upgrades to Class C and Class D reflect the increased credit support to the bonds as a result of significant principal paydown. At issuance, the $400.0 million trust loan was secured by five full-service Westin hotel properties located throughout Canada. Since that time, however, two hotels have been released in the Westin Bayshore property located in Vancouver, which was sold in November 2015 and released with a paydown of 110% of the allocated loan balance, and the Westin Harbour Castle property located in Toronto, which was sold in April 2017 and released with a paydown of 120% of the allocated loan balance. The release-price proceeds paid down Class A-1 in full and repaid the $80.0 million mezzanine loan held outside of the trust. As at the May 2018 remittance, there has been overall collateral reduction of 55.9% since issuance as a result of the two releases and scheduled amortization. The remaining A-note balance is $176.4 million ($122,777 per key) and the loan is scheduled to mature in September 2018. Based on the trailing 12 months (T-12) ending May 2017 net cash flow figure for the remaining properties of $30.38 million, the servicer reported an in-place debt service coverage ratio (DSCR) of 2.07 times (x). This figure implies a DBRS Refi DSCR of 1.58x and a DBRS Exit Debt Yield of 17.0%, suggesting that, despite the cash flow declines since issuance for the remaining properties on the loan (as detailed below), a successful refinance is likely.

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 transaction also benefits from significant equity behind both the mortgage loan and total financing, with the borrower originally contributing $315.0 million of cash equity.

The remaining hotels on the loan are located in Ottawa, Calgary and Edmonton. The largest hotel by allocated loan amount is the 525-key Westin Calgary, which represents 61.2% of the allocated loan balance as at the May 2018 remittance. In recent years, the Calgary market has trudged through performance declines as a result of the sustained depression in the oil markets worldwide; however, recent trends have shown signs of improvement. Per the year-to-date Q3 2017 HVS Canadian Lodging Outlook report, the overall occupancy rate in Calgary increased by 1.0% (from 60.3% to 61.3%) over the prior year, while revenue per available room (RevPAR) increased 0.7% (from $96.36 to $97.09). RevPAR growth was limited due to the slight year-over-year (YOY) decline in the average daily rate (ADR), which fell by 0.9% (from $159.86 to $158.32). These trends compare with the figures cited in the firm’s 2016 report that showed occupancy, ADR and RevPAR had declined by 5.4%, 7.2% and 15.2%YOY, respectively.

According to the Smith Travel Research (STR) report for the Westin Calgary, the property reported a trailing T-12 occupancy rate of 65.1%, with ADR of $211.65 and RevPAR of $137.73, representing a YOY RevPAR improvement of 2.0%. The competitive set reported a YOY increase in occupancy, ADR and RevPAR of 1.6%, 0.9% and 2.4%, respectively. The borrower renovated 126 rooms in June 2016, expecting that these rooms would command a premium of 25% over the standard room rates going forward. Based on the allocated debt service for this property, the servicer reported a T-12 ending May 2017 DSCR of 1.38x, compared with the YE2016 DSCR of 1.31x and the YE2015 DSCR of 1.87x.

The other Alberta hotel remaining on the loan is the 416-key Westin Edmonton, which represents 16.9% of the allocated loan amount. Like the Westin Calgary hotel, the Edmonton property has also seen a decline in performance in recent years due to the downturn of the energy market. Per the STR report for the T-12 ending March 2018, the subject reported an occupancy rate of 64.8%, with ADR of $180.11 and RevPAR of $116.63. While occupancy has remained unchanged YOY, ADR and RevPAR have increased by 5.0% and 4.7%, respectively. A new Hyatt hotel was introduced to the market in November 2016 and it was expected that it would compete with the subject. The allocated debt service resulted in a T-12 ending May 2017 DSCR of 1.88x, compared with the YE2016 DSCR of 1.82x and the YE2015 DSCR of 2.09x.

The Westin Ottawa represents 22.0% of the current allocated loan balance and is secured by a 496-key, full-service hotel located in Ottawa. According to the STR report for the T-12 ending March 2018, the subject reported an occupancy rate of 81.0%, with ADR of $221.92 and RevPAR of $179.78. The subject’s occupancy rate decreased by 1.2% YOY, whereas comparable properties reported an occupancy increase of 3.8% for the same period. In addition, the subject reported YOY ADR and RevPAR improvements of 6.8% and 2.0%, respectively, but was similarly outdone by the comparable set, which reported respective YOY increases of 13.0% and 2.4%. Based on the allocated debt service amount, the servicer reported a T-12 ending May 2017 DSCR of 2.07x, compared with the YE2016 DSCR of 2.17x and the YE2015 DSCR of 2.24x.

Class X is an interest-only (IO) certificate that references a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation 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.

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

The principal methodology is North American Surveillance, 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.

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 under Related Documents or by contacting us at info@dbrs.com.

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.

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