Press Release

DBRS Morningstar Assigns Ratings to MBRT 2019-MBR

CMBS
September 24, 2020

DBRS Limited (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2019-MBR issued by MBRT 2019-MBR as follows:

-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at AA (low) (sf)
-- Class D at A (high) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (sf)
-- Class A-IO at AAA (sf)
-- Class A-Y at AAA (sf)
-- Class A-Z at AAA (sf)
-- Class X-A at B (high) (sf)

All trends are Negative because the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic.

These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about October 8, 2020. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, at www.dbrsmorningstar.com. On March 27, 2020, DBRS Morningstar placed the ratings on its outstanding SASB transactions secured by hospitality properties Under Review with Negative Implications while MCR placed the ratings on its outstanding SASB transactions secured by hospitality properties Under Review Negative as the global shelter-in-place and travel restrictions related to the coronavirus have had an extreme impact on the short-term performance of this asset class. For further information on these rating actions, please see the DBRS Morningstar press release dated March 27, 2020, at www.dbrsmorningstar.com and the MCR press release dated March 27, 2020, at www.morningstarcreditratings.com.

To assign ratings to this transaction, DBRS Morningstar considered both the impact of the updated NA SASB Methodology and its scenarios attributable to the ongoing coronavirus pandemic on the ratings.

Because of the coronavirus’ significant impact on hospitality performance, DBRS Morningstar first considered the application of the updated NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology” to arrive at a baseline result, which incorporated qualitative assumptions, capitalization rates, and loan-to-value (LTV) ratio sizing benchmark quality/volatility adjustments and excluded any potential changes in current or future expected asset performance resulting from the coronavirus.

DBRS Morningstar then overlaid scenarios incorporating market value declines (MVDs) consistent with the projections in its “Global Macroeconomic Scenarios: September Update” published on September 10, 2020, on top of the baseline result to determine the impact of coronavirus-related changes in asset performance on the subject transaction on a tranche-by-tranche basis. For more information on these scenarios, please refer to the Coronavirus Impact Analysis section of this document. The global macroeconomic scenarios include a moderate decline of 15% for all commercial real estate (CRE), which acts as an average for all CRE property types. However, DBRS Morningstar expects a higher stress for hospitality properties, ranging from 25% to 45% based on the type of demand segmentation and asset location, and expects corporate demand and remote fly-to locations to be at the higher end of the value decline.

LOAN/PROPERTY OVERVIEW
The MBRT 2019-MBR transaction is backed by an interest-only (IO), floating-rate mortgage loan in the amount of $370.0 million. The loan, originated on November 15, 2019, has a two-year term with three one-year extension options and was provided to two borrowers that are subsidiaries of Ohana Real Estate Investors. The loan was used to acquire the Monarch Beach Resort in Dana Point, California, for $492.5 million. A cash equity investment of $127.6 million was provided by the two sponsors. The mortgage loan was divided into eight components with different initial spread percentages. The total weighted-average spread is 2.74%. Component spreads are added to the monthly Libor to arrive at the effective interest rates on the notes. For the first extension period the spread will be increased by 25 basis points. For the second and third extension periods the spread will be increased by 35 basis points. The borrower purchased an interest rate cap agreement, limiting Libor to a strike rate of 3.00%. All loan components secure payment of the certificates.

Collateral for the loan consists of the following: (1) the fee interest in the 400-key AAA Five Diamond-rated luxury, full-service resort hotel situated on 155 oceanfront acres featuring an 18-hole championship golf course designed by Robert Trent Jones, Jr., a wellness spa, nine food and beverage (F&B) outlets, four retail outlets, three swimming pools, a spa, three fitness centers, and access to eight tennis courts; and (2) the leasehold interest in the Monarch Bay Beach Club, a private beach club near the hotel facilities that offers a private membership program at various membership levels for access to the Beach Club, Miraval Spa, resort swimming pools, athletic club, tennis, F&B outlets, and social events.

The prior owner invested $56.1 million of capital improvements in the property for guestroom and amenity renovations since it had acquired the hotel in 2014.

The sponsor for the transaction is Ohana Real Estate Investors, an integrated investment company founded in 2009 and headquartered in Redwood City, California, that specializes in the development, acquisition, and management of high-quality hotels and residential communities. The borrower sponsor is an affiliate of the Ohana investment company, OREI Long Term Equity Fund GP LP. The nonrecourse carveout guarantors are OREI Long Term Equity Fund LP and OREI Long Term Equity Fund A LP. The borrowers are two newly formed limited liability companies organized for the purpose of owning the fee and leasehold interests in the property as tenants-in-common, which could complicate and extend any resolution should problems arise with payment on the debt.

The property is managed by KSL MBR Management LLC, which is not an affiliate of the borrower, guarantors, or the sponsor. OB Sports Golf Management (MB), LLC, manages the Monarch Beach Golf Links golf course and related facilities, and KSL Property Manager manages the Miraval Spa.

The loan was securitized at the end of 2019. No year-end financial statements have been received and no negative data has been received from the servicer. No delinquency was reported by the servicer for the September 15, 2020, distribution date. However, the coronavirus pandemic caused an economic shutdown throughout the country beginning in mid-March 2020. Hotels were especially subject to hardship and closure because of the cessation of business and leisure travel. The hotel website indicates that the hotel is open for business. Discussions with staff reveal that the hotel was closed from March 19 until June 18. The hotel and most of the amenities are open with safety procedures, social distancing, capacity limitations, and other precautions required of all staff and guests. Pricing specials and promotions are offered to encourage guest bookings during this period of caution.

DBRS Morningstar reanalyzed the net cash flow (NCF) derived at issuance for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The resulting NCF figure was $22.2 million and DBRS Morningstar applied a cap rate of 7.5%, which resulted in a DBRS Morningstar Value of $295.8 million, a variance of 40.0% from the appraised value of $495.0 million at issuance. The DBRS Morningstar Value implies an LTV of 125.1% compared with the LTV of 74.7% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for lodging properties, reflecting the property’s irreplaceable location in a supply-constrained market with high barriers to entry. This is supported by the lack of new and competitive supply, as well as the high quality of the collateral resort overall, which includes a world-class golf course and other draws that should help provide insulation from market volatility to the property’s value over the loan term.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis totalling 5.0% to account for cash flow volatility, property quality, and market fundamentals.

CORONAVIRUS IMPACT ANALYSIS
DBRS Morningstar overlaid various scenarios incorporating MVDs consistent with the projections in the “Global Macroeconomic Scenarios: September Update” (https://www.dbrsmorningstar.com/research/366542) to estimate the impact of coronavirus-related changes in asset performance on a tranche-by-tranche basis for the subject transaction. The scenarios included subjecting the most recent appraised collateral value to generalized CRE asset value decline projections with an assumption of approximately 25% under the moderate scenario. In cases where the rated debt exceeded the scenario value, DBRS Morningstar assumed that a principal writedown had occurred to account for the difference. Because of the reverse-sequential allocation of losses in commercial mortgage-backed security (CMBS) transactions, DBRS Morningstar’s analysis considered the most subordinate certificate first and, if a complete principal writedown of the certificate had occurred during the scenario, DBRS Morningstar repeated the analysis for the second-most subordinate certificate and so on until the rated debt no longer exceeded the scenario value.

Under the moderate scenario, the cumulative rated debt was insulated from loss.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Classes A-IO and X-A are IO certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2020) and North American CMBS Surveillance Methodology (March 6, 2020), which can be found on www.dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on www.dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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