Morningstar DBRS Confirms Credit Ratings on All Classes of LUX Trust 2023-LION

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

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

All trends are Stable.

The credit rating confirmations reflect a transaction that is early in its lifecycle with limited reporting. Although the most recently reported net cash flow (NCF) represents a 10.9% decline from the Morningstar DBRS NCF, Morningstar DBRS believes performance will rebound in the near term as occupancy at the Ritz-Carlton property was below issuance expectations in 2023 because of extensive capital improvements that were completed to all 218 guest rooms. The transaction continues to benefit from the collateral's location in uptown Dallas, recent capital improvements, and experienced sponsorship.

The subject loan is secured by the borrower's fee-simple and leasehold interests in a portfolio consisting of two, full-service hotels, totaling 444 keys in uptown Dallas, the Ritz-Carlton Dallas and the Hotel Crescent Court. Loan proceeds of $245.8 million, as well as mezzanine financing of $54.3 million, were used to repay existing debt and return $13.2 million of equity to the sponsor. The floating-rate loan has an initial two-year term with three one-year extension options and is interest-only (IO) throughout the fully extended loan term.

Both properties benefit from their location adjacent to The Crescent, an expansive mixed-use development with 1.1 million square feet (sf) of Class A office space and approximately 165,000 sf of upscale retail space. The 218-key Ritz-Carlton Dallas offers a robust amenity package, which includes a spa, fitness center, two acclaimed food and beverage options, and about 19,000 sf of indoor meeting space. The hotel underwent significant renovations totaling $20.5 million ($94,037 per key), which includes full case and soft good upgrades to all 218 guest rooms and complete renovations to bathroom fixtures and finishes, that was completed in October 2023. The 226-key Hotel Crescent Court, recognized as an iconic Dallas landmark, underwent comprehensive renovations between 2017 and 2019, including full-case and soft-good upgrades to the hotel's guest rooms as well as a complete renovation of the spa, the fitness center, and public spaces, totaling $32.3 million ($142,756 per key). Similar to the Ritz-Carlton Dallas, the Hotel Crescent Court offers a variety of amenities including a luxury spa, wellness center, approximately 16,000 sf of meeting space, and three renowned food and beverage options.

Per the March 2024 financial reporting, the portfolio reported a trailing 12-month (T-12) ended March 31, 2024, NCF of $25.8 million and debt service coverage ratio of 1.16 times, representing a 10.9% decline from the Morningstar DBRS NCF of $29.0 million. The decline in NCF from the Morningstar DBRS NCF derived at issuance is because of the business disruption caused by the ongoing renovations to the guest rooms at the Ritz-Carlton property, as occupancy fell to 65.9% in the T-12 period ended March 31, 2024, from the Morningstar DBRS figure of 76.3%. However, given the completion of the renovations in October 2023, Morningstar DBRS expects performance to rebound in the near term. Individually, both hotels continue to outperform their competitors and have been able to achieve average daily rates (ADR) above issuance expectations. According to the April 2024 STR report, the Ritz-Carlton Dallas hotel reported T-12 occupancy, ADR, and revenue per available room (RevPAR) of 66.2%, $563, and $373, respectively, in comparison to the Morningstar DBRS figures of 76.3%, $490, and $374, respectively. During the same period, the Hotel Crescent Court reported T-12 occupancy, ADR, and RevPAR of 72.3%, $409, and $296, respectively, in comparison to the Morningstar DBRS figures of 75.0%, $378, and $283, respectively.

Morningstar DBRS maintained its issuance analysis with this review, which includes a Morningstar DBRS value of $386.3 million, based on the Morningstar DBRS NCF of $29.0 million and a capitalization rate of 7.5%. This results in a loan-to-value ratio (LTV) of 63.6% on the senior debt and a 77.7% on the whole-loan debt, compared with the whole-loan LTV of 61.3% based on the issuance appraised value of $489.0 million. Qualitative adjustments totaling 6.75% were maintained to reflect the portfolio's stable historical cash flows, superior property quality, and strong location.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

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 (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 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 ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

DBRS, Inc.
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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 (July 11, 2024), https://dbrs.morningstar.com/research/436004
-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024), https://dbrs.morningstar.com/research/435293
-- 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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.