Morningstar DBRS Confirms All Credit Ratings on BX 2023-DELC

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2023-DELC issued by BX 2023-DELC Mortgage Trust as follows:

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

All trends are Stable.

The rating confirmations reflect the limited seasoning of the transaction, which closed in June 2023. The transaction is collateralized by the fee-simple and leasehold interests held by the borrower and the fee-simple interest held by HdC North Beach Development, LLP in the Hotel del Coronado, a full-service luxury hotel with 681 guest rooms and 220 third-party condominium owned keys on Coronado Island in San Diego. At issuance, it was noted that the sponsor had recently invested approximately $375 million toward a major capital improvement project to renovate the property and had plans to complete more than $165 million in renovations, including the transformation of more than 350 guest rooms, over a two-year period commencing at the end of 2023. The transaction is early in its life cycle and as a result there are minimal updates to the financial reporting available; however, the revenue per available room (RevPAR) penetration rate for the trailing 12 months (T-12) ended September 30, 2023, of more than 120% demonstrates that the property continues to lead its competitive set. In addition, Morningstar DBRS notes that stabilization of cash flow is not expected until the completion of the capital improvement project, as further described below.

The Hotel del Coronado is a landmarked, full-service luxury beachfront hotel and resort, originally constructed in 1888. The luxury resort features 901 keys (681 guest rooms and 220 condominium keys owned by third parties) across a 29-acre site that provides 1,400 feet of direct ocean frontage. The 681 guest rooms are spread across the Victorian building, The Cabanas, and The Views. The sponsor, Blackstone Real Estate Partners VIII L.P.,(BREP VIII), owns all 681 guest rooms and serves as direct collateral for the loan. The remaining 220 condominium keys are owned by third-party condominium owners and managed by the sponsor with a revenue-sharing program. The 220 condominium keys are at the Shore House and Beach Village. The Hotel del Coronado offers premiere amenities including three outdoor resort-style pools with backdrops of the Pacific Ocean, a full-service spa with 18 treatment rooms, a fitness center that offers both indoor and outdoor class options for guests, and a private beach with lounge seating, 10 retail outlets, and a multitude of restaurant options.

The borrower used whole-loan proceeds to repay existing debt, make an unrelated internal debt repayment for Blackstone, and reinvest equity in the property. The loan benefits from experienced institutional sponsorship by BREP VIII, an affiliate of The Blackstone Group. The interest-only (IO), floating-rate mortgage loan is structured with an initial two-year loan term and three successive one-year extension options. To mitigate interest rate exposure during the loan term, the borrower entered into an interest rate cap agreement with a strike price equal to 4.75%.

Between acquisition of the property in 2015 and securitization in 2023, the sponsor invested more than $450 million, including about $375 million toward a planned capital improvement project of nearly $565 million. The remaining major project, slated to begin in the second half of 2023, includes renovating the Victorian building and luxury condominium community known as Beach Village, increasing the total key count to 404 from 367, and achieving expected average daily rate (ADR) premiums of $100 per night. The sponsor slated an allocation of nearly $150 million toward renovation of the Victorian building's guest rooms and hallways to feature new furniture, fixtures, and equipment; bigger bathrooms; new flooring; wall, lighting, and fixture upgrades; and new elevators with a targeted completion in Spring 2025. Approximately $20 million is carved out for renovating and restoring meeting spaces with a targeted completion in Spring 2024.

The occupancy rate for the T-12 ended September 30, 2023, was 65.0%, a de minimis decline of 2.3% from the prior year. Similarly, RevPAR declined 4.8% over the same period; however, the property is leading the competitive set by a relatively large margin. The servicer-reported net cash flow (NCF) of $49.4 million as of YE 2023 represents a decline of nearly 55.0% from the issuer's stabilized NCF at issuance and a variance of about -40% from the Morningstar DBRS stabilized NCF at issuance; however, the property is still undergoing major renovations and stabilization is not expected to occur until after the renovation projects have been completed.

Given the anticipated volatility in the cash flows until the completion of the large scale business plan, Morningstar DBRS has maintained the issuance as-stabilized value of the portfolio at approximately $1.2 billion, implying a Morningstar DBRS loan-to-value ratio (LTV) of 79.4%. The Morningstar DBRS value was derived using an as-stabilized NCF of $86.7 million and a capitalization rate of 7.25%. Morningstar DBRS made a total qualitative adjustment of 8.00% by increasing the LTV thresholds to account for limited cash flow volatility given the strong barriers to entry and historical RevPAR penetration rate, strong property quality as a result of direct ocean frontage and beach accessibility along with recent significant capital investment from the sponsor, and superior market fundamentals in an affluent market with various demand generators.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS  
There were no Environmental/Social/Governance factors 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 (January 23, 2024), https://dbrs.morningstar.com/research/427030.

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 CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798.

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

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.

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.

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

-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623

-- 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 (April 15, 2024), https://dbrs.morningstar.com/research/431205/

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