Morningstar DBRS Assigns Provisional Credit Ratings to TX Trust 2024-HOU

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

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

All trends are Stable.

The collateral for the Trust includes the borrower's fee-simple interest in the Marriott Marquis Houston property (the Hotel), encompassing 1,000 keys. The subject mortgage loan of $325.0 million will retire approximately $319.9 million of existing debt and cover closing costs of approximately $5.1 million. 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 initial weighted-average component spread, which will be determined based on the final pricing of the Certificates, currently assumed to be 3.227%. The borrower will be required to purchase an interest rate cap agreement, with a one-month Term SOFR strike price of no greater than 6.000%.

The Hotel was built and opened for business in 2016, and is well situated within the Houston central business district. The property is connected via a skybridge to the 1.9 million-square-foot (sf) George R. Brown Convention Center. Adjacent to the Hotel is Discovery Green, a 12-acre urban park that offers outdoor skating, fitness, concerts, art, and more. Additionally, the subject is close to stadiums for three major Houston sports teams: Minute Maid Park is the home of the Houston Astros, Toyota Center is the home of the Houston Rockets, and Shell Energy Stadium is the home of the Houston Dynamo FC. Altogether, the three venues host nearly 200 sporting events and concerts annually. The centrally located Hotel comprises 960 guest rooms and 40 suites, and boasts Houston's largest ballroom (39,295 sf), as part of its nearly 153,000 sf of meeting space across 52 spaces. The subject's robust amenity package consists of a rooftop terrace with cabanas, an infinity pool, a lazy river designed in the shape of Texas, eight food and beverage (F&B) outlets, a 5,000-sf spa, and a state-of-the-art fitness center.

The loan is sponsored by an affiliate of RIDA Development Corporation (RIDA). RIDA was founded in 1972 and serves as a full-service commercial real estate organization. RIDA's corporate headquarters is on the fifth floor of the subject, with regional offices in Orlando, San Diego, and Warsaw, Poland. RIDA is experienced with convention hotels. RIDA's prior convention hotel developments include the 1,424-room Hilton Orlando, 1,008-room Omni Champions Gate, and 1,501-room Gaylord Rockies Resort & Convention Center, among others. RIDA is also currently developing the 1,600-room Gaylord Pacific Resort & Convention Center in Chula Vista, California. The Hotel is managed by Marriott International, with a management agreement extending through December 2046 with two automatic 10-year extension options.

The City of Houston requested proposals for a new hotel development in 2012, which the sponsor ultimately won with its then private equity partner for a Marriott-branded hotel with unique amenities. Completed in 2016, the subject served as the host hotel for the 2017 Super Bowl. The sponsor has shown their commitment to the property by purchasing their private equity development partner's approximate 45% stake in the Hotel in September 2019 as well as carrying the Hotel through when its performance was meaningfully affected by the pandemic. Since development, the sponsor invested approximately $1.2 million to add a second F&B outlet on the leisure deck. The sponsor's future plans include an elective capital improvement plan that involves renovating all 1,000 keys in summer 2025. The planned room renovations will include upgrades to the soft goods and painting walls to make the rooms feels lighter and brighter. Although the $13.9 million planned renovation is expected to be funded through the furniture, fixtures, and equipment Reserve balance, there aren't any guarantees in place that such renovations will be completed as described or at all.

In 2019, prior to the pandemic, the subject reported an occupancy rate of 76.5% and an average daily rate (ADR) of $208.17 for a revenue per available room (RevPAR) of $159.22. While occupancy has declined, the sponsor has been successful in recovering ADR and RevPAR to above their pre-pandemic levels. The property achieved a RevPAR of $172.61 as of the trailing 12 months ended March 31, 2024 (T-12 2024), after the pandemic-affected RevPAR of $56.13 in 2020. The property performance for the T-12 2024 is 8.4% above pre-pandemic levels, based on the 2019 RevPAR of $159.22. Morningstar DBRS believes 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 and therefore Morningstar DBRS believes room rates will normalize. The location, management initiatives, and experienced sponsorship should allow for modest growth above pre-pandemic levels. Morningstar DBRS concluded a stabilized RevPAR of $169.13 that is 6.2% above the 2019 level; however, it is 2.0% lower than the T-12 2024 level.

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 ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations.

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 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 (January 23, 2024) at 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 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

-- Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205

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

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