DBRS Confirms All Classes of Monarch Beach Resort Trust 2018-MBR

DBRS, Inc. (DBRS) confirmed all classes of Commercial Mortgage Pass-Through Certificates, Series 2018-MBR issued by Monarch Beach Resort Trust 2018-MBR (the Trust):

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

All trends are Stable.

The rating confirmations reflect the stable performance of the transaction since issuance. The first mortgage loan is secured by a 400-key, five diamond luxury resort located along the Southern California coastline in Dana Point, California. Originally constructed in 2001, the property offers an award-winning 18-hole championship golf course, eight food and beverage outlets, a 30,000 square foot (sf) destination wellness spa and access to an exclusive private beach club. The sponsor, KSL Capital Partners, acquired the asset in 2014 for $316.9 million and invested $47.6 million ($119,100 per key) in renovations prior to issuance. The $238.0 million interest-only (IO) trust loan and $102.0 million of mezzanine debt retired $226.1 million of existing debt, returned $107.9 million of sponsor equity and covered closing costs. The sponsor had approximately $25.0 million of cash equity remaining in the project at issuance.

The subject’s financial performance continued to improve in 2018, following the extensive renovation that was completed in 2016. The Trust loan reported a year-end (YE) 2018 debt service coverage ratio (DSCR) of 2.41 times (x) compared with the DBRS Term DSCR of 1.75x derived at issuance. The DSCR improvement over the DBRS figures at issuance is a factor of a lower in-place interest rate compared with the stressed scenario assumed by DBRS at issuance as well as a 9.8% increase in the in-place cash flows at YE2018 over the DBRS Net Cash Flow figure derived at issuance. The YE2018 DSCR, inclusive of the mezzanine debt, was reported at 1.25x.

According to the trailing 12-month (T-12) ending December 2018 Smith Travel Research report, the subject’s occupancy rate, average daily rate (ADR) and revenue per available room (RevPAR) were 64.6%, $393.16 and $253.97, respectively. These figures were an improvement over the T-12 ending December 2017 occupancy rate, ADR and RevPAR of 61.6%, $382.80 and $235.76, respectively. However, the resort underperformed compared with the competitive set’s occupancy rate, ADR and RevPAR of 70.7%, $429.09 and $303.33, respectively. The subject caters to more corporate clients rather than leisure clients as the subject features more meeting spaces and ballrooms compared to its competitors. The reliance on group demand to fill a large majority of room nights yields additional risk, should corporations cut back on event spending at upscale resorts.

The 161-room Rosewood Miramar Beach Montecito, identified in the appraisal as a potential competitor, had its grand opening in April 2019. DBRS did not consider this as a direct competitor as the property is located 153 miles north of the collateral near Santa Barbara, California. Rosewood Miramar Beach Montecito also is considerably smaller than the subject and seems to focus more on the luxury leisure guest, whereas the Monarch Beach Resort is heavily focused on group and event bookings. No additional new supply was identified at this time and the subject continues to benefit from high barriers to entry.

Classes X-CP and X-EXT are 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 are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

DBRS provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

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

The principal methodology is North American CMBS Surveillance Methodology, which can be found on www.dbrs.com under Methodologies & Criteria. 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.

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