DBRS Morningstar Confirms Ratings on Margaritaville Beach Resort Trust 2019-MARG, Negative Trends; Removes from Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the following classes of the Commercial Mortgage Pass-Through Certificates, Series 2019-MARG issued by Margaritaville Beach Resort Trust 2019-MARG:

-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at AA (low) (sf)
-- Class X-EXT at AA (low) (sf)
-- Class D at A (high) (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. DBRS Morningstar also discontinued the rating on Class X-CP as it was paid out with the August 2020 remittance.

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 transaction originally closed in May 2019 at an original trust balance of $161.5 million, including an $18.5 million mezzanine loan held outside the trust. The transaction is backed by the leasehold interest in a AAA Four Diamond-rated luxury resort in Hollywood, Florida, situated on 6.2 acres of beachfront property between the Atlantic Ocean and the intracoastal Stranahan River. The collateral is subject to a 99-year term ground lease between the City of Hollywood and the borrower. The ground lease, which commenced in July 2013 and will expire in July 2112, calls for a minimum guaranteed annual rent of $1,000,000, with rent increases of 15.0% on every fifth anniversary of the commencement date.

The resort offers 349 guest rooms, each featuring a private terrace with an ocean/intracoastal view; 30,000 square feet (sf) of indoor/outdoor event space; an adult-only pool; two family-friendly pools; a surf simulator; an 11,000-sf spa; eight branded food and beverage outlets; and 465 parking spaces. The property benefits from its proximity to two major airports: Fort Lauderdale-Hollywood International Airport located 7.5 miles north and Miami International Airport located 23.4 miles south.

The sponsor, KSL Capital Partners, LLC, purchased the resort for $194.0 million in April 2018 from the developer, Starwood Capital Group, which built the property and opened Margaritaville Hollywood Beach Resort for business in 2015. Loan proceeds of $180.0 million were used to retire outstanding debt of $123.6 million and return $49.3 million of equity to the sponsor ($78.8 million of implied sponsor equity remains in the deal). At issuance, the loan was structured with $1.98 million of upfront reserves to cover a room configuration project that the sponsor completed in 2019.

Despite the coronavirus pandemic, the loan is current and the sponsor has not requested any coronavirus-related relief. As of the YE2019 financials, the trust loan reported a debt service coverage ratio (DSCR) of 1.74 times (x), down from the issuer’s assumed DSCR of 1.81x at issuance. This can be attributed to a 5.3% decline in effective gross income, softened by a reciprocal 4.2% decrease in total operating expenses, combining for a total 8.8% decline in net cash flow (NCF) when comparing the YE2019 figures with the issuer’s. The resort is currently open but subject to the county’s coronavirus-related regulations.

DBRS Morningstar reanalyzed the 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 $15.6 million and DBRS Morningstar applied a cap rate of 9.9%, which resulted in a DBRS Morningstar Value of $174.2 million, a variance of 29.7% from the appraised value of $248 million at issuance. The DBRS Morningstar Value implies an LTV of 92.7% compared with the LTV of 65.1% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the middle of the range of DBRS Morningstar Cap Rate Ranges for lodging properties, reflecting the leasehold interest as well as the hotel’s above average-quality and strong sponsorship and management.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 2.50% 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 25% 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.

Classes X-EXT 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 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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