DBRS Morningstar Confirms All Ratings on MBRT 2019-MBR; Three Classes Carry Negative Trends

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2019-MBR issued by MBRT 2019-MBR as follows:

-- Class A at AAA (sf)
-- Class A-IO at AAA (sf)
-- Class A-Y at AAA (sf)
-- Class A-Z at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at AA (low) (sf)
-- Class D at A (high) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class X-A at B (high) (sf)
-- Class G at B (sf)

DBRS Morningstar changed the trends on Classes A, B, C, D, E, A-IO, A-Y, and A-Z to Stable from Negative. Negative trends remain on Classes F, G, and X-A.

The rating confirmations reflect DBRS Morningstar’s generally positive view for the stabilization prospects of the collateral hotel. There remains uncertainty amid the Coronavirus Disease (COVID-19) pandemic, as reflected in the Negative trends on the two lowest principal bonds and the associated interest-only (IO) bond. However, the quality of the collateral hotel and the sponsor’s recent injection of significant equity into the deal, as further discussed below, as well as the recent rebrand to a prestigious Hilton flag in Waldorf Astoria, supports the Stable trends on the remainder of the rated classes.

The IO floating-rate loan is secured by the fee interest in the 400-key AAA Five Diamond-rated luxury, full-service resort hotel and the leasehold interest in the Monarch Bay Beach Club, a private beach club near the hotel facilities in Dana Point, California. The property was rebranded as a Waldorf Astoria in September 2020, which should provide a boost to property traffic as the hotel can now make use of Hilton’s global sales and booking networks. The subject’s average daily rate (ADR) increased considerably during the distressed 2020 fiscal year period as the hotel’s management kept the offered room rates steady from pre-pandemic levels and the borrower was unwilling to provide concessions despite the lower occupancy rates. The collateral is situated to recover in a stronger position than compared to its pre-pandemic operations once the pandemic subsides; however, the pandemic still presents a risk to recovery in the near term.

The loan structure includes a two-year term with three one-year extension options. Loan proceeds of $370.0 million along with sponsor equity of $127.6 million financed the acquisition of the collateral for a purchase price of $492.5 million. The loan was added to the servicer’s watchlist in December 2020 because of a low debt service coverage ratio and the occurrence of a servicing trigger event. The loan failed to meet the minimum 6.0% debt yield in Q2 2020 and cash management was implemented. The loan reported a year-end (YE) 2020 net cash flow (NCF) of -$2.12 million, compared to the trailing 12 months ended September 30, 2019, NCF of $23.7 million and the YE2018 NCF of $23.7 million.

As part of the property’s rebrand to a Waldorf Astoria hotel in September 2020, the property manager was replaced by Waldorf-Astoria Management, LLC (Waldorf Astoria) and the hotel is now known as the Waldorf Astoria, Monarch Beach. Per the Branding and Management Agreement (BMA), Waldorf-Astoria paid $40 million to operate the property for a minimum of 30 years. As a condition of the BMA, the borrower agreed to a $15.1 million property improvement plan (PIP) renovation that will be completed within a three-year schedule. Approximately $2.5 million of pre-conversion work needed to be complete before the rebrand launch. Pre-conversion work included improving safety standards in guestrooms and common areas, replacing exterior signage, installing Hilton’s property management technology system, and upgrading bedding. Major PIP renovation items to be completed consist of the replacement of all operating supplies and equipment, renovation of back-of-house areas, elevator modernization, lobby upgrades, renovation of the pool bar, and new fixtures in the guestrooms.

The full $40.0 millon was paid once the borrower completed all pre-opening work items outlined in the PIP; however, proceeds were not held by the servicer. The borrower is required to repay any unamortized BMA proceeds should the borrower terminate the property manager within the full management term of 75 years.

The sponsor for the transaction is Ohana Real Estate Investors, an integrated investment company founded in 2009 and headquartered in Redwood City, California, that specializes in the development, acquisition, and management of high-quality hotels and residential communities. The sponsor has experience in investing and managing luxury resort properties, including Ritz-Carlton Laguna Niguel, Montage Beverly Hills, Montage Laguna Beach, and the Bacara Resort. OB Sports Golf Management (MB), LLC manages the Monarch Beach Golf Links golf course and related facilities.

DBRS Morningstar reviewed a December 2020 Smith Travel Research report that noted a June 2020 occupancy rate of 42.4%, which increased to 56.3% in August 2020. The occupancy rate held steady at 41.7% in September and 44.5% in October before sharply declining to 12.5% in December, a trend mirrored by the competitive set and likely a result of the stay-at-home order issued by the State of California in November 2020. ADRs at the subject property and the competitive set significantly improved in 2020, with each reporting increases of 16.6% and 12.5%, respectively, relative to 2019. The subject and the competitive set are drive-to destinations that have typically performed better than fly-to hospitality assets during the pandemic. The property was able to achieve a revenue per available room (RevPAR) penetration of 106.7% in 2020 primarily because of greater occupancy rates relative to the competitive set. Historically, RevPAR penetrations for the subject were in the low-to-mid 80% range as the subject derived lower occupancy rates and ADRs; however, the trend could change given the rebrand to Waldorf Astoria.

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.

Classes X-A and A-IO are interest-only (IO) certificates that reference 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 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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