DBRS Morningstar Confirms Ratings on BBCMS 2017-DELC Mortgage Trust and Changes All Trends to Stable from Negative

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the following classes of the Commercial Mortgage Pass-Through Certificates, Series 2017-DELC issued by BBCMS 2017-DELC Mortgage Trust:

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

DBRS Morningstar changed all trends to Stable from Negative as the sponsor continues to invest in the collateral hotel as part of an extensive $400.0 million capital expenditure (capex) project and continues to fund debt service and operating shortfalls out of pocket during the Coronavirus Disease (COVID-19) pandemic. The capex project is expected to be completed before the final loan maturity date in August 2024. Based on the DBRS Morningstar value of $624.0 million, which is approximately 39.6% below the appraised value of $1.0 billion at issuance, the trust balance has a loan-to-value (LTV) ratio of 81.3% and the whole loan has an LTV ratio of 114.1%. However, the sponsor’s $400.0 million capex project should improve the collateral value upon completion.

The rating confirmations reflect the overall stable outlook for the collateral, which continues to be affected by the coronavirus pandemic. The sponsor is using the down time to complete the massive capex project, which was planned at issuance and is being delivered in various phases with a final completion date in 2023. The subject transaction closed in August 2017, and the trust comprises $507.6 million in senior mortgage debt with a total of $204.4 million held across three mezzanine loans held outside the trust. The loan is secured by the Hotel del Coronado, a 757-key luxury beach resort on Coronado Island in the greater San Diego area. The interest-only (IO) loan features a two-year initial term with five one-year extensions. A loan amendment was executed in June 2021 that waived the debt yield trigger event through March 2022 and modified the replacement reserve deposit structure. The servicer confirmed the borrower exercised its third extension option, which extended the maturity date to August 2022.

The loan is sponsored by Blackstone Real Estate Partners VIII L.P., an affiliate of The Blackstone Group Inc., the world’s largest alternative asset manager and real estate advisory firm. The hotel previously operated as an independent hotel but is now managed by Hilton Worldwide Holdings, Inc. (Hilton) under the Curio Collection flag, one of Hilton’s upscale brands. The collateral benefits from Hilton’s global brand distribution system, Hilton Honors members, and Hilton’s marketing influence for group bookings. The hotel management agreement with Hilton began in July 2017 and continues through July 2027 plus two five-year extension options.

According to the property’s website, the renovation project will increase the total key count to 902 when complete. All guestrooms throughout the resort will be updated and a new 142-key residential-style experience will be introduced on the south side of the resort. The renovated guestrooms at The Cabanas were completed in summer 2020 while the upscale, contemporary rooms at The Views were delivered in summer 2021. The residential-style resort will feature one-, two-, and three-bedroom villas with its own check-in; an ocean-view pool with cabanas; a poolside bar; and a casual lounge. Improvements are being developed as whole-ownership, limited-term condominiums with an estimated completion date in mid-2022. Other projects include the exclusive, gated beach community known as Beach Village at The Del that will be finished in 2022 and the full guestroom and common area renovation of The Victorian, the property’s main building, that will be completed in 2023.

The subject is an iconic hotel with an irreplaceable and generally unrivaled oceanfront location for resort hotels in Southern California. The property’s desirable location resulted in stable historical performance and strong revenue per available room (RevPAR) growth prior to the pandemic. The 35 condominium units, totaling 78 keys, housing the North Beach Villas are not sponsor-owned and the condominium owners are not required to participate in the rental program managed by the sponsor. Owners are extremely incentivized to participate in the program as they are required to pay resort and maintenance fees to the hotel regardless of participation and the revenue streams have been historically strong.

A May 2021 Smith Travel Research report detailed the operations during the coronavirus pandemic. While the occupancy rate considerably declined in 2020 and 2021, average daily rate (ADR) growth significantly improved as the collateral continues to be renovated. ADR increased by 20.8% to $528 as of the trailing 12-months (T-12) ended May 31, 2021, from $437 as of the T-12 ended October 31, 2019. The competitive set has been outperforming the subject’s occupancy rate; however, the subject’s ADR growth mitigates some of the occupancy losses. The T-3 ended May 31, 2021, metrics show the property demand was trending upward with an occupancy rate, ADR, and RevPAR of 37.6%, $575, and $216, respectively. Although the state of California lifted most pandemic-related restrictions as of June 2021, DBRS Morningstar is monitoring the ongoing pandemic risk in the near term as travel demand may be diminished should coronavirus outbreaks continue. Additionally, DBRS Morningstar will continue to follow the scheduled completion dates should there be any delays given the construction materials and labor shortages widely reported throughout the pandemic.

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-NCP 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 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.

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

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429