DBRS Morningstar Finalizes Provisional Ratings on LUX Trust 2023-LION

DBRS, Inc. (DBRS Morningstar) finalized provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2023-LION (the Certificates) issued by LUX Trust 2023-LION (LUX 2023-LION):

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (high) (sf)
-- Class HRR at BBB (sf)

All trends are Stable.

The collateral for the LUX 2023-LION transaction includes the borrowers’ fee-simple and leasehold interests in the Ritz-Carlton Dallas and The Hotel Crescent Court properties, encompassing 444 keys. The two luxury hotel properties are well situated within the Uptown neighborhood of Dallas. The hotels are well known and considered to be among the top hotels within Dallas. DBRS Morningstar has a positive view on the collateral, considering its location within Dallas and its sponsorship. DBRS Morningstar believes the significant capital invested into the portfolio, the ongoing renovations, as well as continued near-term investment should support the portfolio’s financial performance.

The 218-key Ritz-Carlton Dallas was built and opened in 2007, and is adjacent to The Crescent, an expansive mixed-use development with 1.1 million square feet (sf) of Class A office space and about 165,000 sf of upscale retail space. The Ritz-Carlton Dallas offers a robust amenity package, which consists of its spa, fitness center, and event space. The property also features two acclaimed food and beverage options, Fearing’s Restaurant and Rattlesnake Bar. The Ritz-Carlton Dallas also includes approximately 19,000 sf of indoor meeting space used for weddings, business conferences, conventions, or other large events. The Ritz-Carlton Dallas is undergoing a significant capital improvement plan to upgrade all guest rooms, which will have a capital expenditure amount of approximately $20.5 million ($94,039 per key). These renovations were approximately 80% complete as of July 24, 2023, and the renovations are planned to be completed in August 2023. Additionally, the hotel common areas and amenity spaces, including the spa, received recent capital expenditures that allocated approximately $12.6 million ($57,740 per key) between 2017 and 2022.

The 226-key Hotel Crescent Court, anchoring The Crescent, was built and opened in 1985. The Hotel Crescent Court is well renowned and has been recognized by travel magazines as an iconic Dallas landmark. Amenity spaces at The Crescent include a recently renovated luxury spa, including 16 treatment rooms, lounges, a nail salon, and a wellness center featuring TechnoGym equipment. Other amenities include a newly renovated gym offering fitness classes and personal trainers plus an outdoor pool with a poolside food and beverage service. Food and beverage options at The Crescent include three renowned food and beverage options, including Nobu, Beau Nash, and The Conservatory. Other food and beverage options include The Crescent Club, Afternoon Tea in the Great Hall, as well as a Starbucks on the property. The Hotel Crescent Court includes approximately 16,000 sf of indoor meeting space, conference rooms, boardrooms, and meeting rooms used for business events, conventions, or large receptions. The Hotel Crescent Court received $32.3 million ($142,756 per key) in renovations between 2017 and 2019. Comprehensive renovation included full case and soft goods upgrades to the hotel’s guest rooms as well as a complete renovation of the spa, the fitness center, and public spaces. The 2017 through 2019 renovation is in addition to approximately $1.8 million ($7,773 per key) capital expenditures invested from 2020 through 2022.

The portfolio has received recognition from a variety of accredited hospitality institutions. The Ritz-Carlton Dallas first received a Five Star Award from Forbes Travel Guide in 2017, which made it Texas’ first and Dallas’ only hotel to receive the award, making it one of the 359 hotels in the world to receive the award in 2023. The properties also received a AAA Four Diamond Award and a U.S. News & World Report Gold Badge distinction, which places the properties in the top 10% of hotels in the United States per the U.S. News & World Report rankings.

The subject mortgage loan of $245.75 million, as well as mezzanine financing of $54.25 million, will be used to retire $268 million of existing debt, return $13.2 million of equity to the sponsor, cover closing costs of $11.3 million, fund $5.2 million in the Ritz-Carlton Project Costs Reserve, and fund $2.3 million in Tax and Insurance Escrow. The first mortgage loan is a two-year floating-rate interest-only mortgage loan, with three one-year extension options. The floating rate for the mortgage loan will be based on the one-month Secured Overnight Financing Rate (SOFR) plus the weighted-average component spread. The borrower will be required to purchase an interest rate cap agreement with a one-month Term SOFR strike price of no greater than 5.000%.

John C. Goff co-founded the Borrower Sponsor. The Borrower Sponsor is headquartered in Fort Worth, Texas, and is a real estate developer, operator, and Securities and Exchange Commission-registered investment advisor with approximately $4.4 billion in real estate assets and securities, including approximately 4,188 hotel keys, and approximately $410.0 million in current developments. Crescent is an experienced investor and developer in the portfolio’s submarket.

In 2019, prior to the Coronavirus Disease (COVID-19) pandemic, the portfolio reported an 81.5% occupancy and a $359 average daily rate (ADR) for a revenue per available room (RevPAR) of $292. While occupancy has declined, the sponsor has been successful in recovering ADR to above its pre-pandemic historical average. The properties achieved a RevPAR of $338.65 as of the trailing 12 months (T-12) ended March 31, 2023, after the pandemic-affected RevPAR of $132.38 in 2020. The portfolio performance for the T-12 is 15.8% above pre-pandemic levels, based on the 2019 RevPAR of $292.42. DBRS Morningstar believes that the strong recent performance is at least partially due to a higher transient proportion in the hotel segmentation as a result of the pent-up demand because of the pandemic-related restrictions; therefore, DBRS Morningstar believes room rates will normalize. The location, experienced sponsorship, as well as the property’s recent and continued renovations should allow for modest growth above pre-pandemic levels. DBRS Morningstar concluded a stabilized RevPAR of $373 is 12.1% above the 2019 level; however, it is -3.2% lower than the T-12 level.

DBRS Morningstar’s credit ratings on the Certificates address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are listed at the end of this press release.

DBRS Morningstar’s credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations (for example, Yield Maintenance Premium).

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, AND 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 at https://www.dbrsmorningstar.com/research/416784 (July 4, 2023).

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

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

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the credit ratings referenced herein.

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 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, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

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

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

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

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

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

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

Financial Obligations of the issuer are listed as follows:

-- Class A Principal Amount
-- Class A Interest Distribution Amount
-- Class B Principal Amount
-- Class B Interest Distribution Amount
-- Class C Principal Amount
-- Class C Interest Distribution Amount
-- Class D Principal Amount
-- Class D Interest Distribution Amount
-- Class HRR Principal Amount
-- Class HRR Interest Distribution Amount