DBRS Morningstar Upgrades Seven Classes of MBRT 2019-MBR, Confirms Remaining Four Classes

DBRS Limited (DBRS Morningstar) upgraded its ratings on seven classes of the Commercial Mortgage Pass-Through Certificates, Series 2019-MBR issued by MBRT 2019-MBR as follows:

-- Class B to AAA (sf) from AA (high) (sf)
-- Class C to AA (sf) from AA (low) (sf)
-- Class D to AA (low) (sf) from A (high) (sf)
-- Class E to A (low) (sf) from BBB (low) (sf)
-- Class F to BB (high) (sf) from BB (low) (sf)
-- Class X-A to BB (sf) from B (high) (sf)
-- Class G to BB (low) (sf) from B (sf)

DBRS Morningstar also confirmed the following classes:

-- Class A at AAA (sf)
-- Class A-IO at AAA (sf)
-- Class A-Y at AAA (sf)
-- Class A-Z at AAA (sf)

All trends are Stable.

The rating actions reflect the overall improved performance of the collateral, including significant growth in net cash flow (NCF) and average daily rate (ADR) figures, following the borrower’s nearly $40.0 million capital improvement plan, as well as the results of the stressed scenario considered by DBRS Morningstar as part of this review, as further described below.

The transaction is collateralized by the fee interest in a AAA Five-Diamond, full-service golf resort and the leasehold interest in a private beach club, collectively known as the Waldorf Astoria Monarch Beach Resort and Club, in Dana Point, California. The collateral features 400 guest rooms; eight food and beverage outlets; four retail outlets; 120,500 square feet (sf) of indoor and outdoor function space; and a range of on-site amenities, including a 30,000-sf full-service spa, three swimming pools, an 18-hole championship golf course, and private beach club access.

Loan proceeds of $370.0 million, along with sponsor equity of $127.6 million, financed the acquisition of the property at a purchase price of $492.5 million and covered closing costs. The loan had an initial two-year term, with three one-year extension options, subject to interest rate increases and requiring the purchase of capitalization rate protection. The second extension option was exercised in November 2022, and the loan is currently scheduled to mature in November 2023.

The property was rebranded as a Waldorf Astoria hotel in September 2020, providing opportunity for the subject to leverage Hilton’s global sales and booking networks. According to the branding and management agreement, Waldorf Astoria paid $40.0 million to operate the property for a minimum of 30 years, and the borrower was required to complete a property improvement plan to align with brand standards. Per the March 2023 site inspection report, the hotel recently received approximately $40 million of capital improvements, including the renovation of all 400 units with select suites being remodeled, upgrades to the banquet area, the meeting room, and the addition of an exterior seating area off of the ballroom.

For the trailing 12 months (T-12) ended February 28, 2023, the property reported occupancy, ADR, and revenue per available room (RevPAR) figures of 58%, $555, and $623, respectively, reflecting a RevPAR penetration rate of 81.1%. While the subject has historically underperformed when compared with its competitive set with RevPAR penetration rates hovering near 80.0%, the T-6 and T-3 RevPAR penetration rates for the same time period improved to 88.6% and 95.3%, respectively, indicating an increase in competition post-renovation. Property performance has also significantly improved when compared with historical figures prior to the capital improvements and the onset of the Coronavirus Disease (COVID-19) pandemic. For the T-12 ended February 29, 2020, the property reported occupancy, ADR, and RevPAR figures of 64.0%, $389, and $252, respectively, implying an ADR growth of 42.6% over a three-year period.

According to the financials for the T-12 ended March 31, 2023, the loan reported an NCF of $35.5 million (a debt service coverage ratio of 1.69 times (x)), an improvement over the YE2022 figure of $32.6 million, and a significant rebound from the YE2021 and YE2020 figures of $18.7 million and -$2.1 million, respectively, when pandemic mitigation efforts were in place and the property was undergoing renovations. When assigning ratings in 2020, DBRS Morningstar had derived a NCF figure of $22.5 million.

In the analysis for this review, DBRS Morningstar derived a value of $473.5 million, based on a 7.5% capitalization rate. The DBRS Morningstar value implies a loan-to-value (LTV) ratio of 78.1% compared with the LTV of 74.7% based on the issuance appraised value. To evaluate the potential for upgrades given the significant improvement in collateral performance, DBRS Morningstar considered a stressed value scenario, and, based on the LTV sizing benchmarks resulting from that stressed analysis, the upgrades were warranted.

The capitalization rate DBRS Morningstar applied is at the lower end of DBRS Morningstar’s range for lodging properties, reflecting the property’s irreplaceable location in a supply-constrained market with high barriers to entry. This is supported by the lack of new and competitive supply, as well as the high quality of the collateral resort overall, which includes a world-class golf course and other draws in addition to the recent renovations that should help provide insulation from market volatility to the property’s value over the remainder of the loan term.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 5.0% to account for cash flow volatility, property quality, and market fundamentals.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 (May 17, 2022) at https://www.dbrsmorningstar.com/research/396929.

Class X-A is an interest-only (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
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

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)

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

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

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].