Morningstar DBRS Assigns Provisional Credit Ratings to SCG 2024-MSP Mortgage Trust

DBRS, Inc. (Morningstar DBRS) assigned provisional credit ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2024-MSP (the Certificates) to be issued by SCG 2024-MSP Mortgage Trust (the Trust):

-- 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 (sf)
-- Class HRR at B (low) (sf)

All trends are Stable.

The SCG 2024-MSP transaction is secured by the borrower’s fee-simple or leasehold interests in a four-property portfolio of Marriott-branded full-service hotels. The portfolio is made up of all suites and totals 1,016 keys. The properties are located in Atlanta, Georgia (254 keys; 15.7% of allocated loan amount (ALA)); Costa Mesa, California (253 keys; 20.7% of ALA); and Scottsdale, Arizona (two properties totaling 509 keys; 63.6% of ALA).

The Sponsor of the transaction is Starwood Capital Group, a private investment firm founded in 1991. Starwood acquired this portfolio in August 2019 for $250.0 million, which was securitized in the GSMS 2019-SMP transaction. The loan proceeds of $220.2 million, along with approximately $8.36 million in cash, will be used to refinance existing debt of $218.85 million, pay closing costs of approximately $5.5 million, and fund an upfront capital reserve of approximately $4.2 million. The capital reserve exceeds 110% of the actual costs as determined by a final detailed fully costed budget for any such property improvement plan or similar plan required based on the replacement management agreements entered into with respect to the Atlanta and Old Town Properties. The loan will be structured with a two-year initial term with three one-year extension options.

The properties were built between 1988 and 1999 and feature large room sizes, exhibiting a weighted average by unit count of 518 sf. Since purchasing the portfolio, Starwood has invested approximately $37.8 million in capital expenditures. This is in addition to the approximately $19.4 million that was invested by the previous owners between 2013 and 2019, for a total of over $57 million in capital expenditures across the four properties since 2013. The largest recipient of capex funds was Marriott Costa Mesa, which underwent a complete renovation of guest rooms totaling $18.8 million. Other large capital improvement projects at the properties include $4.9 million at Marriott at McDowell Mountains for renovations of the hotel’s chiller and cooling tower as well as automation systems; $3.3 million at Marriott Old Town for roof repairs, parking garage renovations, pool deck renovations, food and beverage renovations, and new fitness center tile; and $3.3 million at Marriott Atlanta Midtown for renovations of the hotel’s chiller and cooling tower. Overall, the rooms and conference areas in the Atlanta property and both Scottsdale properties appeared dated per the Morningstar DBRS site inspections; however, their performance shows that their large room sizes and availability of meeting space in good locations will continue to benefit the properties in their respective markets.

Although there are not yet any brand mandated PIPs, the loan is structured with a $4.2 million reserve for potential required PIPs at the Marriott Old Town and Marriott Atlanta Midtown properties as their Marriott Management agreements expire during the loan term in 2028. This upfront reserve is in addition to the outstanding Furniture, fixtures, and equipment (FF&E) reserves for the two properties totaling $6.5 million as well as the $2 million per year the sponsor will be required to fund during the loan term. The upfront reserves and continuations of using outstanding reserves to improve the properties are considered more prudent loan features for loans secured by hotel properties compared with planned use of on-going reserves to fund future capital improvements.

Prior to the COVID-19 pandemic for the year ended (YE)2019 period, the portfolio had an occupancy rate of 78.0% and an ADR of $176.53, resulting in RevPAR of $137.71. For YE2023, occupancy was still below pre-COVID levels at 67.2% but ADR and RevPAR were higher, at $216.47 and $145.53, respectively. Based on an occupancy rate of 64.3% and the T-12 ending January 2024 ADR figure of $217.15, the concluded Morningstar DBRS RevPAR of $139.15 is 4.9% lower than the T-12 ending January 2024 RevPAR of $146.76. Morningstar DBRS applied RevPAR discounts of 5% to the Marriott Atlanta Midtown as well as 7.5% discounts to the two Scottsdale properties in its Morningstar DBRS Net Cash Flow (NCF) analysis because of new supply in both markets, as well as slight declines in performance in the second half of 2023. The concluded Morningstar DBRS RevPAR figure is slightly above the YE2019 RevPAR figure of $137.71.

Noted risks include new supply in the Scottsdale and Atlanta markets, recent performance declines, and the seasonality of the two Scottsdale properties. There is a brand new 976-key hotel in Atlanta and two new hotels are opening in Scottsdale in 2024 with 265 and 235 keys, respectively. The Atlanta and Scottsdale properties also showed slight performance declines in the second half of 2023. Morningstar DBRS accounted for these declines by using an occupancy plug to lower the assumed RevPAR for these properties. The two Scottsdale assets have historically shown performance declines in the summer months with lower RevPAR figures compared with the rest of the year. Although there are some concerns with the properties, Morningstar DBRS has a generally positive view of the credit characteristics of the portfolio. With its strong sponsorship, Marriott brand affiliation, and continued capital improvements, Morningstar DBRS has a favorable outlook on the portfolio.

Morningstar DBRS’ 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 the related Principal Distribution Amounts and Interest Distribution Amounts for the rated classes.

Morningstar DBRS’ credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, Spread Maintenance Premium.

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. Morningstar DBRS 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. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

All credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

Notes:
All figures are in U.S dollars unless otherwise noted.

The principal methodology is the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428799.

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

With regard to due diligence services, Morningstar DBRS 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 Morningstar DBRS’ methodology, Morningstar DBRS used the data file outlined in the independent accountant’s report in its analysis to determine the credit ratings referenced herein.

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.

Morningstar DBRS 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.

A provisional credit rating is not a final credit rating with respect to the above-mentioned securities and may change or be different than the final credit rating assigned or may be discontinued. The assignment of final credit ratings on the above-mentioned securities is subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalize the credit ratings.

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://dbrs.morningstar.com/about/methodologies.

-- DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023), https://dbrs.morningstar.com/research/420982

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

-- Legal Criteria for U.S. Structured Finance (December 7, 2023), https://dbrs.morningstar.com/research/425081

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