DBRS Morningstar Confirms All Ratings on CFCRE Trust 2018-TAN, Removes UR-Dev. Status

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the following classes of the Commercial Mortgage Pass-Through Certificates, Series 2018-TAN (the Certificates) issued by CFCRE 2018-TAN:

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

All trends are Stable. The ratings have been removed from Under Review with Developing Implications, where they were placed on November 14, 2019.

As of the February 2020 remittance report, Class HRR had an outstanding shortfall of $33,686. The servicer has advised that the shortfall is the result of interest that has accrued on administrative expenses incurred by the servicer over the life of the deal. Although there are no active plans to cure the shortfall, which may continue to accumulate over time, interest is contained to the risk retention piece held by the issuer and as such, is not considered a credit impairment to the Trust.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, on the DBRS Morningstar website at www.dbrsmorningstar.com.

Prior to the finalization of the NA SASB Methodology, the DBRS Morningstar ratings for the subject transaction and all other DBRS Morningstar-rated transactions subject to the methodology in question were previously placed Under Review with Developing Implications, as the proposed methodology changes were material.

The subject transaction is one of four NA SASB transactions (24 classes of certificates) publicly rated by both Morningstar Credit Ratings, LLC (MCR) and DBRS Morningstar. As noted in the March 1, 2020 press release, as part of the ongoing consolidation of DBRS Morningstar and MCR, MCR previously placed its outstanding ratings on NA SASB transactions Under Review – Analytical Integration. In conjunction with these rating actions by DBRS Morningstar for the subject transaction, the MCR ratings will be withdrawn.

The subject rating actions are the result of the application of the NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology,” as applicable. Qualitative adjustments were made to the final loan-to-value (LTV) Sizing Benchmarks used for this rating analysis.

The collateral for this transaction is the Aruba Marriott Resort, a 411-key upscale beachfront resort located in Aruba. Included in the collateral is the Stellaris Casino, the largest casino on the island. The subject loan consists of a $135.0 million senior note and a $60.0 million subordinate note (Note B), both of which are assets of the Trust. The underlying loan is interest only (IO) throughout its five-year term and is sponsored by a joint venture between DLJ Real Estate Investment Partners and MetaCorp International. The hotel has been managed by an affiliate of Marriott International since it opened in 1995, and the current management agreement runs through 2025 with four consecutive 10-year extension options thereafter.

In the analysis for these rating actions, the DBRS Morningstar net cash flow (NCF) figure of $26.2 million derived at issuance was accepted and a cap rate of 10.5% was applied, resulting in a DBRS Morningstar Value of $249.4 million, a variance of -20.8% from the appraised value at issuance of $315.0 million. The DBRS Morningstar Value, including Note B held in the trust, implies an LTV of 78.2%, as compared with the LTV on the issuance appraised value of 61.9%.

The cap rate applied is at the higher end of the range of DBRS Morningstar Cap Rate Ranges for lodging properties, reflective of high competition for comparable properties within the Caribbean hotel market, as well as the subject’s relative location, quality, and condition relative to the larger competitive set. Consideration was also given to the leasehold structure, sovereign risk associated with the Aruba government (currently investment grade rated), as well as the heavy reliance on both international tourism and gaming demand drivers.

The international tourism reliance factor is particularly noteworthy given the global travel disruptions currently underway amid the Coronavirus Disease (COVID-19) outbreak. If the coronavirus outbreak and related travel restrictions and cancellation trends observed thus far extend for the moderate to longer term, DBRS Morningtar notes the subject will likely see a significant cash flow drop in the coming months.

At issuance, DBRS Morningstar noted over $51.0 million ($126,192 per key) of capital investment since 2010 in improvements for the subject property, including approximately $17.6 million ($42,822 per key) spent between 2016 and 2018 to update guest rooms, paint the exterior facade, expand the fitness center, and update restaurants. According to the servicer, as of the trailing 12 months (T-12) ending in September 2019, the subject reported an occupancy rate, average daily rate (ADR), and revenue per available room (RevPAR) of 88.0%, $462, and $407, respectively, compared with the previous year’s figures of 85.8%, $426.28, and $365.54, respectively. Based on the RevPAR trends, the sponsor’s commitment to updating the property has been successful increasing room rates and traffic alike. The property performs well within the market and reported an overall RevPAR penetration of 156.9% as of the September 2019 Smith Travel Research report.

Aruba’s credit rating continues to exhibit investment-grade characteristics, primarily benefiting from its long-standing institutional relationship with the Kingdom of the Netherlands (rated AAA with a Stable trend by DBRS Morningstar) and its relatively high per-capita income in the Caribbean region. Key challenges include weak growth prospects, limited economic diversification, and relatively high debt levels for a small island economy, which have recently increased with recovering spending following Hurricane Dorian in August 2019. Aruba’s economy also has negative exposure to the current turmoil in Venezuela, which has led to a reduction in tourist arrivals from Venezuela. The Sovereign Ratings team at DBRS Morningstar also noted particular challenges amid the coronavirus outbreak given Aruba’s heavy reliance on tourism.

The DBRS Morningstar NCF figure applied as part of the analysis represents a -8.1% variance to the Issuer’s NCF, primarily driven by lower occupancy and casino revenue assumed by DBRS Morningstar. The issuer assumed an occupancy rate of 85.0%, while DBRS Morningstar used an 80.0% occupancy rate, below the competitive set’s rate of 84.9% as of September 2019, and the subject’s T-12 ending September 2019 rate of 88.0%. For casino revenue, DBRS Morningstar concluded to a figure at 26.9% of total revenue, which is lower than the Issuer’s figure of 27.2%.

The servicer reported a Q3 2019 debt service coverage ratio (DSCR) of 2.97 times (x), up from the YE2018 figure of 2.64x. The T-12 figure reported by the servicer, reflects a +33.1% variance over the DBRS Morningstar NCF figure, primarily a factor of higher occupancy and ADR rates, as room revenue increased 32.2% ($15.0 million), and increased other income (primarily casino income), which has increased 23.4% ($6.4 million).

While performance is currently exceeding the DBRS Morningstar expectations at issuance, hotels typically exhibit higher cash flow volatility, particularly amid events like the ongoing coronavirus outbreak. If the outbreak’s impact on global travel continues to escalate and extends into a longer term, significant cash flow declines at the subject and other hotel properties around the world can be expected, at least temporarily. DBRS Morningstar notes the subject property benefits from a dedicated sponsor who has continued to invest in improvements for the property over the last several years, as well as the longer-term viability of the property and larger Caribbean hotel market in continuing to draw international travelers once the coronavirus effects begin to diminish.

Class X is an 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.

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

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

The principal methodology is the North American Single-Asset/Single-Borrower Ratings 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 Morningstar 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.

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

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