DBRS Morningstar Finalizes Provisional Ratings on GS Mortgage Securities Corporation Trust 2023-FUN

DBRS, Inc. (DBRS Morningstar) finalized its ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2023-FUN issued by GS Mortgage Securities Corporation Trust 2023-FUN (GSMS 2023-FUN):

-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (high) (sf)
-- Class D at A (sf)
-- Class HRR at A (low) (sf)

All trends are Stable.

The GSMS 2023-FUN transaction is a $350.0 million mortgage loan secured by the fee-simple interest in the Kalahari Resorts Pocono Manor, a 977-key waterpark resort in Pocono Manor, Pennsylvania. Well located in the Pocono Mountains, Pocono Manor is within driving distance of Philadelphia, New York City, and Washington, D.C., which provide the demand base for this leisure-oriented city. The property is within a four-hour drive of nearly 18 million households. The location results in an increased foot traffic attributable to numerous nearby attractions, restaurants, lodging facilities, shopping centers, and the Pocono Manor Golf Club. The Kalahari resort was built in 2015 with 457 rooms; was expanded in 2017 to its current room count and a larger waterpark; and, in 2019, underwent a convention center expansion and additions to employee housing. It features a 220,000-sf indoor waterpark, an approximately 90,000 sf outdoor waterpark, 16 food and beverage outlets, a convention center which includes 91,500 sf of indoor meeting space, more than 60,000 sf of flexible rentable meeting space and additional pre-function space, a spa, and a fitness center.

The subject financing of $350.0 million will go to retire $328.1 million of existing debt, return $14.5 equity to the sponsor, and cover closing costs of $7.4 million. The loan is a two-year floating-rate (one-month Secured Overnight Financing Rate (SOFR) plus a WA spread of 2.7603%) interest-only mortgage loan with three one-year extension options. The Borrower is required to purchase an interest rate cap upon each extension with a one-month Term SOFR strike price of no greater than 6.000%.

The transaction sponsor is Kalahari Resorts & Conventions. Founded in 1998 by Todd and Shari Nelson, the Wisconsin-based firm owns and manages waterpark resorts in the United States. There are four Kalahari resorts in the U.S.: Kalahari Resorts Wisconsin Dells, Kalahari Resorts Poconos, Kalahari Resorts Sandusky, and Kalahari Resorts Round Rock. Kalahari Resorts & Conventions (“Kalahari Resorts”) currently owns and operates 2,662 resort keys and manages an additional 952 condominium keys of which Kalahari Resorts owns 181 condominium keys across the resorts located in Wisconsin Dells, Wisconsin and Sandusky, Ohio. These properties offer an African-themed waterpark resort and attractions. All these resorts are self-managed and similar in terms of their offerings.

The sponsor has invested approximately $228.1 million, or $233,469 per key, in capital improvements to the resort since 2015. In 2016 and 2017, the sponsor spent $179 million, or $183,214 per key, in hotel expansion by adding an additional 520 rooms. Most recently, the sponsor invested around $49.1 million, or $50,255 per key, in convention center expansion and other capital improvements that were completed in 2022.

In 2019, prior to the Coronavirus Disease (COVID-19) pandemic, the property reported 70.3% occupancy and a $315.39 average daily rate (ADR) for a revenue per available room (RevPAR) of $221.59. While occupancy has declined, the sponsor has been successful in recovering ADR to above its pre-pandemic historical average. The property achieved a RevPAR of $270.65 as of YE2022, after the pandemic-affected RevPAR of $130 in 2020. The hotel performance for 2022 is 22% above pre-pandemic levels, based on the 2019 RevPAR of $221. DBRS Morningstar believes that the strong 2022 performance is at least partially due to a higher transient proportion in the hotel segmentation as a result of the pent-up demand because of the pandemic-related restrictions and, therefore, DBRS Morningstar believes room rates will normalize. The property’s location, experienced sponsorship, and attractions should allow for modest growth above pre-pandemic levels. The property reported RevPAR of $270.65 for YE2022, based on occupancy of 62% and ADR of $436.51. This represents a penetration rate of 96.8%, 130%, and 125.0% for occupancy, ADR, and RevPAR, respectively, to its competitive set. DBRS Morningstar concluded a stabilized RevPAR of $242, 9.0% above the 2019 level. Furthermore, the YE2022 cash flow was up nearly 24% from 2019. Based on forward bookings and the sponsor's projections, 2023 cash flow is expected to be up roughly 34% over the pre-pandemic levels.

Overall, DBRS Morningstar has a favorable outlook on Kalahari Resorts, considering its location in the Poconos, the sponsorship, and its strong performance against its competitive set. The $350 million loan represents a relatively conservative loan-to-value ratio of 56.8% on the DBRS Morningstar concluded value, which is below the typical leverage point for most single-asset/single-borrower transactions. There is also no existing additional debt in the form of a B note or mezzanine debt.

The rooms have not received a major renovation since construction in 2015, and, in order for the property to remain competitive in the full-service hotel segment, room upgrades may be necessary within the loan term. According to the Issuer, there are no major planned renovations at the property, and elective renovation work will be done when needed. The loan is structured with 4% replacement reserves.

A substantial component of revenue across the properties is derived from non-rooms revenue, including waterpark and attractions revenue (22% of DBRS Morningstar revenue) and revenue from food and beverage outlets (25.8% of DBRS Morningstar revenue). These revenue sources are generally more volatile than rooms revenue. The waterpark and attractions income have significantly increased in 2022 owing to pent-up leisure demand and higher transient mix.

The target audience for the waterpark resorts is families with children and, thus, the summer months and spring break are the most popular seasons. However, the resorts have evolved over the years with the introduction of indoor waterpark and additional attractions, which provide for strong shoulder seasons and a very brief downtime, leading to diminishing seasonality in recent years. Two major new properties, Great Wolf Lodge Perryville and Great Wolf Lodge New England, will collectively deliver more than 937 new rooms over the next several years. Additionally, Great Wolf Lodge Poconos is undergoing an expansion with waterpark and villas expected to open in 2023. Great Wolf Lodge Resorts offer similar amenities to the subject property. Both resorts that are in development, along with an imminent expansion of Great Wolf Poconos, will likely compete, to some extent, with Kalahari’s product and will attempt to draw its share of visitors.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/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 (May 17, 2022).

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

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 (February 23, 2023), 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 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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