DBRS Morningstar Confirms Credit Ratings on All Classes of MTK 2021-GRNY Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2021-GRNY issued by MTK 2021-GRNY Mortgage Trust as follows:

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

All trends are Stable.

The credit rating confirmations reflect the stable performance of the underlying collateral as evidenced by the generally healthy revenue per available room (RevPAR) figure and YE2022 net cash flow (NCF). The loan is secured by the borrower’s fee-simple interest in Gurney’s Montauk Resort and Seawater Spa, a full-service resort and spa that spans more than 20 acres along the ocean in Montauk, New York, approximately two and a half hours from New York City by car. The property consists of 149 keys with more than 2,000 linear feet of private beach, and the majority of rooms feature ocean views and private terraces. Loan proceeds of $217.5 million were used to repay outstanding debt of $102.1 million and $55.7 million of preferred equity, fund $12.6 million of upfront reserves, and return $42.7 million of equity to the sponsor. The floating-rate, interest-only (IO) loan is structured with an initial two-year term with three one-year extension options, resulting in a fully extended maturity date in December 2026. The borrower is required to purchase an interest rate cap agreement with each extension, but a minimum debt yield of 9.0% must be achieved to exercise the second and third extension options. Per the servicer, the first extension option was exercised, resulting in a new maturity date of December 2024.

The loan is sponsored by a joint venture between BLDG Management Co. Inc. and Metrovest Equities, Inc., both well-established entities in real estate investment and management and owners of the nearby Gurney’s Star Island Resort & Marina, as well as Gurney’s Newport Resort & Marina in Newport, Rhode, Island. Since acquiring the property in 2013, the sponsor spent approximately $54.1 million across guest room and lobby renovations, food and beverage outlets, and event meeting spaces. At issuance, the sponsor was completing an extensive $16.4 million renovation and expansion of the property’s Seawater Spa, which was completed in February 2022. In addition, the servicer noted that the sponsor had winterized all rooms and is currently in the process of replacing the furniture, fixtures, and equipment for 38 rooms.

According to the most recent STR, Inc. report, the property reported an occupancy rate, average daily rate, and RevPAR of 60.5%, $972.44, and $588.59, respectively, for the trailing 12 months (T-12) ended June 30, 2023, representing a RevPAR penetration rate of 146.5%. RevPAR has increased when compared with the YE2022 figure of $579.92 as well as pre-pandemic levels, with the YE2019 figure at $445.74 and the DBRS Morningstar RevPAR at $471.82. The subject performed extremely well through the Coronavirus Disease (COVID-19) pandemic as evidenced by the issuance RevPAR of $675.81.

The loan is currently on the servicer’s watchlist because of a low debt service coverage ratio (DSCR), which was reported at 0.21 times (x) with an annualized NCF figure of $5.7 million based on the financials for the T-6 period ended June 30, 2023. However, the reporting reflects only a portion of the year, and given the seasonal nature of the hospitality market, cash flow volatility is expected. In addition, the subject reported a strong YE2022 NCF of $17.7 million (DSCR of 1.38x), which is above the DBRS Morningstar NCF of $13.7 million (DSCR of 1.41x). Despite the improvement in the YE2022 NCF, DSCR has decreased given the floating-rate nature of the loan, which resulted in an increase in debt service from issuance levels; however, this is mitigated by the interest rate cap agreement in place.

At issuance, DBRS Morningstar derived a value of $188.7 million based on the DBRS Morningstar NCF of $13.7 million and a capitalization rate of 7.25%, which represents a 22.7% haircut from the appraisal value of $224.0 million. In addition, DBRS Morningstar applied positive qualitative adjustments totaling 7.0% to the sizing to reflect the property’s quality, market fundamentals, and cash flow volatility.

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).

Classes X-CP and X-EXT are IO certificates that reference 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 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 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
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

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 (October 19, 2023; https://www.dbrsmorningstar.com/research/422174)

-- 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 22, 2023; https://www.dbrsmorningstar.com/research/420982)

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

-- North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://www.dbrsmorningstar.com/research/419592)

-- 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].