DBRS Morningstar Assigns Ratings to CCRESG Commercial Mortgage Trust 2016-HEAT

DBRS Limited (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2016-HEAT (the Certificates) issued by CCRESG Commercial Mortgage Trust 2016-HEAT as follows:

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

All trends are Negative because the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic.

These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about October 7, 2020. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

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, at www.dbrsmorningstar.com. On March 27, 2020, DBRS Morningstar placed the ratings on its outstanding SASB transactions secured by hospitality properties Under Review with Negative Implications while MCR placed the ratings on its outstanding SASB transactions secured by hospitality properties Under Review Negative as the global shelter-in-place and travel restrictions related to the coronavirus have had an extreme impact on the short-term performance of this asset class. For further information on these rating actions, please see the DBRS Morningstar press release dated March 27, 2020, at www.dbrsmorningstar.com and the MCR press release dated March 27, 2020, at www.morningstarcreditratings.com.

To assign ratings to this transaction, DBRS Morningstar considered both the impact of the updated NA SASB Methodology and its scenarios attributable to the ongoing coronavirus pandemic on the ratings.

Because of the coronavirus’ significant impact on hospitality performance, DBRS Morningstar first considered the application of the updated NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology” to arrive at a baseline result, which incorporated qualitative assumptions, capitalization rates, and loan-to-value (LTV) ratio sizing benchmark quality/volatility adjustments and excluded any potential changes in current or future expected asset performance resulting from the coronavirus.

DBRS Morningstar then overlaid scenarios incorporating market value declines (MVDs) consistent with the projections in its “Global Macroeconomic Scenarios: September Update” published on September 10, 2020, on top of the baseline result to determine the impact of coronavirus-related changes in asset performance on the subject transaction on a tranche-by-tranche basis. For more information on these scenarios, please refer to the Coronavirus Impact Analysis section of this document. The global macroeconomic scenarios include a moderate decline of 15% for all commercial real estate (CRE), which acts as an average for all CRE property types. However, DBRS Morningstar expects a higher stress for hospitality properties, ranging from 25% to 45% based on the type of demand segmentation and asset location, and expects corporate demand and remote fly-to locations to be at the higher end of the value decline.

LOAN/PROPERTY OVERVIEW
The Certificates are collateralized by a $160.0 million fixed-rate, first-mortgage loan with interest-only (IO) payments for a term of five years. Additional financing is provided by a $50.0 million co-terminus mezzanine loan that is not included in the trust. The loan matures in less than one year on April 6, 2021.

The loan is secured by the leasehold interest in a condominium unit represented by The Ritz-Carlton, South Beach in Miami Beach, Florida. The complex consists of 375 guest rooms, including a presidential suite, four food and beverage (F&B) establishments, 15,201 square feet (sf) of indoor banquet facilities, a Ritz-Carlton Spa, an outdoor luxury pool, and two poolside lanai wings. The collateral includes three commercial units. Additional attached retail spaces, including a 19,966-sf Walgreens, are not part of the hotel condominium unit collateral. The luxury hotel complex is in a restored Art Deco building within Miami Beach’s Art Deco Historic District, which was designated a National Register of Historic Places District in 1979. The district has become known for upscale restaurants, art galleries, boutique retailers, and luxury hotel accommodations. The property is managed by the Ritz-Carlton Hotel Company, LLC, which is part of the luxury business segment of hotel giant, Marriott International, Inc.

For nearly 50 years, the hotel has operated under affiliated ownership. The sponsor, Di Lido Beach Resort Parent LLC, indirectly owns and controls the borrower. Flag Luxury Group and Lionstone Development own the sponsor through a joint venture (JV). The founder and chairmen of the respective JV partners are the guaranteeing sponsors of the financing for customary-loss recourse carveouts and certain full-recourse carveouts. An affiliate of Lionstone Development acquired the property in 1971 operating under its historic name, DiLido Hotel.

The hotel condominium unit is subject to a ground lease, which commenced in September 1999 and ends in September 2128 (129 years). The ground lease is between Di Lido Beach Resort Ltd. and Di Lido Beach Hotel Corporation, both affiliates of the sponsors.

In September 2017, Hurricane Irma caused extensive water damage to the walls, mechanical and electrical systems, and roof failure at the hotel. The problems resulted in the hotel going offline for what was then estimated to be two to three months. The sponsors used the downtime as a stimulus to initiate an extensive renovation of the entire hotel facility. After nearly three years using the insurance proceeds and a $90.0 million sponsor investment, the hotel reopened in January 2020 following the renovation of all the 375 guest rooms and upgrades to the lobby, pool and spa, ballroom facilities, and F&B establishments. During the renovation period, the loan remained current.

However, shortly after reopening, the 2020 coronavirus pandemic caused the hotel to close for several months starting in March 2020. The hotel reopened on June 1, 2020. The borrower has requested relief because of the economic damage caused by the pandemic shutdown and loss of guest revenues. The special servicer rejected the forbearance request; however, the loan remains current on payments, primarily because of the sponsors’ extensive experience and financial strength as well as the asset’s inherent value.

DBRS Morningstar reanalyzed the net cash flow (NCF) derived at issuance for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The resulting NCF figure was $14.9 million and DBRS Morningstar applied a cap rate of 8.13%, which resulted in a DBRS Morningstar Value of $183.3 million, a variance of 45.8% from the appraised value of $337.9 million at issuance in 2016. DBRS Morningstar has not obtained a new valuation post-hurricane renovation. The DBRS Morningstar Value implies an LTV of 87.3% compared with the LTV of 47.4% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the lower to middle of the range of DBRS Morningstar Cap Rate Ranges for lodging properties, reflecting the destination vacation/tourist market, the oceanfront location in a historic district, strong performance versus competition, as well as the extensive renovations of guest rooms, systems, amenities, and common areas.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totalling 5.50% to account for cash flow volatility, property quality, and market fundamentals.

CORONAVIRUS IMPACT ANALYSIS
DBRS Morningstar overlaid various scenarios incorporating MVDs consistent with the projections in the “Global Macroeconomic Scenarios: September Update” (https://www.dbrsmorningstar.com/research/366542) to estimate the impact of coronavirus-related changes in asset performance on a tranche-by-tranche basis for the subject transaction. The scenarios included subjecting the most recent appraised collateral value to generalized CRE asset value decline projections with an assumption of approximately 45.0% under the moderate scenario. In cases where the rated debt exceeded the scenario value, DBRS Morningstar assumed that a principal writedown had occurred to account for the difference. Because of the reverse-sequential allocation of losses in commercial mortgage-backed security (CMBS) transactions, DBRS Morningstar’s analysis considered the most subordinate certificate first and, if a complete principal writedown of the certificate had occurred during the scenario, DBRS Morningstar repeated the analysis for the second-most subordinate certificate and so on until the rated debt no longer exceeded the scenario value.

Under the moderate scenario, the cumulative rated debt was insulated from loss.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2020) and North American CMBS Surveillance Methodology (March 6, 2020), which can be found on www.dbrsmorningstar.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.dbrsmorningstar.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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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

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