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

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

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

All trends are Stable. Class P and Class ELP are not rated by DBRS Morningstar.

The LUXE Trust 2021-TRIP transaction is secured by the fee-simple and/or leasehold interests in nine luxury resorts and high-quality full-service hotels primarily located in high-barrier-to-entry urban and resort markets across five states with approximately 3,269 guest rooms, 616,140 sf of total function space, and numerous award-winning amenities including restaurants, spas, fitness clubs, golf courses, and beach activities. The portfolio is comprised of four properties (828 keys) operating under the Four Seasons brand family: Four Seasons Scottsdale, Four Seasons Jackson Hole, Four Seasons Austin, and Four Seasons Silicon Valley; two properties (1,437 keys) operating under the Fairmont brand family: Fairmont Scottsdale Princess and Fairmont Chicago; two properties (657 keys) operating under the Marriott (Ritz-Carlton) brand family: Ritz-Carlton Laguna Niguel and Ritz-Carlton Half Moon Bay; and one property (347 keys) operating under the Loews brand family: Loews Santa Monica. The properties were constructed between 1984 and 2006 and have a WA year built of 1993 and WA renovation year of 2017. DBRS Morningstar assigned a property quality grade of Above Average or Excellent to each of the collateral properties.

The transaction sponsor is an affiliate of Strategic Hotels and Resorts (Strategic). Founded in 1997, Strategic currently owns and manages 15 luxury hotels across North America and Europe. Strategic employs brand specific hotel management companies to operate its management contracts and operating leases. Previously, Strategic was publicly traded on the New York Stock Exchange under the ticker BEE and was subsequently acquired by AB Stable VIII, LLC (AB Stable), an indirect subsidiary of Anbang Insurance Group Co., Ltd. (Anbang), excluding the Hotel del Coronado. The borrower sponsor is under common control with Anbang, the predecessor to the borrower sponsor as owner of the borrowers

The trust collateral is expected to be originated by Goldman Sachs Bank USA and Bank of America N.A. prior to the closing date and consists of a mortgage loan in the amount of $1.8 billion. The mortgage loan is expected to be evidenced by two promissory notes: Note A-1 with an original principal balance of $1.17 billion and Note A-2 with an original principal balance of $630 million. Both promissory notes are expected to be contributed to the trust and support payments on the rated certificates. The mortgage loan is expected to have an initial term of 36 months, with two, one year extension option and pay interest only at a rate of Libor + 2.6000%. The sponsor is partially using proceeds from the loan to repatriate approximately $508 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 $2.7 billion, the sponsor will have approximately $1.0 billion of unencumbered market equity remaining in the transaction.

The largest two properties by NCF are the Fairmont Scottsdale Princess, which represents approximately 23.9% of NCF, and the Ritz-Carlton Laguna Niguel, which represents approximately 21.9% of NCF. No other property represents more than approximately 11.8% of portfolio NCF. The properties average approximately 363 keys and the largest hotel, Fairmont Scottsdale Princess, contains 750 keys, or approximately 22.9% of the total aggregate keys in the portfolio. The portfolio is located across five states with the largest concentration by NCF in California, which accounts for approximately 46.7% of NCF. The second largest concentration by NCF is in Arizona, which accounts for approximately 32.3% of NCF, followed by Wyoming at 9.0% of NCF, Texas at 7.8% of NCF, and Illinois at 4.2% of NCF.

The ongoing coronavirus pandemic continues to pose challenges and risks to virtually all major commercial real estate property types, creating a substantial element of uncertainty around the recovery of demand in the hospitality sectors, even in stronger markets that have historically been highly liquid. As a result of the pandemic, occupancy and RevPAR across the portfolio declined from 65.7% and $467.08 as of YE2019 to 28.6% and $156.46 as of the T-12 ended August 2021. All of the properties remained open during the pandemic, with the exception of the Four Seasons Silicon Valley and the Four Seasons Jackson Hole. The Four Seasons Silicon Valley closed in mid-March2020, subsequently re-opened in October 2020, and has remained open since. The Four Seasons Jackson Hole closes every year for five weeks in the spring and for three to four weeks in the fall in tandem with the closures at Jackson Hole Mountain Resort. The date of the seasonal closure was moved forward slightly in 2020 because of the pandemic, but the hotel reopened in mid-June 2020 and has experienced strong transient demand since. All debt service associated with the properties’ existing financing is current and there have been no requests for forbearance.

Four properties, the Four Seasons Austin, Four Seasons Silicon Valley, Fairmont Chicago, and Loews Santa Monica, all recorded negative NCF during the T-12 ended August 2021. These properties are primarily reliant on group and business demand, which has been significantly affected by the pandemic and is one of the slowest sectors to recover. Collectively, these four properties represent 25.0% of DBRS Morningstar’s stabilized NCF. The loan is structured with a 12-month debt service reserve that should be sufficient to cover any ongoing operating losses from depressed occupancy at these properties.

In 2019, prior to the Coronavirus Disease (COVID-19) pandemic, the portfolio averaged 66.7% occupancy and reported a WA ADR and RevPAR of $420 and $283, respectively. As of August 2021 YTD, WA RevPAR penetration for the portfolio was 110% based on occupancy of 32.8%, ADR of $539, and RevPAR of $193. The portfolio demonstrated strong performance metrics prior to the onset of the coronavirus pandemic, with 2019 WA (by NCF) occupancy, ADR, and RevPAR penetration rates of 95.8%, 128.5%, and 125.7%, respectively. The 2018 WA occupancy, ADR, and RevPAR penetration rates were 95.3%, 133.6%, and 125.6%, respectively. From 2014 to 2019, the portfolio exhibited WA occupancy, ADR, and RevPAR penetration rates of 98.3%, 127.1%, and 124.5%, respectively. As of August 2021, weighted average RevPAR penetration for the portfolio was approximately 119%, driven by the August 2021 YTD average occupancy of 47.9%, ADR of approximately $493, and RevPAR of approximately $258.

DBRS Morningstar’s concluded NCF and value for the portfolio reflect a stabilized occupancy assumption of 65.1%, which is well above the 32.8% occupancy of the portfolio for August 2021 YTD period. However, from 2014 to 2019, the portfolio exhibited an average annual occupancy of 70%. Portfolio occupancy has overall been trending upward since January 2021 and, as of August 2021, was 47.9%, the second highest since the pandemic began. DBRS Morningstar elected to stabilize the portfolio and assumed occupancy in line with its pre-pandemic performance given the best-in-class brand affiliation and quality of the properties, strong operating history, locations in high-barrier-to-entry drive-to markets, and the experienced management/sponsorship of Strategic. Although certain assets in the portfolio that are more reliant on business and group demand experience a slower recovery, others that are more focused on transient customers continue to see rapid improvement. Additionally, the loan is structured with a 12-month debt service reserve that should be sufficient to cover any ongoing operating losses from depressed occupancy until the portfolio achieves a DSCR greater than 1.0x.

While occupancy has declined, Strategic has been successful in maintaining ADR during the pandemic and, for a number of properties, has been able to increase rates above their pre-pandemic highs, which has somewhat mitigated the impact of the pandemic on portfolio RevPAR. The Fairmont Scottsdale Princess, Ritz-Carlton Laguna Niguel, Ritz-Carlton Half Moon Bay, the Four Seasons Jackson Hole, and the Four Seasons Scottdale (which together represent approximately 75.0% of DBRS Morningstar’s stabilized NCF) all benefited from increased domestic travel because of international restrictions and the pent-up demand from lockdowns. Additionally, these assets offer tremendous vacation/tourism appeal because of their luxurious amenities and prime locations. These demand drivers were reflected in an increase to ADR, while occupancy remained affected by the pandemic. Overall, portfolio ADR increased by 32.0% to $546.58 for the T-12 ended August 2021 from $413.94 in 2019. DBRS Morningstar assumed a stabilized ADR of $394.61, 38.5% below the actual August 2021 T-12 ADR, as demand segmentation in the portfolio will likely normalize when international travel and group/business demand resume. Based on a review of booking PACE reports, the portfolio will likely experience the abovementioned increase in occupancy along with a corresponding decrease in rates as management locks in lower priced but guaranteed group room nights rather than to more lucrative but less certain transient customer room nights.

Based on a stabilized occupancy of 65.1% and ADR of $394.61, DBRS Morningstar’s concluded RevPAR of $256.80 is approximately -5.5% below the portfolio’s 2019 RevPAR of $271.80, and -7.7% below its peak RevPAR of $278.46 in 2018. From 2014 to 2019, the portfolio achieved an average RevPAR of $260.48. As of the T-12 ended August 2021, the portfolio was 28.6% occupied and reported a WA ADR and RevPAR of $546.58 and $156.46, respectively. DBRS Morningstar found the seven properties it toured to be extremely well run and maintained in keeping with the high expectations of travelers staying at a luxury property. Staff were extremely friendly and attentive and clearly focused on delivering the high level of service that guests at high-end hotels expect. A number of the properties have also clearly benefited from their drive-to location during the pandemic and have successfully shifted their yield strategy from group and convention business to leisure travelers. Overall, DBRS Morningstar believes that as the pandemic continues to abate, demand segmentation normalizes, and international and business travel returns, the portfolio should revert to a level of RevPAR consistent with its observed historical performance

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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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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