DBRS Morningstar Confirms Ratings on Margaritaville Beach Resort Trust 2019-MARG, Trends Changed to Stable

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage Pass-Through Certificates, 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)

In addition, DBRS Morningstar changed the trends on all classes to Stable from Negative.

The subject transaction closed in May 2019 with an original trust balance of $161.5 million, with an $18.5 million mezzanine loan held outside the trust. Earlier this year, the borrower executed the first of three available one-year extension options for the loan, with the loan now scheduled to mature in May 2022. According to The Real Deal, Pebblebrook Hotel Trust will acquire the property for $270.0 million. Pebblebrook Hotel Trust’s Q2 2021 reporting stated that the contract to acquire the property has been executed. DBRS Morningstar has reached out to the servicer for confirmation of the pending sale and for the new owner’s plans for the subject loan and as of the date of this press release, the response is pending. The reported sales price of $270.0 million is above the issuance appraised value of $248.0 million and well above the current loan balance of $161.5 million. These factors suggest the sale is a credit positive event that brings new equity into the transaction and a sales price that indicates the leverage remains healthy, supporting the rating confirmations and Stable trends for all classes with this review.

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 current loan 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.

Prior to the pandemic, the property’s performance was generally stable amid the ongoing renovations that were completed in 2019. According to the year end (YE) 2019 financials, the trust loan reported a debt service coverage ratio (DSCR) of 1.74 times (x), down slightly from the Issuer’s DSCR of 1.81x. According to the YE2020 financials, the loan reported a DSCR of -0.07x, driven by the forced shutdown amid the Coronavirus Disease (COVID-19) pandemic and related steep decline in travel across the country and around the world.

The March 2020 STR, Inc. report is the most recent on file with DBRS Morningstar. That report showed a trailing 12 month (T-12) occupancy, average daily rate (ADR), and revenue per available room (RevPAR) of 78.2%, $276.60, and $216.21, respectively, compared with the competitive set’s averages of 72.2%, $256.55, and $185.25, respectively. The property’s occupancy rate reported for YE2020 was 32.1% and the loan remains on the servicer’s watchlist for the low occupancy rate and low DSCR, the latter of which caused a cash trap to be triggered. According to the August 2021 reporting, the servicer reported approximately $10.9 million in a reserve account.

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-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.

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 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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