DBRS Morningstar Assigns Provisional Ratings to Citigroup Commercial Mortgage Trust 2021-KEYS, Commercial Mortgage Pass-Through Certificates, Series 2021-KEYS

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the classes of Citigroup Commercial Mortgage Trust 2021-KEYS, Commercial Mortgage Pass-Through Certificates, as follows:

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

All trends are Stable. Class J, Class K-RR and Class P are not rated by DBRS Morningstar.

The Citigroup Commercial Mortgage Trust 2021-KEYS transaction is secured by the fee-simple interest in the Isla Bella Beach Resort (Isla Bella), a full-service hotel that spans more than 24 acres on Knights Key, with more than a mile of oceanfront exposure. The collateral also includes a 30-key, on-site employee housing structure known as Manatee Bay. Isla Bella is located approximately two hours south of Miami at the threshold of the Seven Mile Bridge, halfway between Islamorada and Key West. The property is composed of 199 keys, 112 of which are one-bedroom units and 87 of which are two-bedroom units, resulting in 286 total bedrooms that can accommodate over 800 guests per night. Development of Isla Bella began in July 2017, and construction was completed in March 2019. The property is the only resort developed in the Middle Keys in the past 20 years and represents the newest addition to a historically supply-constrained submarket with extremely high barriers to entry. DBRS Morningstar has a positive view of the property based on its location, quality, and strong amenity offerings.

Isla Bella offers some of the largest rooms in the Florida Keys with an average room size of greater than 600 sf with each room offering private balconies and unobstructed views of the Atlantic Ocean. It is also the only luxury resort in the Keys with both one- and two-bedroom suites. The property features a substantial set of modern amenities including five swimming pools (including the 4,500-sf resort pool), a 5,000-sf fitness and spa center, a 5,000-sf retail market place, and a 24-slip marina. The property offers easy accessibility to numerous outdoor activities including a kayak rental, jet ski tour, tiki boat rental, scuba diving, snorkeling, and fishing. The property also features three F&B outlets, (Il Postino, The Marketplace Cafe, and The Beach Bar) in addition to a pool bar and offers banquets/catering services in conjunction with its 20,000 sf of meeting space.

Upon delivery in March 2019, Isla Bella quickly ramped with cash flow turning positive by June 2019 and occupancy exceeding 89% by February 2020. Upon the onset of the Coronavirus Disease (COVID-19) pandemic, the local government imposed a lockdown on the Florida Keys for April and May 2020, which restricted guests from accessing the entire archipelago. The property re-opened in June 2020 and achieved a 50.1% occupancy and positive cash flow in that first month. Since reopening, Isla Bella has continued to ramp its performance each month, generating $18.3 million in NCF as of the T-12 period ended July 2021 at a $383 RevPAR. Based on the sponsor’s 2021 reforecast, the property is projected to achieve a $22.8 million NCF by YE2021 at a $448 RevPAR.

The property was in the middle of ramping up when the coronavirus pandemic caused a two-month closure, resulting in a lack of stabilized historical performance to analyze. However, based on the STR reports provided for 2019, 2020, and 2021, Isla Bella has demonstrated strong performance relative to its comp set with penetration ratios steadily increasing since reopening in June 2020. For the trailing three-month period ended June 2021, the property exhibited a RevPAR penetration ratio of 126.7% with occupancy and ADR penetration ratios of 93.7% and 135.3%, respectively. The strong performance through the pandemic is further supported over the T-12 with occupancy, ADR, and RevPAR of 66%, $542.79, and $358.51 resulting in penetration rates of 87.1%, 131.2%, and 114.3%, respectively. For June 2021, the property achieved occupancy, ADR, and RevPAR of 84.9%, $638, and $541.5 and penetration rates of 94.3%, 135.3%, and 127.0%, respectively. DBRS Morningstar concluded to a stabilized occupancy, ADR, and RevPAR of 73.4%, $566, and $416, which represent penetration rates of 82.2%, 116.8%, and 96.2%, respectively, versus the trailing three-month June 2021 comp set and 87.0%, 115.6%, and 100% versus YTD 2021.

Widely considered one of the best hotel markets in the world, the Florida Keys benefit from favorable supply-demand dynamics that have historically proved resilient during various cycles of economic stress. With heavy restrictions to supply, and healthy demand in the market, the Florida Keys witnessed a RevPAR compound annual growth rate (CAGR) of approximately 4% for the 30-year period from 1987 to 2017. During the 2009 financial crisis, occupancy in the Keys increased by 3% while the rest of the U.S. declined by 10%. From 1995 to 2019, total supply in the Upper Florida Keys has increased by just a CAGR of 0.7%. Compared with the total U.S. growth at 1.7%, the Florida Keys is one of the most supply constrained market in the country. With approximately 74% of visitors arriving to the Keys by car in 2019, demand in the market is dominated by transient leisure travelers. Since 2016, group demand has never exceeded 10%, potentially insulating the property from the projected slow recovery of the group segment following the coronavirus pandemic.

The property is located in the Florida Keys south of Miami and is at elevated risk of casualty associated with windstorm and flood events. The loan requires insurance coverage for these perils in an amount that is significantly below its outstanding balance of $225 million, which includes $100 million of wind/named storm coverage and $50 million of flood coverage, per occurrence. However, the required insurance limits for of $100 million for wind and named storm insurance are in excess of the probable maximum loss amount for the 1,000 year return period of approximately $80.2 million (inclusive of storm surge, business interruption, and loss amplification) as determined by a study prepared by Risk Management Solutions. In addition all the buildings at the resort are constructed in accordance with current Florida hurricane building codes with impact resistant windows and doors rated for winds over 150 mph. The property has not suffered any storm damage since construction.

The transaction sponsor is an affiliate of EOS Investors LLC (EOS), which acquired a 40% controlling common equity interest in the resort in 2019. Founded in 2017 by Jonathan Wang, EOS is a fully integrated investment firm operating primarily in the hospitality sector. EOS’ portfolio consists of a number of luxury hotels including the Viceroy L’Ermitage Beverly Hills, the Hamilton Hotel in Washington, D.C., and the Hilton Myrtle Beach. EOS also owns and/or manages two additional hotels in the Florida Keys, the Faro Blanco Resort & Yacht Club in Marathon and the Oceans Edge Resort & Marina in Key West. EOS’s partner, Singh Investors, the developer of the property, holds a 60% completely passive common equity interest.

The sponsor is partially using proceeds from the whole loan to repatriate approximately $9.2 million of equity. DBRS Morningstar views cash-out refinancing transactions as less favorable than acquisition financings because sponsors typically have less incentive to support a property through times of economic stress if less of their own cash equity is at risk. Based on the appraiser’s as-is valuation of $331.9 million, the sponsor will have approximately $107.4 million of unencumbered market equity remaining in the transaction.

The nonrecourse carveout guarantor is EOS Real Estate Partners I, L.P., which is only required to maintain a net worth of at least $25 million with no liquidity minimum, effectively limiting the recourse back to the sponsor for bad act carveouts. “Bad boy” guarantees and consequent access to the guarantor help mitigate the risk and increased loss severity of bankruptcy, additional encumbrances, unapproved transfers, fraud, misappropriation of rents, physical waste, and other potential bad acts of the sponsor. DBRS Morningstar views this threshold as weak in the context of the size of the mortgage and as a result, applied a penalty to the transaction’s capital structure.

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.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

Notes:
All figures are in U.S. dollars unless otherwise noted.

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is the North American Single-Asset/Single-Borrower Ratings Methodology (March 2, 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.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

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

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