DBRS Morningstar Assigns Ratings to GS Mortgage Securities Corporation Trust 2019-BOCA, Places Ratings Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2019-BOCA (the Certificates) issued by GS Mortgage Securities Corporation Trust 2019-BOCA as follows:

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

DBRS Morningstar also placed the ratings on all classes Under Review with Negative Implications, given the negative impact of the Coronavirus Disease (COVID-19) on the underlying collateral.

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 8, 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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 backed by a $600.0 million, floating-rate, two-year loan with five one-year extension options originated on June 4, 2019. The sponsor used the loan to facilitate its purchase of the Boca Raton Resort & Club, a Waldorf Astoria Resort for $875.0 million, fund a seasonality reserve of $5.5 million, and pay closing costs of $17.4 million. As part of the acquisition, the sponsor invested $297.9 million in equity.

The 1,047-key Boca Raton Resort & Club is one of South Florida’s premier resort destinations. The AAA Four Diamond Award-winning resort contains five main buildings and is situated on 162 acres, much of which is waterfront property, and includes resort amenities such as 30 tennis courts, two 18-hole championship golf courses, seven swimming pools, a 32-slip marina capable of anchoring 170-foot-long yachts, 16 food and beverage outlets, 200,000 square feet of indoor/outdoor event space, fitness centres, and other attractions. The collateral is located between Fort Lauderdale and Palm Beach within driving distance of three international airports serving South Florida. The loan collateral excludes the Boca Country Club and the Jewel Parcel, an undeveloped parcel adjacent to the Boca Country Club.

The hotel features five separate main structures, each with a different guest-targeted price point. In addition to the resort hotel accommodations, the hotel offers a membership club which provides revenue through initiation fees, annual dues, dining and bar revenues, and usage fees for the extensive facilities without the need to stay at the hotel. This private membership club generates roughly 30% of total hotel revenues. The sponsor is permitted to release the bungalow parcel, one of the main structures that is the lowest-priced tier of hotel rooms at the facility. The release is subject to debt paydown of 105% of the allocated loan amount and certain debt yield tests.

The previous sponsor, the Blackstone Group Inc., invested more than $302.0 million in the resort amenities and facilities from 2005 to 2018. The renovations featured upgrades to certain groups of guest rooms, restaurants, and the Beach Club facilities. Renovations of a 361-key guest wing resulted in a near doubling of revenue, driven by improved room rates and a 50% increase in occupancy. The current sponsor is MSD Partners, L.P., a New York-based development group owned by billionaire Michael Dell. The facility is managed and flagged by Hilton Worldwide Holdings Inc. and operates under the Waldorf Astoria brand, which is a strong brand affiliation associated with luxury quality.

DBRS Morningstar received updated trailing 12-month period ended May 31, 2020 (T-12), Smith Travel Research (STR) reports. According to the trailing three-month period ended May 31, 2020, reporting, the subject reported occupancy, average daily rate (ADR), and revenue per available room (RevPAR) of 11.6% (-84.4%), $373 (+3.5%), and $43 (-83.9%), respectively. In comparison, the competitive set reported occupancy, ADR, and RevPAR of 29.1% (-60.9%), $517 (+18.0%), and $150 (-53.8%), respectively. On a T-12 basis, the subject reported occupancy, ADR, and RevPAR of 47.1% (-27.5%), $318 (+1.8%), and $150 (-53.8%), respectively.

Because of the coronavirus pandemic, the lodging sector has experienced a unprecedented decline in demand across multiple revenue segments. The subject’s reliance on leisure demand will continue to put significant stress on the hotel’s performance in the short to medium term. In May 2020, the sponsor informed the master servicer of a revenue decline caused by the pandemic; however, the sponsor continues to support the hotel and still plans to invest $75.0 million in capital expenditures (capex) by 2022.

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 $55.1 million and DBRS Morningstar applied a cap rate of 7.25%, which resulted in a DBRS Morningstar Value of $760.1 million, a variance of 16.1% from the appraised value of $906.0 million at issuance. The DBRS Morningstar Value implies an LTV of 78.9% compared with the LTV of 66.2% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for lodging properties, reflecting the collateral’s diversified revenue stream stemming from multiple sources outside room revenues, significant capex over the past 15 years, and vast offering of luxurious amenities.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totalling 6.25% 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% 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 through Class F exceeded the value under the Coronavirus Impact Analysis and therefore DRS Morningstar presumes that the economic stress from the coronavirus had affected the class.

The DBRS Morningstar ratings assigned to Classes B, C, D, E, F, G, and HRR vary by three of more notches from the results implied by the LTV sizing benchmarks when MVDs are assumed under the Coronavirus Impact Analysis. These classes are Under Review with Negative Implications as DBRS Morningstar continues to monitor the evolving economic impact of the coronavirus-induced stress on the transaction.

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.

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.

DBRS Morningstar’s North American CMBS analytical team will continue to monitor the transaction to evaluate the increased risk factors related to the coronavirus pandemic. As information (e.g., updated property-level financials, Smith Travel Research Reports, new valuations for specially serviced loans, and workout and/or modification specifics, if applicable) becomes available, DBRS Morningstar will address the Under Review with Negative Implications rating actions over the near to moderate term. DBRS Morningstar typically endeavors to resolve an Under Review rating action within 90 days, but the circumstances surrounding these rating actions (i.e., the unknown length of the pandemic-related downturn) may result in a prolonged resolution period.

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

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