DBRS Morningstar Confirms Ratings with Negative Trends on Fontainebleau Miami Beach Trust 2019-FBLU

DBRS Limited (DBRS Morningstar) confirmed the 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 X-A at AA (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 trends are Negative because the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic. The ratings have been removed from Under Review with Negative Implications, where they were placed on March 27, 2020.

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 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.

As it reviewed the ratings for 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 stress 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 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 financing package totals $1.175 billion with $975.0 million structured as first mortgage debt and $200.0 million structured as mezzanine debt.

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. 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 89.8%. Two major airports are near the subject, including the Miami International Airport, 10 miles west, and Fort Lauderdale-Hollywood International Airport, approximately 21 miles north.

Jeffrey Soffer, along with other principals of the prior sponsor entity, originally acquired the subject in 2005 and later brought in an equity partner, Istithmar Hotels FB Miami LLC, which took on a 50.0% stake in 2008 for $375.0 million just prior to completing an extensive $571.8 million ($397,079 per key) renovation. Since acquiring the resort in 2005, the sponsor has invested approximately $837.3 million in capital improvements throughout the property, the majority of which occurred in 2008 with a transformative capital renovation. The sponsor continues to commit to the property, with plans to contribute an additional $32.0 million between 2020 and 2022.

In March 2020, the loan was transferred to the special servicer due to the borrower requesting coronavirus-related relief in a form of a forbearance. According to the servicer, the forbearance request was primarily providing the deferral of furniture, fixtures, and equipment payments through 2020 and the exclusion of the 2020 financials when calculating the debt yield tests. The loan is expected to return to the master servicer in October 2020. As of September 2020 reporting, the loan has $8.4 million in a replacement reserve.

Based on the trailing 12-months ending September 2019 operating statement, the subject reported a weighted-average occupancy rate, average daily rate, and revenue per available room of 75.2.0%, $361.38, and $271.74, respectively, compared to the 2015 figures of 74.6%, $346.01, and $287.34, respectively.

Both the domestic and international tourism reliance factor is particularly noteworthy given the global travel disruptions currently underway amid the coronavirus outbreak. DBRS Morningstar notes the subject will likely experience cash flow disruptions in the coming months, potentially more severe than the property experienced in 2016 with the outbreak of the Zika virus. However, DBRS Morningstar notes the subject and other local hotels likely benefitted from a strong start to the year given the fact that Miami hosted Super Bowl LIV in February 2020, which should serve to provide some cushion against declines in revenue associated with the coronavirus pandemic.

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 $77.2 million and DBRS Morningstar applied a cap rate of 8.0%, which resulted in a DBRS Morningstar Value of $965.0 million, a variance of 41.2% from the appraised value of $1,640 million at issuance. The DBRS Morningstar Value implies an LTV of 101.0% compared with the LTV of 59.5% 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 property’s irreplaceable location, high quality, and limited competitive new supply.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis totalling 4.00% 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 was insulated from loss.

The DBRS Morningstar rating assigned to Class D had a variance that was higher than those results implied by the LTV Sizing Benchmarks when market value declines are assumed under the Coronavirus Impact Analysis. This Class carries a Negative trend as DBRS Morningstar continues to monitor the evolving economic impact of 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.

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.

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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