DBRS Morningstar Finalizes Provisional Ratings on CSMC 2021-BHAR

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2021-BHAR issued by CSMC 2021-BHAR:

-- Class A at AAA (sf)
-- Class X-CP at AAA (sf)
-- Class X-NCP at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

All trends are Stable.

The balances for Classes X-CP and X-NCP are notional.

The CSMC 2021-BHAR transaction is a $188.0 million interest-only floating-rate mortgage loan with an initial two-year loan term and three successive one-year extension options. The loan is secured by the fee-simple interest in the St. Regis Bal Harbour Resort, a 216-key luxury full-service hotel in Miami Beach, Florida. The 216-keys includes 192 hotel rooms and 24 third-party-owned condominium units that participate in a rental management program. The resort was built in 2011 and is part of a larger mixed-use development, totaling three towers on 21.0 acres. The collateral is located within the Center Tower, which uniquely has all oceanfront rooms. The Center Tower is flanked by the North and South Towers (both noncollateral). The property features four upscale restaurants, multiple swimming pools, approximately 14,000 square feet (sf) of amenities, and more than 33,000 sf of indoor/outdoor event space. DBRS Morningstar has a positive view of the collateral and believes that the St. Regis Bal Harbour Resort’s net cash flow (NCF) will remain competitive in the market considering the hotel’s oceanfront beach location, full-service offerings, and brand recognition.

The sponsor has invested $37.6 million (approximately $174,000 per key) in capital improvements to the resort since 2016. More specifically, the sponsor spent $26.4 million in 2015 alone to expand the north lobby and build out the Atlantikós restaurant and raised deck, while another $1.9 million will be allocated toward property-wide upgrades at loan closing.

The St. Regis Bal Harbour Resort has been a consistent and strong performer in the market and against its competitive set, with a revenue available per room (RevPAR) penetration rate over 150.0% as of the trailing-12-month (T-12) period ended August 31, 2021. The onset of the Coronavirus Disease (COVID-19) pandemic in March 2020 had a severe impact on the lodging industry, causing occupancy, average daily rate (ADR), and RevPAR to decline to unprecedented levels domestically and globally. Inevitably, the resort’s RevPAR in 2020 dropped 45.9% compared with 2019; however, the decline was less than the nationwide and Miami submarket RevPAR declines of 47.5% and 50.8%, respectively. The resort remained open and operational throughout the pandemic and has demonstrated incredible signs of recovery growth with cash flow for the T-12 period ended August 31, 2021, up 673% from 2020. The property reported RevPAR of $695.32 for the T-12 period ended August 31, 2021, based on occupancy of 66.8% and ADR of $1,040.21. This represents a penetration rate of 127.9%, 117.7%, and 150.5% for occupancy, ADR, and RevPAR, respectively.

DBRS Morningstar elected to stabilize the property's NCF in line with its pre-pandemic performance, which is considerably below its recent performance. It is DBRS Morningstar's view that the high ADR and occupancy experienced over the past year include abnormal travel patterns as a result of the pandemic. Florida quickly became a travel destination during the pandemic because of its more relaxed restrictions and ease of transportation by flight or automobile. International travel restrictions and the general cautiousness of U.S. travelers also pushed higher demand to Florida. As ADR increased to all-time highs, the hotel also benefited from cost-cutting to the rooms expense and undistributed expenses. DBRS Morningstar believes that many of the cost savings could be temporary, however, as luxury travelers will again demand a high level of service. Removing the impacts of the pandemic, DBRS Morningstar believes the property has the ability to capture upscale transient business and an affluent guest base throughout the fully extended loan term. DBRS Morningstar’s concluded NCF and value reflect a stabilized occupancy assumption of 73.0% (which is above the T-12 ended August 31, 2021, occupancy of 66.8% and well above the 2020 level of 35.1%) and an ADR of $840, which is a 10.6% increase over 2019 levels. The resulting RevPAR of $613.20 is 5.0% above 2019 levels. Additionally, the land value of $45.0 million represents only 23.9% of the total loan amount.

Overall, DBRS Morningstar has a favorable outlook of the St. Regis Bal Harbour Resort, considering its location along the Atlantic Ocean that provides an oceanfront view in each guest room and its strong performance during the pandemic against its competitive set.

Built in 2011, the St. Regis Bal Harbour collateral features 216 total including 64 suites composed of 23 one-bedroom suites and 32 multi-bedroom suites, including junior suites and a presidential suite. The resort’s space, amenities, beachfront accommodations, swimming pools, and restaurants are of luxury quality. The property features more than 30,000 sf of indoor/outdoor meeting space. Situated on more than 21.0 acres of beachfront land, each guest room provides guests with private balconies and unobstructed views of the Atlantic Ocean.

The property experienced a strong resurgence of domestic leisure travelers, and property performance hit all-time highs in the early months of 2021. Occupancy exceeded 85.0% from January 2021 through April 2021 and ADR during this time was well above historical levels, in several months exceeding an average ADR of $1,200 per night. The resulting RevPAR was an impressive $1,406 at the peak in March 2021 and the property is consistently a top performer in the competitive set, achieving RevPaAR penetration levels over 170.0% in peak months.

The property benefits from experienced, institutional-quality sponsorship. The Qatar-based sponsor, Al Faisal Holding, was founded in 1964, and the real estate investment company has a current portfolio of 37 properties across the world with five luxury hotels in the United States, including the subject property. The property is operated and managed by Sheraton (a Marriott owned brand). There are a total of 49 St. Regis hotels comprising nearly 11,000 keys and 17 St. Regis Residences with approximately 1,700 keys. Marriott International manages more than 7,000 hotel properties with a presence in 131 countries.

The ongoing coronavirus pandemic continues to pose challenges and risks to virtually all major commercial real estate property types, creating a substantial element of uncertainty around the recovery of demand in the hospitality sector, even in stronger markets that have historically been highly liquid. Operations at the property were significantly affected by the pandemic, resulting in a 66.5% decline in NCF from 2019 to 2020.

The rooms have not received a major renovation since construction in 2011, and in order for the property to remain competitive in the luxury hotel segment, room upgrades may be necessary within the loan term. As noted upon DBRS Morningstar’s site inspection, room soft goods showed considerable wear and property representatives indicated that the rooms were in need of an upgrade. According to the issuer, there is no brand-mandated property improvement plan for the property and elective renovation work will be done when needed, which will likely include upgrades to carpets, curtains, bedding, and in-suite kitchenettes in the near future. The loan is structured with a $1.9 million reserve at closing for general capex.

The sponsor is projecting a rooms expense ratio of 16.3% as of 2022, and the property was operating at 11.9% as of the T-12 period ended August 31, 2021, which is substantially below where a full-service hotel normally operates on a percent of departmental revenue basis. The cost of employee insurance benefits is also low because of minimal employee elections. DBRS Morningstar concluded to a rooms expense ratio of 20.5% or $172.20 per occupied room as it believes that it is unlikely for the current trend of reduced room servicing to persist in the long term, particularly at luxury hotels where guests are paying a premium on a per-night basis, as well as a general inflationary trend in overall wages from both social and economic pressures.

The sponsor is partially using proceeds from the whole loan to repatriate approximately $44.5 million of equity. DBRS Morningstar views cash-out refinancing transactions as less favorable than acquisition financings because sponsors typically have less incentive to support a property through times of economic stress if less of their own cash equity is at risk. Based on the appraiser’s as-is valuation of $331.0 million, the sponsor will have approximately $131.0 million of unencumbered market equity remaining in the transaction.

While still present, the market has experienced diminishing seasonality in recent years because of the region’s proximity to the large and growing population residing in South Florida, which provides for strong shoulder seasons and a very brief downtime. The Christmas holiday through Memorial Day has historically represented the Miami South Beach lodging market’s primary season, when “snow birds” from the northeastern and midwestern U.S. and from Europe travel south to escape the increasingly cold winter season. From Memorial Day through Labor Day, the market experiences a minor shoulder season where performance remains strong, with the bulk of the demand coming from “drive-to” guests throughout Florida as well as some Europeans on summer holiday. During September and October, resorts tend to target senior travelers and small groups as the market gears up again for the rush of demand during the winter holiday season.

The DBRS Morningstar loan-to-value ratio (LTV) is high at 97.2% based on the $188.0 million in total mortgage debt. In order to account for the high leverage, DBRS Morningstar programmatically reduced its LTV benchmark targets for the transaction by 1.50% across the capital structure.

The DBRS Morningstar NCF's includes income from 24 units that participate in the St. Regis's rental program. As part of the program, the loan sponsor rents, manages, and controls the 24 units according to a rental agreement. Unit owners have the ability to opt into a one- or two-year initial term and split net proceeds 50/50, after deducting a service fee and a furniture, fixtures, and equipment deposit. The number of participating units has been between 24 and 26 units since 2017. Given that the rental income is dependent on nonowned assets and the variable nature of the number of units that participate in the program, DBRS Morningstar considered a downward value adjustment.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Classes X-CP and X-NCP 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.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

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

With regard to due diligence services, DBRS Morningstar 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 DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is North American Single-Asset/Single-Borrower Ratings Methodology (March 2, 2021), which can be found on 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 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

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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