Morningstar DBRS Finalizes Provisional Credit Ratings on JW Commercial Mortgage Trust 2024-MRCO

DBRS, Inc. (Morningstar DBRS) finalized provisional credit ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2024-MRCO (the Certificates) issued by JW Commercial Mortgage Trust 2024-MRCO (the Trust):

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

All trends are Stable.

The collateral for the Trust includes the borrower's fee-simple interest in the JW Marriott Marco Island Beach Resort, encompassing 809 keys. The AAA Four Diamond luxury resort is well located on Marco Island, a barrier island on the southwest coast of Florida, featuring a quarter mile of direct beachfront on the Gulf of Mexico. The property offers an extensive amenities package and is one of the top performing resorts in the Naples/Marco Island market. Morningstar DBRS has a positive view of the collateral considering its high property quality, prime beachfront location, strong historical performance, and experienced sponsor.

The property comprises 747 guestrooms and 62 suites, including 695 keys in the Island and Palm Towers, 94 keys in the adults-only Lanai Tower, and 20 beachfront cottages. Amenities include 11 food and beverage outlets, ranging from an upscale steakhouse to a grab-and-go cafe; five pools; four fitness centers; seven retail outlets; a 24,000-square-foot (sf) Spa by JW; four Har-Tru tennis courts; two championship 18-hole golf courses, which are in Naples, Florida, approximately 6.7 miles and 9.4 miles from the main property, respectively; and the Members Club at Marco, a nonequity private club that offers golf and social memberships. The property also offers approximately 140,000 sf of meeting and event space, including a 30,033-sf ballroom, and more than 95,000 sf of outdoor beach venues and terraces. The property's robust amenities package appeals to both leisure and group demand, allowing the property to easily shift segmentation.

The collateral was built in phases between 1971 and 2018. During 2015-18, the property underwent a $337.8 million ($417,605 per key) capital expenditure (capex) program. This included the construction of the Lanai Tower, which features 94 keys and approximately 120,000 sf of meeting and event space, and extensive renovations to the rest of the property to upgrade to a JW Marriott from a Marriott. Since the completion of the capex program, the borrower has continued to invest in the property, spending an additional $110.0 million ($135,988 per key) on capex initiatives from 2017 to 2023. Over the next five years, the borrower plans to invest approximately $164.3 million ($203,031 per key) to complete further renovations at the property, which will include guestroom renovations for all 695 keys in the Island and Palm Towers and improvements to many of the amenities. Morningstar DBRS believes the 2017-23 renovations elevated the guest and group experience and increased revenue potential. The sponsor's further investment on an equity basis should be accretive to the value of the collateral. This near-term investment will help the property maintain its position as a top performing resort in the Naples/Marco Island market.

The mortgage loan of $590.0 million will retire $480.0 million of existing balance sheet debt, return $101.0 million of equity to the sponsor, and cover approximately $9.0 million in closing costs. The loan is a two-year floating-rate interest-only mortgage loan with three one-year extension options. The interest rate will be based on the one-month Secured Overnight Financing Rate (SOFR) plus the initial weighted-average component spread of approximately 2.053%. The borrower will be required to purchase an interest rate-cap agreement. This agreement must have a one-month Term SOFR strike price of 6.000% for the initial term and a rate that yields a per annum interest rate that results in a minimum debt service coverage ratio of 1.15 times for the extension terms.

The borrower sponsor for this transaction is Barings, a wholly owned subsidiary of Massachusetts Mutual Life Insurance Company. Headquartered in Charlotte, North Carolina, Barings is a global investment manager with more than $381 billion in assets under management as of December 2023. The firm's $46.4 billion real estate portfolio includes 15 hotels comprising approximately 4,500 keys and $2.3 billion of assets under management. Barings has actively invested in the property since acquiring the asset in 1979.

The property has demonstrated strong performance since completion of the capex program in 2018. In 2019, prior to the pandemic, the subject reported an occupancy rate of 82.9% and an average daily rate of $350.01, resulting in a revenue per available room (RevPAR) of $290.10. While occupancy declined during the pandemic, the property's performance quickly recovered, with the YE2021 RevPAR of $395.45 representing a 36.3% increase over 2019 levels. RevPAR has continued to increase at a more modest pace over the past two years; the property achieved a RevPAR of $405.78 in 2022, 2.6% above 2021, and a RevPAR of $409.22 as of the trailing 12 months ended March 31, 2024 (T-12 2024). The property's T-12 2024 RevPAR is 41.1% higher than the 2019 RevPAR, but only 0.8% higher than the 2022 RevPAR. Morningstar DBRS believes this normalization of the room rate is due to the phasing out of the pent-up transient demand witnessed in 2022 and H1 2023 following the removal of the pandemic-related travel restrictions. Morningstar DBRS expects moderate room rate growth in the future because of the subject's desirable location, ongoing capital improvements, and experienced sponsorship. Morningstar DBRS concluded a stabilized RevPAR of $397.02, which is 36.9% above the 2019 level and 3.0% below 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. For example, the credit ratings do not address Spread Maintenance Premiums.

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.

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].