Morningstar DBRS Assigns Provisional Credit Ratings to KSL Commercial Mortgage Trust 2024-HT2

DBRS, Inc. (Morningstar DBRS) assigned provisional credit ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2024-HT2 (the Certificates) to be issued by KSL Commercial Mortgage Trust 2024-HT2 (the Trust):

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

All trends are Stable.

The Trust is secured by secured by the fee-simple and/or leasehold interests in 13 hospitality properties across six states. The portfolio consists of 2,384 total keys, including four properties (1,072 keys, representing 42.9% of allocated loan amount (ALA)) operating under the Marriott brand family; four properties (398 keys, representing 21.7% of ALA) as independent brands; three properties (549 keys, representing 20.6% of ALA) operating under the Hilton brand family; and two properties (365 keys, representing 14.9% of ALA) operating under the Hyatt brand family. The properties were constructed between 1904 and 2015 and have a weighted-average (WA) year built of 1997 and WA renovation year of 2021.

The subject financing of $761.0 million, along with a $104.0 million mezzanine loan, will facilitate the refinancing of $740.9 million of existing debt, redistribute $77.6 million to the sponsor, establish a $29.2 million property improvement plan (PIP) letter of credit, and cover closing costs. The loan is a two-year, floating-rate (one-month Secured Overnight Financing Rate (SOFR) plus 2.800% per annum) interest-only mortgage loan with three one-year extension options. The borrower is expected to purchase an interest rate cap with a one-month Term SOFR strike price of 5.0%.

The transaction sponsor is an affiliate of KSL Capital Partners (KSL). KSL is a private equity firm specializing in equity and debt investing in U.S. and international travel and leisure enterprises, spread across five primary sectors: hospitality, recreation, clubs, real estate, and travel services. KSL has been an industry leader for its 30 years of operation by strategically acquiring lodging and leisure-oriented assets and implementing management to help drive cash flow. Since 2005, KSL has raised more than $21 billion worth of capital commitments that focus solely on its travel and leisure endeavors, investing in more than 185 businesses across the world.

The properties in the portfolio were constructed between 1904 and 2015. Since 2016, approximately $161.3 million ($67,647 per key) in capital expenditure (capex) was invested in the properties. An additional $29.2 million ($17,718 per key) of planned capex is budgeted for seven of the properties from 2024 through 2027. The planned capex is part of brand-mandated PIPs over the fully extended five-year loan term. In lieu of an upfront reserve to cover the cost of the brand-mandated PIPs, the sponsor is required to deliver a letter of credit in an amount equal to $29.2 million. Once/if performed, these improvements would allow the portfolio to maintain its competitive position and improve its overall financial performance. One property, which will potentially require a PIP upon an upcoming franchise expiry in 2025, is not included in the PIP cost estimate. Morningstar DBRS applied a $5.0 million Morningstar DBRS value adjustment to recognize the PIP shortfall during the initial loan term.

The largest properties by net cash flow (NCF) are the Westin Philadelphia, the Boston Envoy, and the Hilton Garden Inn New York-Midtown East, which represent approximately 11.8%, 11.6%, and 10.7% of the trailing 12-month period (T-12) ended September 30, 2024, NCF, respectively. No other property represents more than 10.5% of portfolio NCF. The 13 properties average approximately 183 keys and the largest hotel, the Cadillac Hotel & Beach Club, Autograph Collection, contains 357 keys, or approximately 15.0% of the total keys in the portfolio. The portfolio is located across six states, with the largest concentration by ALA in New York and Florida, which account for approximately 39.6% and 23.0% of the loan balance by ALA, respectively. No other state accounts for more than 15.0% of the loan balance by ALA. Most of these markets are located within a Morningstar DBRS Market Rank of 7 or 8 (62.0% of ALA), and the WA portfolio Market Rank is 6.1. The locations within these markets are primarily high-barrier-to-entry urban markets that benefit from increased liquidity driven by consistently strong investor demand, even during times of economic stress.

In 2019, prior to the coronavirus pandemic, the portfolio achieved an occupancy rate of 82.9% and an average daily rate (ADR) of $238.96, resulting in a revenue per available room (RevPAR) of $198.19. Following a significant decline during 2020 because of the coronavirus pandemic, the portfolio's performance was able to recover to pre-pandemic levels by 2022, with the YE2022 RevPAR of $198.43 just higher than the YE2019 RevPAR of $198.19. Over the past two years, the portfolio has continued to experience consistent top-line growth. During the T-12 ended September 30, 2024, the portfolio achieved an occupancy rate of 79.1%, representing a 3.9% increase over the YE2023 occupancy and an ADR of $278.63, representing an 0.6% increase over the YE2023 ADR. These figures resulted in a RevPAR of $220.46, representing a 4.5% increase over the YE2023 RevPAR and an 11.2% increase over the YE2019 RevPAR. Of the 13 properties in the portfolio, 11 achieved a higher RevPAR during the T-12 ended September 30, 2024, than in 2019, while 12 saw RevPAR increases from YE2023 to the T-12 ended September 30, 2024. The portfolio achieved a WA RevPAR penetration of 107.7% during the T-12 ended September 30, 2024, as well as 104.8% in YE2023, 99.9% in YE2022, and 102.2% in YE2019, indicating that the majority of properties in the portfolio have historically outperformed their respective competitive sets. Morningstar DBRS concluded a RevPAR of $219.19 based on an occupancy rate of 78.8% and an ADR of $278.24. This RevPAR figure is 0.6% lower than the T-12 ended September 30, 2024, RevPAR of $220.46 and 3.9% greater than the YE2023 RevPAR of $210.94.

The overall portfolio appraised value is $1.25 billion, which equates to a moderate appraised total debt LTV of 69.1% (65.9% LTV based on the $1.31 bulk sale value). The Morningstar DBRS-concluded value of $906.5 million ($380,243 per key) represents a significant 27.6% discount to the appraised value and results in a Morningstar DBRS whole-loan LTV of 95.4%, which is indicative of high-leverage financing; however, the Morningstar DBRS value is based on a capitalization rate (cap rate) of 8.19%, which represents a significant stress over current prevailing market cap rates and accounts for a $5.0 million Morningstar DBRS value deduction to account for the PIP shortfall for the Hilton Garden Inn Tribeca during the initial loan term.

Morningstar DBRS' credit rating on the Certificates addresses 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, the credit ratings do not address Spread Maintenance Payments.

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 Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

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 (September 19, 2024), https://dbrs.morningstar.com/research/439699.

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.

-- Legal Criteria for U.S. Structured Finance (October 28, 2024), https://dbrs.morningstar.com/research/441840
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.