DBRS Morningstar Finalizes Provisional Ratings on Fontainebleau Miami Beach Trust 2019-FBLU

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2019-FBLU issued by Fontainebleau Miami Beach Trust 2019-FBLU:

-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class C as AA (low) (sf)
-- Class D at A (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All classes will be privately placed. The Class X-A balance is notional.

DBRS Morningstar also discontinued and withdrew its ratings of B (sf) on Class X-B and A (high) (sf) on Class X-A, then assigned a new rating of AA (sf) to Class X-A. DBRS Morningstar subsequently placed all finalized provisional ratings Under Review with Developing Implications because of the request for comments (RFC) on the “North American Single-Asset/Single-Borrower Ratings Methodology” on November 14, 2019. If the updated methodology is adopted following the request for comment, there will likely be no ratings impact to the provisional ratings assigned to this transaction. For more information, please see the press release, “DBRS Morningstar Requests Comments on North American Single-Asset/Single-Borrower Ratings Methodology.”

The subject is a four-diamond, 1,594-room luxury resort situated along 15.5 acres of oceanfront property at 4441 Collins Avenue in the mid-beach area of Miami Beach, Florida. The collateral includes the fee-simple interest in the land and resort improvements. The total room count includes 748 non-owned condo-hotel units, which are not collateral for the loan; however, historical participation in the hotel’s unit rental program averaged 85.6% since 2011 up to and including the most recent period ending September 2019, which reports a current participation rate of 89.7%. Two major airports are near the subject, including the Miami International Airport 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 amenities. Designed by 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, a 5,800-sf fitness center and a 23-slip deep-water marina along the intracoastal side of the resort. The financing package totals $1.175 billion with $975.0 million structured as first-mortgage debt and $200.0 million structured as mezzanine debt. Jeffrey Soffer, along with other principals of the previous sponsor, 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 prior to completing an extensive $571.8 million ($397,079 per key) renovation. The collateral was refinanced with subsequent commercial mortgage-backed security (CMBS) 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 the prior sponsor entity. The subject was additionally refinanced in 2018 via a floating-rate CMBS loan that was ultimately securitized in the DBRS Morningstar-rated GSMS 2018-FBLU transaction. The subject financing package will retire outstanding debt of $1.05 billion of existing debt on the property associated with the GSMS 2018 securitization, return approximately $112.0 million of cash equity to the borrower, fund $10.0 million in reserves and cover $3.0 million in origination costs associated with the transaction. Soffer now owns the hotel under his new real estate development company, Fontainebleau Development.

The property experienced performance declines in 2016 and 2017 primarily as a result of the Zika virus and Hurricane Irma, which affected the overall Miami Beach submarket and were not specific to the subject. After experiencing average year-over-year (YOY) NOI growth of 9.4% from 2011 through 2015, net operating income (NOI) was down by 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 (STR) report indicates that property occupancy and revenue per available room (RevPAR) in September 2017 declined by 41.4% and 32.1%, respectively, compared with September 2015 metrics. The impact was less in October 2017, but still substantial. The sponsor identified more than 11,206 room nights, equating to $8.0 million in lost revenue, associated with Hurricane Irma. With respect 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 Hurricane Irma impact. Performance bounced back with a 2017 to 2018 RevPAR increase of 9.7% at the subject property and a 12.7% increase across the collateral’s competitive set identified in the September 2019 STR report. Similarly, the subject’s NOI increased by 10.8% over the same period between 2017 and 2018.

The collateral and surrounding Miami Beach again experienced moderate disruption between August and September 2019 because of the anticipated landfall of Hurricane Dorian, which was projected to hit the Florida coast over Labor Day weekend before changing course. While Hurricane Dorian never made landfall in Miami, the collateral suffered a surge of room-night cancellations that, based on estimates from the hotel’s management team, amounted to approximately $4.0 million in lost hotel revenue. As a result, the collateral’s RevPAR dropped by 1.6% between the trailing 12-month (T-12) period ending July 2019 and the T-12 period ending September 2019. Isolating this trend to the hurricane impact is challenging, however, because RevPAR had already been declining in early 2019 as evidenced by the T-12 ending July 2019 RevPAR falling by 0.9% compared with YE2018. Fortunately, management indicated that the collateral is on track to rebound in Q4 2019 with group bookings up 3.0% YOY. Miami is also hosting Super Bowl LIV in 2020, which should further facilitate a stable recovery.

The appraisal identified new hotels that it deemed to have some degree of interaction with the collateral, but ultimately did not consider any new additions to be primarily competitive with the subject. The new additions included the JW Marriott Turnberry Resort & Spa, Miami Beach Convention Center Hotel and Marriott Marquis Miami World Center. The JW Marriott Turnberry Resort & Spa was renovated by the sponsor for this transaction and reopened in January 2019. Because of the JW Marriott Turnberry Resort & Spa’s non-beachfront location in Aventura, Florida, and its lower daily rate, the appraisal deemed it to be only 25.0% competitive with the collateral. The 800-key Miami Beach Convention Center Hotel was approved for development in November 2018 and is anticipated to be delivered to the Miami Beach area in January 2023. Because of the proposed hotel’s non-beachfront location, convention-based targeted guests and location approximately two miles south, the appraisal deemed the asset to be only 15.0% competitive with the collateral and DBRS Morningstar does not consider the new supply to be a primary competitor with the subject. Furthermore, given the limited convention space and the lack of a large, modern convention hotel in Miami Beach, the area has historically been challenged in attracting larger city-wide conventions. The expanded and renovated convention center, along with additional hotel keys, will likely drive substantial new convention demand to the area rather than purely additive in supply terms. Lastly, the 1,700-key Marriott Marquis Miami World Center is anticipated to be delivered to the Downtown Miami area in January 2023; however, given the new property’s lower price point, lack of resort amenities, limited F&B outlets and non-beachfront location, the appraisal did not deem the Marriott Marquis Miami World Center to be competitive with the collateral.

At 0.79 times (x), the DBRS Morningstar Refinance Debt Service Coverage Ratio (DSCR) on the mortgage debt is low for a hotel loan, even one with the subject’s high-end product offering and excellent location. Term-default risk is considered modest as reflected in the DBRS Morningstar Term DSCR of 1.99x,. The DBRS Morningstar value of $791.8 million represents a considerable 51.7% discount to the appraiser’s as-is concluded value of $1.64 billion. The DBRS Morningstar value also represents a -4.6% discount to the DBRS Morningstar value estimate from the GSMS 2018-FBLU securitization. The value variance is driven by cash flow, largely resulting from declining average daily rates at the Chateau and Versailles rooms, increased operating expense ratios, higher property taxes and an increased insurance premium. The DBRS Morningstar cap rate of 9.75% is well above the cap-rate range of 5.0% to 6.4% 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 Morningstar loan-to-value (LTV) ratio on the full $1.175 billion debt load is high at 148.4%, falling to a still relatively high level of 123.1% based on the senior mortgage debt of $975.0 million; however, the cumulative investment-grade-rated proceeds of $677.0 million reflect a more reasonable LTV of 78.3% based on the DBRS Morningstar value of $77.2 million. As a result of the property’s irreplaceable location, continued anticipated increase in RevPAR from the elimination of Zika concerns and detrimental impact of Hurricane Irma, lack of competitive new supply and extensive amenity offerings, including upscale restaurants and a world-renowned nightclub, DBRS Morningstar 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 the property’s value over the loan term.

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

For supporting data and more information on this transaction, please log into www.viewpoint.dbrs.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

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

With regard to due diligence services, DBRS Morningstar 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 Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is North American Single-Asset/Single-Borrower 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 Morningstar 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 Morningstar 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 [email protected].

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

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