DBRS Morningstar Confirms Ratings on Morgan Stanley Capital I Trust 2018-SUN, Maintains Negative Trends for Four Classes

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-SUN issued by Morgan Stanley Capital I Trust 2018-SUN as follows:

-- Class A at AAA (sf)
-- Class X-EXT at AAA (sf)
-- Class B at AA (sf)
-- Class C at AA (low) (sf)
-- Class D at A (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (sf)
-- Class H at B (low) (sf)

The trends for Classes A, B, C, D, and X-EXT are now Stable. Negative trends remain on Classes E, F, G, and H given the general uncertainty surrounding the timeline for stabilization for the collateral hotels amid the effects of the Coronavirus Disease (COVID-19) global pandemic.

The rating confirmations reflect the relatively stable performance of the transaction since the DBRS Morningstar ratings were issued in September 2020. The trend change to Stable for the five classes as outlined above is generally reflective of positive developments for the transaction in the loan’s return to performing status and the sponsor’s recent injection of capital to cover operating cost and debt service shortfalls throughout the pandemic.

The loan transferred to the special servicer in April 2020 following the sponsor’s request for a forbearance. The loan was current at the time of the loan’s transfer but fell delinquent with the June 2020 remittance date. A loan modification was executed in December 2020, and the loan was returned to the master servicer in April 2021. The borrower brought all delinquent debt service payments and reserve deposits current as part of the modification, which also required a $3.5 million cash payment from the sponsor to satisfy all legal fees and other ancillary costs incurred by the special servicer. In consideration for the borrower’s commitment, the special servicer agreed to accept a cure of the loan defaults, exercise the first maturity extension option to July 2021, and conditionally waive the pursuit of accrued default interest if there is not another monetary event that occurs. The special servicer also required written evidence from the mezzanine noteholder confirming the extension of the mezzanine loan through July 2021 and consent to the remaining workout terms. As of July 2021, the servicer reported that a second extension for the maturity to July 2022 was pending execution.

The floating-rate interest-only (IO) loan is secured by the fee-simple interest in two luxury beachfront hotels totaling 327 keys in Santa Monica, California. Loan proceeds of $356.6 million and mezzanine debt of $73.4 million (held outside of trust) refinanced existing debt of $422.5 million, returned $3.2 million to the sponsors, and funded prepayment penalties. The loan features a two-year initial term with five one-year extension options. The Shutters on the Beach (Shutters) hotel opened in 1993 with 198 guest rooms, three food and beverage locations, a spa, and 8,632 square feet (sf) of meeting space. The Casa del Mar hotel opened in 1999 with 129 guest rooms, one restaurant and bar/lounge, a spa, and roughly 11,000 sf of meeting space. The loan sponsors, Edward and Thomas Slatkin, developed both hotels more than 20 years ago. The sponsors operate a third-generation family investment company founded in 1982 with long-time experience in the ownership and operations of luxury hotels.

The properties are the only hotels located directly on the beach in the Santa Monica market, giving the collateral a significant advantage against competitors. Both hotels are recognized as two of the premier luxury hotels in Southern California and their respective restaurants derive considerable income from nonhotel guests. Between 2008 and 2018, more than $53.5 million was invested in capital expenditure projects, totaling $150,250 per key for the Shutters property and $184,300 per key for the Casa del Mar property. Ongoing significant capital investment is necessary to maintain the hotels at the standard necessary to compete in the luxury hotel market.

The properties have traditionally outperformed their competitors with strong revenue per available room (RevPAR) penetrations. That outperformance continued throughout the coronavirus pandemic, which forced the properties to close between March 2020 and July 2020.

As has generally been the case for similarly positioned hotels across the country, occupancy rates have remained depressed over the past year. The special servicer reports that the sponsor provides monthly occupancy figures for both properties, with the June 2021 occupancy rates reported at 35.1% and 38.0% for Casa del Mar and Shutters, respectively.

In addition, March 2021 STR, Inc. (STR) reports were provided for each property, which showed a trailing 12-month (T-12) RevPAR penetration rate of 130.6% for the Shutters property and 148.7% for the Casa Del Mar property. The STR reports show nearly all hotel guests are leisure travelers, not surprising given the impacts to meeting and event scheduling caused by the coronavirus pandemic. At issuance, approximately 19.6% of total occupancy across both properties was generated by group demand, suggesting occupancy rates will continue to be affected as pandemic continues.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Class X-EXT 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.

The DBRS Morningstar Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer 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 methodology is North American CMBS Surveillance Methodology (March 26, 2021), which can be found on 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 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.

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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