DBRS Morningstar Confirms All Ratings on Morgan Stanley Capital I Trust 2018-SUN

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)

All trends are Stable.

The rating confirmations reflect the overall performance of the transaction, which remains in line with DBRS Morningstar’s expectations from last review. The floating-rate interest-only (IO) loan is secured by the fee-simple interest in two luxury beachfront hotels totaling 327 keys in Santa Monica, California. Loan proceeds of $356.6 million and mezzanine debt of $73.4 million (held outside of the trust) refinanced existing debt of $415.0 million. The loan was previously in special servicing in April 2020 following the sponsor’s request for a forbearance; ultimately, a modification was approved 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 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 unless further monetary default occurs over the remainder of the loan term. The loan was transferred back to the master servicer in April 2021. The loan is scheduled to mature in July 2023 but has two one-year extension options remaining with a fully extended maturity in July 2025.

The Shutters on the Beach (Shutters) hotel consists of 198 guest rooms, three food and beverage locations, a spa, and approximately 8,600 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 most recent STR report provided to DBRS Morningstar, for the trailing 12 months (T-12) ended June 30, 2022, Shutters reported an occupancy rate, average daily rate (ADR), and revenue per available room (RevPAR) of 72.9%, $789.93, and $575.66, respectively, representing a RevPAR penetration of 141.3%. This is a significant improvement from the RevPAR of $422.99 for the T-12 ended December 31, 2021, and is in line with pre-pandemic levels. Casa del Mar reported an occupancy rate, ADR, and RevPAR of 68.6%, $812.77, and $557.66, respectively, for the T-12 ended June 30, 2022, representing a RevPAR penetration of 142.5%. RevPAR has improved from $406.49 for the T-12 ended December 31, 2021, and is in line with pre-pandemic levels.

Based on the YE2022 financials, the loan reported a net cash flow (NCF) of $29.4 million, an improvement over the YE2021 NCF of $11.3 million, YE2019 NCF of -$9.0 million, and DBRS Morningstar NCF of $26.1 million. Despite the NCF improvement, the debt service coverage ratio declined to 1.15 times (x), down from 1.28x at YE2021 as a result of rising interest rates, which resulted in a 146.2% increase in debt service obligations between YE2021 and YE2022. According to the loan documents at issuance, the borrower is required to purchase an interest rate cap agreement with each extension executed, but if the borrower is unable to replace the agreement, an extension would not be permitted and the borrower would be required to repay the loan. The loan is structured with a cash flow sweep in the event the debt yield falls below 6.25% at any time during the third extension and onward. Based on the most recent financials, the YE2022 debt yield on the trust debt was 5.86%. DBRS Morningstar has requested an update from the servicer regarding the status of a cash sweep, and as applicable, the balance of the cash management account. According to the April 2023 loan-level reserve report, approximately $4.0 million is held across all reserves, including $1.1 million in furniture, fixtures, and equipment reserves and $2.9 million in other reserves.

Although rising interest rates have increased the refinance risk for this transaction, DBRS Morningstar notes mitigating factors that include the high property quality, favorable location, high barriers to entry, and stable portfolio performance (which rebounded to pre-pandemic levels in 2022), along with the sponsor’s continued commitment to the property as evidenced by the significant equity injection with the loan modification. The DBRS Morningstar value of $336.4 million is derived from the DBRS Morningstar NCF figure of $26.1 million and a cap rate of 7.75%, which represents a 43.1% haircut from the issuance value of $591.4 million. Although the higher interest rate environment has recently pushed cap rates upward, the in-place cash flows are also up by more than $3.0 million from the DBRS Morningstar NCF figure.

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).

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.

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

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

DBRS Limited
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The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023;
https://www.dbrsmorningstar.com/research/410191)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022; https://www.dbrsmorningstar.com/research/402153)

Legal Criteria for U.S. Structured Finance (December 7, 2022;
https://www.dbrsmorningstar.com/research/407008)

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