DBRS Finalizes Provisional Ratings on Margaritaville Beach Resort Trust 2019-MARG Commercial Mortgage Pass-Through Certificates, Series 2019-MARG

DBRS, Inc. (DBRS) finalized the provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2019-MARG issued by Margaritaville Beach Resort Trust 2019-MARG:

-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at AA (low) (sf)
-- Class X-CP at AA (low) (sf)
-- Class X-EXT 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 (low) (sf)

The Class X-CP and X-EXT balances are notional. All trends are Stable.

The subject property is a AAA Four Diamond-rated luxury resort in Hollywood, Florida, situated on 6.2 acres of beachfront property between the Atlantic Ocean and the intracoastal Stranahan River. The resort offers 349 guest rooms, each featuring a private terrace with an ocean/intracoastal view; 32,000 square feet (sf) of indoor/outdoor event space; an adults-only pool; two family-friendly pools; a surf simulator; an 11,000 sf spa; eight branded food and beverage outlets; and 465 parking spaces. The property benefits from its proximity to two major airports: the Fort Lauderdale-Hollywood International Airport located approximately 7.5 miles north and the Miami International Airport located approximately 23.4 miles south. The sponsor, KSL Capital Partners, LLC, purchased the resort for $195.0 million in April 2018 from the developer, Starwood Capital Group, which built the property and opened Margaritaville Hollywood Beach Resort for business in 2015. Loan proceeds of $180.0 million are being used to retire outstanding debt of $123.5 million, return $50.9 million of equity to the sponsor ($60 million of implied sponsor equity remains in the deal), cover upfront reserves of $2.0 million for a room reconfiguration project that will add 20 guest rooms to the resort and pay for $3.6 million of closing costs.

The property has shown strong performance since opening in 2015 with its net cash flow increasing to $16.9 million as of the trailing 12-month period ending March 2019 (the T-12 period) from $11.7 million as of year-end (YE) 2016. As of the T-12 period, the resort reported an occupancy rate and average daily rate (ADR) of 81.7% and $284.71, respectively, resulting in a revenue per available room (RevPAR) figure of $240.04. The T-12 period RevPAR represents a 10.81% increase over YE2017 and a 15.79% increase over YE2016. Margaritaville Hollywood Beach Resort has performed exceptionally well compared with its competitive set, showing occupancy, ADR and RevPAR penetrations of 106.0%, 111.0% and 117.0%, respectively, according to a January 2019 Smith Travel Research report.

This loan is structured with $1.98 million of upfront reserves to cover a room configuration project that the sponsor plans to complete by September 2019 and improvements to the LandShark Bar & Grill, Margaritaville Coffee Shop and resort corridors to be completed by April 2019. By reconfiguring 14 underutilized suites and converting the 2,834 sf Jimmy Buffett Presidential Suite, the sponsor will add 20 new guest rooms to the resort, which is projected to drive an additional $520,000 of room revenue and $1.9 million in total additional revenue in 2020.

There is no incoming supply identified in the appraisal that is expected to be a direct competitor to the subject property. A 638-key Hard Rock Hotel is currently under construction in Hollywood with an expected opening date in Q3 2019. This property is a non-beachfront asset with a large casino that targets a different guest profile than the Margaritaville Hollywood Beach Resort, and the appraiser does not consider it to be a direct competitor. The appraisal also mentions the construction of the Four Seasons Fort Lauderdale Beach, a 150-key luxury resort expected to come online in Q1 2020 that is not anticipated to compete directly with Margaritaville because of its projected higher price point. Most of the competitive set and possible future competition is considered to be beachfront property primarily located in the Fort Lauderdale market. The subject property benefits from its beachfront location but is at a slight disadvantage to some of its competitors as a result of its distance from well-known Fort Lauderdale.

The DBRS value of $149,095,849 represents a 39.9% discount to the appraised value of $240.0 million. In addition, the DBRS cap rate of 10.489% is likely approximately 298 basis points above a current market cap rate, allowing for significant reversion to the mean in lodging valuation metrics. Given the property’s Above Average quality, strong sponsorship and management as well as the loan’s moderate leverage, DBRS expects loan performance to be strong during the five-year term (fully extended) and, although the risk is elevated based on DBRS stressed metrics, refinance at maturity is considered likely.

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 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 a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS’s methodology, DBRS used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

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 which can be found on www.dbrs.com in the Commentary tab under Regulatory Affairs. 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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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.

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