DBRS Morningstar Upgrades Ratings on Four Classes of LUXE Trust 2021-TRIP, Confirms All Others

DBRS Limited (DBRS Morningstar) upgraded its ratings on four classes of Commercial Mortgage Pass-Through Certificates, Series 2021-TRIP issued by LUXE Trust 2021-TRIP as follows:

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

In addition, DBRS Morningstar confirmed its ratings on the following three classes:

-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)
-- Class HRR at B (low) (sf)

All trends are Stable.

The rating upgrades reflect significant principal paydown following the release of three of the original nine lodging properties collateralizing the underlying loan. According to the July 2023 remittance, the current pool balance was reported at $1.1 billion, representing a collateral reduction of $685.7 million (38.1%) since issuance. The paydown is directly attributable to three property releases described in further detail below. As a result of the paydown, overall credit support to the bonds has increased significantly. DBRS Morningstar revised the loan-to-value (LTV) sizing in its analysis for this review to reflect the recent deleveraging as well as to account for potential adverse selection, and derived an updated baseline value of $1.4 billion based on the value DBRS Morningstar concluded at issuance and a stressed value of $1.15 billion.

The $1.8 billion floating-rate, interest-only loan is structured with an initial three-year term with two additional one-year extension options for a fully extended maturity date of October 2026. At issuance, the transaction was collateralized by the fee-simple and/or leasehold interest in a portfolio of nine luxury hospitality properties, totaling 3,269 rooms. The hotels were distributed among four different flags, namely the Four Seasons, Fairmont, Loews, and Marriott (Ritz-Carlton). The sponsor is an affiliate of Strategic Hotels and Resorts (Strategic), which was acquired by AB Stable VII, LLC (AB Stable) and is an indirect subsidiary of Anbang Insurance Group Co., Ltd. (Anbang), the owner of the borrowers.

As noted at issuance, property releases are permitted and subject to a release premium of 110% for the first 25% of the collateral, followed by 115% until a 50% collateral reduction is reached, and 120% thereafter, based on the allocated loan amount (ALA). Furthermore, immediately prior to the release the property, debt yield must equal or be greater than 5.5%. As of the July 2023 remittance, three of the original nine properties have been successfully released from the pool: the Four Seasons Jackson Hole, the Four Seasons Scottsdale Troon North, and Loews Santa Monica. In November 2022, the Four Seasons Jackson Hole was released for a total release price of $237.0 million, including a $15.2 million release premium as well as a $69.7 million fee to maintain the debt yield, followed by the release of the Four Seasons Scottsdale Troon North in December 2022 for $189.8 million with a $14.7 million release premium and a $28.2 million debt yield fee. Lastly, Loews Santa Monica was released in February 2023 for a total price of $259.0 million, including a $32.9 million dollar release premium and no debt yield fee.

The remaining six properties total 2,588 rooms across Arizona, California, Illinois, and Texas. Four of the six properties have reported improved performance since issuance, while two properties lag behind issuance expectations. The YE2022 reported net cash flow (NCF) for the remaining assets was $108.3 million, up from the DBRS Morningstar concluded NCF of $102.8 million for the same assets at issuance. According to the STR report for the trailing 12-month (T-12) period ended March 31, 2023, the weighted-average occupancy rate, average daily rate (ADR), and revenue per available room (RevPAR) based on the remaining keys were 58.6%, $475.82, and $279.13, respectively. For those same properties, the DBRS Morningstar issuance figures were 65.1%, $391.03, and $256.79, respectively. As noted in that STR report, all of the remaining properties maintained RevPAR penetration rates above 100% with the exception of the Four Seasons Silicon Valley, which reported a RevPAR penetration rate of 84.7%.

According to the YE2022 operating statement, the Four Seasons Silicon Valley (7.4% of the ALA) reported an individual net operating income (NOI) of $1.4 million, marking a 30.1% decline from DBRS Morningstar’s stabilized NOI of $8.3 million at issuance, driven primarily by a decline in occupancy. For the T-12 ended March 31, 2023, the reported occupancy rate, ADR, and RevPAR were 44.2%, $581.53, and $257.24. Despite a slight increase in ADR, the occupancy rate and RevPAR were lower than the DBRS Morningstar concluded values of 60.6% and $315.94. The second hotel with declining performance is the Fairmont Chicago (6.1% of the ALA). Despite performing in line with its competitive set and recording improvements in occupancy rate, ADR, and RevPAR, the property’s NOI has decreased by 68.5% from $4.4 million at issuance to $1.4 million as of YE2022.

These declines are mitigated by the performance improvements exhibited by the other four assets, with the combined performance of the pool largely in line with DBRS Morningstar’s expectations at issuance. DBRS Morningstar also notes that graduated increases to release premiums will continue to lower the bonds’ exposure and offset the potential for adverse selection. Given the significant deleveraging achieved since issuance, DBRS Morningstar updated the LTV sizing in its analysis for this review to reflect both the impact of that paydown and the ability of the ratings to withstand fluctuations in property value over the remainder of the term. DBRS Morningstar concluded a value of $1.4 billion based on the DBRS Morningstar concluded values from issuance for the six remaining assets. In the stressed scenario, DBRS Morningstar applied a more conservative haircut of 20% to the YE2022 NCF, resulting in a stressed value of $1.15 billion. A 7.5% cap rate was used in both scenarios. To evaluate the stability of the upgrade pressure the baseline LTV sizing results produced, DBRS Morningstar sized the stressed DBRS Morningstar value in its analysis for this review. DBRS Morningstar maintained positive qualitative adjustments totaling 5.75% to account for the historically strong performance, 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 at https://www.dbrsmorningstar.com/research/416784 (July 4, 2023).

All credit ratings are subject to surveillance, which could result in credit 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 the 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 credit rating was initiated at the request of the rated entity.

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

This is a solicited credit rating.

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

DBRS Limited
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The credit 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)

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

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

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

A description of how DBRS Morningstar analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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