DBRS Assigns Provisional Ratings to GS Mortgage Securities Corporation Trust 2018-FBLU

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

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

All classes will be privately placed. The Class X-CP and X-NCP balances are notional. All trends are Stable.

The Fontainebleau Miami Beach is a four-diamond, 1,594-room luxury resort situated along 15.52 acres of oceanfront property at 4441 Collins Avenue in the mid-beach area of Miami Beach, Florida. Collateral includes the fee-simple interest in the land and resort improvements. The total room count includes 748 non-owned condominium-hotel units, which are not collateral for the loan. However, historical participation in the hotel’s unit rental program has averaged 84.4% since 2011 up to and including the most recent trailing 12-month (T-12) period ending September 2018, which reports a current participation rate of 86.6%. Two major airports are proximate to the subject, including the Miami International Airport located ten miles west and Fort Lauderdale-Hollywood International Airport approximately 21 miles north. Originally constructed in 1954, the property serves as one of the most recognizable and architecturally significant resorts in the world, rich with historical relevance and well known for its extensive amenity offering. Designed by the distinguished architect, Morris Lapidus, the resort was added to the U.S. National Register of Historic Places in December 2008. The subject boasts an impressive amenity package, including 12 food and beverage (F&B) outlets, 11 pools, 199,763 square feet (sf) of indoor and outdoor meeting space, six retail shops, a 40,000-sf spa, 5,800-sf fitness center and 23-slip deep-water marina along the intracoastal side of the resort. The financing package totals $1.05 billion with $850.0 million structured as first-mortgage debt and $200.0 million structured as mezzanine debt. The sponsor, Turnberry Associates, Inc. (Turnberry), originally acquired the subject in 2005 and later brought in an equity partner, Istithmar Hotels FB Miami LLC (Istithmar), which took on a 50.0% stake in 2008 for $375.0 million just prior to completing an extensive $571.8 million ($397,079 per key) renovation. The collateral was refinanced with subsequent commercial mortgage-backed security loans in 2012 and again in 2013 with first-mortgage amounts of $412.0 million and $535.0 million, respectively. The 2013 transaction facilitated the buyout of Istithmar’s 50.0% equity interest, reconsolidating sole ownership to Turnberry. The subject financing package will retire outstanding debt of $950.0 million, cover approximately $21.0 million in closing costs and return $79.0 million of equity to the sponsor.

The property experienced a performance decline in 2016 and 2017, primarily as a result of the combination of the Zika virus and Hurricane Irma. This affected the overall Miami Beach submarket and was not specific to the subject asset. After experiencing 9.4% in average year-over-year net operating income (NOI) growth from 2011 through 2015, NOI was down 9.9% and 14.5% for 2016 and 2017, respectively, compared with the 2015 figure. The Centers for Disease Control and Prevention issued a travel alert in August 2016 identifying numerous cases of Zika reported in several Miami neighborhoods and recommended avoiding travel to the Miami area. The travel alert remained in place until June 2017, but the stigma lingered and continued to affect performance at the subject. Hurricane Irma, which made landfall in south Florida in September 2017, also severely affected performance at the property. The Smith Travel Research report indicates that property occupancy and revenue per available room (RevPAR) in September 2017 declined 41.4% and 32.1%, respectively, compared with metrics reported for September 2015. The impact was less in October 2017, but still quite substantial. The sponsor identified more than 11,206 room nights, equating to $8.0 million in lost revenue, associated with Irma. As it relates to Zika, the sponsor’s insurance policy covered up to $15.0 million in damages for a single instance of an infectious disease. As a result, the sponsor performed a thorough analysis outlining lost business, which was submitted to the insurance companies. The analysis revealed more than 48,000 lost room nights, or approximately $26.0 million in lost revenue, attributed to Zika and the adverse impact on the property. Notably, the analysis took place at the end of 2016 and, therefore, does not capture the full impact of 2017 cancellations. Furthermore, neither analysis accounts for lost F&B revenue associated with the lost room nights. Insurance proceeds amounting to $15.4 million were paid out to the sponsor as a result of the Zika and Irma impact. Performance has bounced back through the T-12 period ending September 2018 period with RevPAR up 8.8% over the YE2017 figure. Similarly, NOI has increased 10.1% over the same period. Moderate RevPAR growth should continue as Zika concerns have curtailed and as the Miami Beach Convention Center is slated to reopen in December 2018.

No new incoming supply is identified in the appraisal that would compete directly with the subject, but the appraiser references the Turnberry Isle Resort, which is being converted to a JW Marriott by December 2018, as secondarily competitive, given the conversion. However, given the non-beachfront location in Aventura, Florida, and the lower daily rate, Turnberry Isle Resort has been deemed only 25% competitive with the subject. November 2018 news reports indicate that Miami Beach voters approved the development of an 800-key hotel that will be constructed adjacent to the Miami Beach Convention Center. Because of the proposed hotel’s non-beachfront location, convention-based targeted guests and location approximately two miles south, DBRS does not consider the new supply a primary competitor to the subject.

At 0.95 times (x), the DBRS refinance debt service coverage ratio (DSCR) on the mortgage debt is moderately low for a hotel loan, even one with a high-end product offering and excellent location such as the subject. Term default risk is considered modest, as reflected in the DBRS Term DSCR of 1.95x, based on a 2.81% loan margin and a LIBOR of 2.07% based on the DBRS “Interest Rate Stresses for U.S. Structured Finance Transactions” methodology, which is lower than the 3.0% LIBOR strike of the interest-rate cap in place at closing. The DBRS value of $829.0 million represents a considerable 53.7% discount to the appraiser’s as-is concluded value of $1.54 billion. Furthermore, the appraisal estimates an as-stabilized valuation of $1.71 billion by November 2021, which suggests further upside as capital renovations continue to have a positive impact on performance at the subject. The DBRS cap rate of 9.75% is well above the cap-rate range between 1.8% and 6.3% in the appraiser’s sales comparables and is likely approximately 400 basis points above a current market cap rate for the subject. This allows for a significant buffer against market volatility in the near term that could result in a widening cap rate and lower trading activity.

The implied DBRS loan-to-value (LTV) ratio on the full $1.05 billion debt load is high at 126.7%, falling to a still-relatively high level of 102.5% based on the senior mortgage debt of $850.0 million; however, the cumulative investment-grade-rated proceeds of $676.0 million reflect a more reasonable LTV of 79.5%. As a result of the property’s irreplaceable location, continued anticipated increase in RevPAR from the elimination of Zika concerns and detrimental impact of Irma, lack of competitive new supply and extensive amenity offerings, including upscale restaurants and a world-renowned nightclub, DBRS anticipates that the mortgage loan will perform well during its fully extended five-year term. At refinance, the highly desirable location, which generates increased demand for trophy-caliber assets such as the subject, should provide insulation from market volatility to property value over the loan term.

Classes X-CP and X-NCP are interest-only (IO) certificates that reference 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.

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 the 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.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents 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.