DBRS Morningstar Upgrades Seven Classes of Fontainebleau Miami Beach Trust 2019-FBLU

DBRS Limited (DBRS Morningstar) upgraded its ratings on seven classes of the Commercial Mortgage Pass-Through Certificates, Series 2019-FBLU issued by Fontainebleau Miami Beach Trust 2019-FBLU as follows:

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

DBRS Morningstar also confirmed the following class:

-- Class A at AAA (sf)

All trends are Stable.

The rating upgrades reflect continued year-over-year improvements in performance. DBRS Morningstar re-evaluated its net cash flow (NCF) analysis in light of sustained cash flow growth and derived an updated value of $1.2 billion, compared with DBRS Morningstar’s issuance value of $791.8 million, as described below. To further test the durability of the ratings, DBRS Morningstar performed a stressed scenario, which provides additional support for the rating upgrades.

The loan is secured by the Fontainebleau Miami Beach, a four-diamond, 1,594-key luxury resort in Miami Beach, Florida. It is well located on an irreplaceable, 20-acre oceanfront parcel in Mid-Beach. The whole loan consists of $975.0 million of senior debt held in the trust and mezzanine debt that had an issuance balance of $200.0 million, which is held outside the trust. The loan is interest only (IO) through its five-year term and scheduled to mature in December 2024.There are no extension options. Between 2005 and 2019, the sponsor had invested $837.3 million in capital improvements throughout the property, with an additional $32.0 million contributed at issuance for additional room renovations, which were completed in January 2023.

Prior to issuance in 2019, the property experienced performance declines in 2016 and 2017 primarily as a result of the Zika virus and Hurricane Irma, which affected the overall Miami Beach submarket and were not specific to the subject. The hotel lost additional revenue because of the anticipated landfall of Hurricane Dorian in late 2019, further tempering DBRS Morningstar’s expectations at issuance. Following the onset of the Coronavirus Disease (COVID-19) pandemic, DBRS Morningstar signaled concerns regarding the property’s performance outlook through Negative trends on the ratings, but these trends became Stable again over the course of 2021 and 2022 as performance stabilized in line with original expectations. An updated STR report was not available; however, according to the December 2021 STR report, the collateral reported a trailing 12 months (T-12) occupancy rate of 65.9%, average daily rate of $426.01, revenue per available room (RevPAR) of $280.74, and a RevPAR penetration rate of 224.3%. The hotel had an occupancy rate of 73.3% at YE2022, according to the operating statement analysis report, up from the YE2021 figure of 63.2%. Reported NCF has also improved to $123.4 million by YE2022, which shows a marked improvement from the YE2021 NCF of $90.4 million and the DBRS Morningstar NCF of $77.2 million, derived in October 2020. The reporting, bolstered in part because of the return of business and convention travel, illustrates the property’s staying power as a mainstay in Miami’s luxury segment. Departmental revenue as of YE2022 showed a year-over-year increase of 28.0%, while departmental income saw a 31.9% increase for that same time period. The debt service coverage ratio for YE2022 was 2.38 times (x), up from 1.74x at YE2021 and the DBRS Morningstar issuance figure of 1.99x.

In the analysis for this review, DBRS Morningstar derived a stressed NCF of $98.7 million, based on a 20% haircut to the YE2022 NCF. DBRS Morningstar utilized a conservative haircut to evaluate the potential for upgrades given the significant improvement in collateral performance. The resulting DBRS Morningstar value of $1.2 billion, based on a 8.0% capitalization rate, implies a loan-to-value (LTV) ratio of 78.9% for the senior debt and 95.2% on a whole-loan basis, compared with the October 2020 LTV figure of 101.0% and 121.8%, respectively. 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 its range for lodging properties, reflecting the property’s irreplaceable location. This is supported by the lack of new competitive supply, as well as the high quality of the collateral overall that should help stabilize the property’s value against market volatility over the remainder of the loan term. DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks for this rating analysis, totaling 4.0% to account for cash flow volatility, property quality, and market fundamentals.

ENVIRONMENTAL, SOCIAL, AND 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-A 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)

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].