DBRS Morningstar Finalizes Provisional Ratings on MTK 2021-GRNY Mortgage Trust

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

-- Class A 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)
-- Class X-CP at AAA (sf)
-- Class X-EXT at AAA (sf)

All trends are Stable.

The MTK 2021-GRNY single-asset/single-borrower transaction is secured by the borrower’s fee-simple interest in Gurney’s Montauk Resort, a full-service resort and spa that spans more than 20 acres along the ocean in Montauk, New York. The property is just east of the Hamptons in the beach hamlet of Montauk and is approximately two and a half hours from New York City by car. The property totals 149 keys, 109 of which are located on the resort parcel and 40 of which are a part of the panoramic co-op parcel. The property includes more than 2,000 linear feet of private beach, and the majority of rooms at the property feature ocean views and private terraces/patios. The sponsors acquired the property in 2013 and have executed a comprehensive renovation plan across the property’s guest rooms, common areas, and amenity spaces that have repositioned the asset from a dated seasonal beach motel to a full-service luxury resort with year-round appeal. The sponsors have spent approximately $54.1 million across guest room renovations, the lobby, food and beverage outlets, and the beach and event/meeting spaces.

Not unlike other full-service luxury resort properties in drive-to markets, the property has performed extremely well through the Coronavirus Disease (COVID-19) pandemic, with revenue per available room (RevPAR) growing by more than 50% from pre-pandemic levels. DBRS Morningstar believes a portion of the growth is attributable to the rooms renovation, as well as pandemic-driven demand for rooms at destination resort hotels in a key drive-to leisure and vacation market with proximity to the New York City metropolitan area. Despite this strong performance, the property remains a seasonal destination, with the summer months exhibiting strong performance and with weaker performance through the winter months. Nevertheless, the sponsor has executed upon a strategy to expand the property’s appeal through the shoulder season (October/November and April/May) via winterizing certain guest rooms along with a comprehensive renovation of the spa, which should attract incremental meeting and event demand during the shoulder and low months of the year.

The property benefits from its irreplaceable location along the ocean just east of the Hamptons in the beach community of Montauk. The site encompasses approximately 20.3 acres of oceanfront land, and the commercial zoning entitlement for an oceanfront parcel of this size is considered very rare in the submarket. In addition, approximately 60% of Montauk (more than 6,775 acres) is protected open space, which is the largest amount of open space relative to any other East Hampton Planning Area. The lack of available land and high barriers to development should limit any potential new supply of competitive full-service resort rooms in the area.

Similar to other luxury full-service leisure hotels in drive-to hospitality markets, the property exhibited strong performance throughout the coronavirus pandemic. RevPAR for the trailing 12-month period ended September 30, 2021, was $675.81, which represents a mammoth 52% increase over the pre-pandemic YE2019 RevPAR of $443.88. DBRS Morningstar believes the robust RevPAR growth is partially attributable to average daily rate (ADR) growth flowing from the extensive rooms renovation, along with separate ADR and occupancy growth driven by unprecedented demand from regional guests seeking pandemic getaways (including during the shoulder seasons). The property has also consistently outperformed its competitive set from an occupancy, ADR, and RevPAR perspective; the property’s RevPAR penetration rate has exceeded 150% each year going back to 2018.

The sponsors are nearing the completion of an extensive $16.4 million renovation and expansion of the property’s spa. When completed, the renovated Seawater Spa will span approximately 30,000 square feet and is expected to offer four spa pools, a full-size indoor swimming pool with ocean views, and 20 treatment rooms. Natural seawater will be pumped into the spa facility from the ocean, which will be used in the swimming pool, cosmetic products, and treatments. DBRS Morningstar believes the spa will be a draw among hotel guests and wedding and event attendees, along with affluent residents of the local community. DBRS Morningstar’s concluded cash flow includes spa revenue based on a pre-renovation per occupied room figure; spa revenue is likely to be higher after the spa is expanded and the renovations are complete, representing potential future upside at the property.

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. Countercyclically, the subject property has benefited from increased demand attributable to leisure travelers seeking pandemic getaways in a drive-to hospitality market proximate to New York City and the surrounding metro area. The equilibrium of hotel pricing and occupancy is likely to stabilize below pandemic highs, and the property will likely experience an element of mean reversion with respect to ADR and occupancy. In addition, the property (like all hospitality assets) remains subject to the uncertainties associated with an ongoing public health crisis, including the emergence of new coronavirus variants and other developments.

The property is in a heavily seasonal hospitality market where temperatures drop precipitously and the weather deteriorates in the off-season months, which contributes to a significant level of cash flow volatility at the property throughout the year. Until recently, a significant portion of the rooms at the property were not winterized to support occupancy during the winter months from November through April. However, the property is one of only a handful of hotels that operates year-round in the submarket, and the expansion of the spa and recent winterization of certain rooms should enable the sponsors to capitalize on leisure demand during the fall and spring shoulder seasons, along with some level of event and group business during the winter season. The sponsors also deposited $4.2 million into an upfront seasonality working capital reserve account at close and are required to deposit between $400,000 and $850,000 per month into an ongoing seasonal working capital reserve account during the summer and shoulder season months.

The sponsors are partially using proceeds from the whole loan to repatriate approximately $42.7 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 $244.0 million, the sponsors will have approximately $64.0 million of unencumbered market equity remaining in the transaction.

The DBRS Morningstar loan-to-value (LTV) ratio is high at 115.2% based on the $217.5 million mortgage debt. In order to account for the high leverage, DBRS Morningstar programmatically reduced its LTV benchmark targets for the transaction by 2.5% across the capital structure. The high-leverage nature of the transaction, combined with the lack of amortization, could potentially result in elevated refinance risk and/or loss severities in an event of default.

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.

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

Classes X-CP and X-EXT are interest-only (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.

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.

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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