DBRS Morningstar Confirms Ratings on All Classes of Margaritaville Beach Resort Trust 2019-MARG

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2019-MARG issued by Margaritaville Beach Resort Trust 2019-MARG as follows:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the underlying collateral, which remains in line with DBRS Morningstar’s expectations.

The transaction is secured by the leasehold interest in a AAA Four Diamond-rated luxury resort in Hollywood, Florida, situated on 6.2 acres of beachfront property between the Atlantic Ocean and the intracoastal Stranahan River. The collateral is subject to a 99-year ground lease between the City of Hollywood and the borrower. The ground lease, which commenced in July 2013 and expires in July 2112, calls for a minimum guaranteed annual rent of $1.0 million, with rent increases of 15.0% on every fifth anniversary of the commencement date.

The resort offers 369 guest rooms, each featuring a private terrace with an ocean/intracoastal view. In addition, the property features approximately 30,000 square feet (sf) of meeting and event space, three pools, a spa, and eight food and beverage outlets, among other amenities. The property benefits from its proximity to two major airports, Fort Lauderdale-Hollywood International Airport and Miami International Airport, both of which are within a 25-mile radius.

The floating-rate, interest-only (IO) loan was structured with an initial two-year term and included three one-year extension options, all of which have been exercised by the borrower. The loan is currently scheduled to mature in May 2024. The loan sponsor, Pebblebrook Hotel Trust (Pebblebrook), acquired the resort in September 2021 for $270 million from KSL Capital Partners, LLC. Pebblebrook is a publicly traded real estate investment trust and the largest owner of urban and resort lifestyle hotels in the United States. Pebblebrook funded the acquisition with approximately $108.5 million in cash and assumed the $161.5 million of existing non-recourse, secured debt that resides within the trust. The $270.0 million sale price was above the issuance appraised value of $248.0 million and well above the current loan balance, suggesting the sale was a credit-positive event that injected fresh equity into the transaction. In conjunction with the closing of the transaction, the $18.5 million mezzanine loan was repaid.

According to the YE2022 STR report, the loan reported occupancy rate, average daily rate (ADR), and revenue per available room (RevPAR) figures of 70.0%, $440, and $308 (RevPAR penetration rate of 137.0%), respectively, compared with 73.0%, $358, and $260 (RevPAR penetration rate of 143.0%) respectively, at YE2021. Per the YE2022 financial reporting, the property generated net cash flow (NCF) of $22.0 million (a debt service coverage ratio (DSCR) of 3.46 times (x)), an improvement from the YE2021 and YE2020 figures of $18.9 million and $-0.4 million, respectively, when pandemic mitigation efforts were in place. When assigning ratings in 2020, DBRS Morningstar had derived a NCF figure of $15.6 million.

In its analysis for this review, DBRS Morningstar derived a value of $222.3 million, by applying a 9.9% capitalization rate to the YE2022 NCF of $22.0 million. The DBRS Morningstar value implies a loan-to-value (LTV) ratio of 72.6%, compared with the LTVs of 65.1% and 59.8%, based on the issuance appraised value and the recent acquisition price, respectively. Given the rapid cash flow growth in a relatively short time since issuance for this transaction, DBRS Morningstar then stressed that value with a 20% haircut to the cash flow to evaluate the potential for upgrade. With the stressed cash flow figure, the implied LTV was 90.8% (generally close to the LTV implied by the DBRS Morningstar value derived in 2020), supporting the rating confirmations with this review.

DBRS Morningstar made positive qualitative adjustments totaling 2.5% to the final LTV sizing benchmarks used for this rating analysis to account for cash flow volatility, property quality, and market fundamentals.

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 (May 17, 2022) at https://www.dbrsmorningstar.com/research/396929.

Class X-EXT is an IO certificate that reference as 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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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)

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].