DBRS Morningstar Changes Trends on Four Classes of Morgan Stanley Capital I Trust 2018-SUN to Stable, Confirms All Ratings

DBRS Limited (DBRS Morningstar confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-SUN issued by Morgan Stanley Capital I Trust 2018-SUN as follows:

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

With this review, DBRS Morningstar changed the trends on Classes E, F, G, and H to Stable from Negative. With this change, all trends are Stable.

The rating confirmations and trend changes reflect the overall improved performance as the collateral properties continue to recover from the effects of the Coronavirus Disease (COVID-19) pandemic. The underlying floating-rate interest-only (IO) loan is secured by the fee-simple interest in two luxury beachfront hotels totalling 327 keys in Santa Monica, California. The loan was previously in special servicing in April 2020 following the sponsor’s request for a forbearance. A loan modification was executed in December 2020 that required the borrower to bring all delinquent debt service and reserve deposits current. In addition, the sponsors contributed $3.5 million in cash to satisfy all legal fees and other ancillary costs incurred by the special servicer. In consideration for the borrower’s commitment, the special servicer agreed to accept a cure of loan defaults and conditionally waive the pursuit of accrued default interest as long as no other monetary default occurs over the remainder of the loan term. The loan was transferred back to the master servicer in April 2021 and is currently on the watchlist because of its upcoming maturity in July 2022. The loan has three one-year extension options remaining.

Loan proceeds of $356.6 million and mezzanine debt of $73.4 million (held outside of trust) refinanced existing debt of $422.5 million and returned $3.2 million to the sponsors. The loan features a two-year initial term with five one-year extension options. The Shutters on the Beach (Shutters) hotel consists of 198 guest rooms, three food and beverage locations, a spa, and 8,632 square feet (sf) of meeting space. The Casa del Mar hotel consists of 129 guest rooms, one restaurant and bar/lounge, a spa, and roughly 11,000 sf of meeting space. The properties are the only hotels directly on the beach in the Santa Monica market, giving the collateral portfolio a significant advantage over the few direct competitors. Both hotels are recognized as two of the premier luxury hotels in Southern California, and their respective restaurants derive considerable income from non-hotel guests.

According to the December 2021 STR report, Shutters reported a trailing 12 months (T-12) ended December 31, 2021, occupancy rate of 59.0%, average daily rate (ADR) of $716.81, and revenue per available room (RevPAR) of $422.99, with a RevPAR penetration rate of 118.4%. This is a significant improvement from the T-12 ended March 31, 2021, RevPAR of $172.36, but it’s below the T-12 ended December 31, 2019, RevPAR of $568.58. Casa del Mar reported a T-12 ended December 31, 2021, occupancy rate of 55.1%, ADR of $737.68, and RevPAR of $406.49, with a RevPAR penetration rate of 128.3%. RevPAR has significantly improved from the T-12 ended March 31, 2021, RevPAR of $166.32, but it’s still below the T-12 ended December 31, 2019, RevPAR of $555.60.

Based on the T-12 ended March 31, 2022, financials, the loan reported a net cash flow (NCF) of $19.9 million, an improvement from the YE2021 NCF of $11.3 million and YE2020 when the loan reported a negative NCF. Although the in-place debt service coverage ratio remains low, with cash flows down by approximately $10.0 million from issuance, DBRS Morningstar expects a successful extension option will be executed for the July 2022 maturity date given the sponsors’ commitment to the loan and performance trends for the collateral hotels over the last year.

The loan includes a cash flow sweep in the event the debt yield falls below 5.75% on a 12-month basis any time prior to the first day of the third extension, and 6.25% at any time during the third extension and onward. Based on the most recent financials, the loan reported a whole-loan debt yield of 4.6%, and according to the servicer, there is $9.3 million held in the cash management account as of June 2022. Based on the May 2022 loan level reserve report, there is $1.3 million held in a furniture, fixture, and equipment reserve and $9.3 million held in other reserves (which typically includes tax and insurance impounds).

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no environmental, social, and governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Class X-EXT 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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

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.

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

The principal methodology is North American CMBS Surveillance Methodology (March 4, 2022), 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.

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.

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

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