DBRS Morningstar Finalizes Provisional Ratings on LUXE Trust 2021-MLBH

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2021-MLBH issued by LUXE Trust 2021-MLBH:

-- Class A at AAA (sf)
-- Class B at AA (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 G at B (low) (sf)

All trends are Stable. Class J, Class HRR, and Class ELP are not rated by DBRS Morningstar.

The LUXE Trust 2021-MLBH transaction is a $340.0 million interest-only, floating-rate mortgage loan with an initial three-year loan term and two successive one-year extension options. The loan is secured by the fee-simple interest in Montage Resort & Spa Laguna Beach, a 258-key luxury full-service hotel in Laguna Beach, California. The resort was built in 2003 and spans more than 30 acres on the beachfront of the Pacific Ocean. It features AAA Four Diamond and Four-Star restaurants, poolside bars/lounges, 20,000 square feet (sf) of spa-related amenities, and approximately 34,000 sf of indoor/outdoor function space for various events. DBRS Morningstar has a positive view on the collateral and believes the net cash flow (NCF) on Montage Resort & Spa Laguna Beach is sustainable and will continue to grow over the term of the loan considering the hotel's quality, historical performance, and sponsorship.

The sponsor has invested approximately $32.4 million, or $125,628 per key, in capital improvements to the resort since 2015. In 2018 and 2019, the sponsor spent $22 million, or $85,200 per key, for a full renovation that was completed in early 2019. With more than $62,000 per key and $22,600 per key invested in guest rooms and furniture, fixtures, and equipment, respectively, DBRS Morningstar views the value-add renovation and constant upkeep of the resort a key element to sustain and enhance the hotel’s performance because luxury resorts’ guests typically demand new, high-quality, and exceptional guest rooms and amenities.

Montage Resort & Spa Laguna Beach has been a consistent and solid performer in the market and has ranked number one in both average daily rate (ADR) and revenue per available room (RevPAR) out of its competitive set each year since 2014. In fact, the property has never had a RevPAR penetration rate below 185.7% since 2014. The onset of the Coronavirus Disease (COVID-19) pandemic in March 2020 had a severe impact on the lodging industry, causing occupancy, ADR, and RevPAR to decline by unprecedented levels domestically and globally. Inevitably, the resort’s RevPAR in 2020 dropped 32.4% compared with 2019; however, the decline was less than the 47.5% and 55% compared with the nationwide and the Anaheim-Santa Ana submarket RevPAR declines, respectively. Despite the overall decline in 2020, the hotel still outperformed its competitive set with penetration rates of 100.4%, 188.8%, and 189.4% in occupancy, ADR, and RevPAR, respectively. The resort weathered the storm well throughout the pandemic, remaining open and operational throughout the entire time and demonstrating strong performance with trailing 12 month (T-12) ended August 2021 cash flow up nearly 154% from 2020. The property reported a T-12 ended August 2021 RevPAR of $542.72 based on a 47.5% occupancy and $1,142 ADR. This represents a penetration rate of 122.2%, 197.9%, and 241.9% for occupancy, ADR, and RevPAR, respectively. Based on forward bookings and the sponsor's projections, cash flow for 2021 is expected to be up roughly 17% over the highest pre-pandemic levels. In 2019, prior to the pandemic, the hotel’s occupancy, ADR, and RevPAR penetration rates were 102.2%, 183.9%, and 188.1%, respectively.

DBRS Morningstar’s concluded NCF and value reflect a stabilized occupancy assumption of 72.5%, which is well above the 47.5% occupancy for the T-12 ended August 2021 period. However, from 2015 to 2019, the property exhibited an average occupancy of close to 74%, and this included the 2018–19 renovation periods, which somewhat affected the occupancy rate. The 72.5% occupancy was also the T-12 ended February 2020 rate, reflecting the performance right before the pandemic began. While occupancy has declined, the sponsor has been successful in raising the rates above their pre-pandemic highs, which has mitigated the impact of the pandemic on the property’s RevPAR. The resort offers tremendous vacation/tourism appeal because of its luxurious amenities and prime location. These demand drivers were reflected in an increase to ADR, while occupancy remained affected by the pandemic. Overall, the ADR increased by 57.0% to $1,141.31 for T-12 ended August 2021 from $726.98 in 2019. DBRS Morningstar assumed a stabilized ADR of $726.22, 36.0% below the actual T-12 ended August 2021 ADR, considering the demand segmentation at the resort will likely normalize when group and business demand resume. Based on a stabilized occupancy of 72.5% and an ADR of $726.22, DBRS Morningstar concluded a RevPAR of $526.22. This RevPAR resembles the pre-pandemic T-12 ended February 2020 RevPAR level. It is approximately 3% higher than the 2019 RevPAR of $508.63 and 3% lower than the actual T-12 ended August 2021 RevPAR of $542.54. The 2019 RevPAR reflected a partial-year renovation at the property with some rooms being offline. From 2014 to 2019, the hotel achieved an average RevPAR of $498.56. Overall, DBRS Morningstar expects the RevPAR to increase subsequent to the completion of the renovation in 2019. The property’s NCF, occupancy, and ADR were all trending upward when DBRS Morningstar compared the T-12 ended July 2021 financial statement with the T-12 ended August 2021 statement. DBRS Morningstar elected to stabilize the property and assumed occupancy in line with its pre-pandemic performance given the best-in-class quality of the property, strong operating history, and the experience and commitment of the management company and sponsorship. DBRS Morningstar views the resort's ability to capture upscale transient business and an affluent guest base as credit positive since this allows the resort to eventually form its own unique high-end market niche and hence help solidify the resort’s cash flow. DBRS Morningstar believes this market niche to be less susceptible to revenue swings, making it more resilient during economic downturns.

The sponsor of this transaction is an affiliate of Strategic Hotels & Resorts (Strategic), a leading U.S. luxury hotel owner and asset manager founded in Chicago in 1997. Strategic currently owns and manages 15 luxury hotels across North America and Europe. The firm employs brand-specific hotel management companies to operate its management contracts and operating leases. The resort is managed by Montage International, which is a luxury hotel and resort management company based in Orange County, California. The resort operates under the Montage brand through a management agreement with an initial term expiring in December 2029 and a fully extended term through December 2059.

DBRS Morningstar has a favorable outlook on Montage Resort & Spa Laguna Beach in the long run, considering its location in a highly sought-after market with high barriers to entry and its performance during the pandemic. The land value of $122 million represents about 36% of the loan amount. The resort benefits from heavy drive-to leisure visitation from the greater Los Angeles and Orange County metropolitan area and has successfully shifted its yield strategy from group and convention business to leisure travelers during the pandemic. However, the loan has an elevated DBRS Morningstar loan-to-value ratio of 104.6%, which increases the term and balloon risks. The loan is structured with a six-month debt service reserve. The DBRS Morningstar debt service coverage ratio (DSCR) is 2.79 times (x) based on one-month Libor of 0.10% plus 2.35% spread. Based on the strike rate of 2.5% plus 2.35% spread, DBRS Morningstar's DSCR will be 1.41x.

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 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 not 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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