DBRS Morningstar Finalizes Provisional Ratings on BX 2023-DELC, Mortgage Trust

DBRS, Inc. (DBRS Morningstar) finalized provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2023-DELC (the Certificates) to be issued by BX 2023-DELC, Mortgage Trust (BX 2023-DELC).

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

All trends are Stable.

Update as of June 9, 2023
Since the release of DBRS Morningstar’s provisional ratings on May 12, 2023, the issuer revised the loan structure and updated the issuer NCF. The loan structure was updated to include $60 million in upfront, lender-controlled cash reserves which will be allocated as a $45 million shortfall reserve and a $15 million capital expenditure reserve to complete the Victorian building’s renovations. The sponsor also will be required to purchase a 4.25% SOFR interest rate cap for the initial term, which is lower than the previous SOFR interest rate cap of 4.75%. The sponsor also finalized ongoing negotiations with the collateral’s manager, Hilton Management LLC regarding an updated fee structure. The property’s total management fee, including the Hilton Honors expense, will now be capped at 1.8% of total operating revenue which ultimately led to a $1.3 million increase in the issuer’s stabilized net cash flow. Based on the issuer’s updated loan structure and NCF’s, DBRS Morningstar lowered the execution penalty from -5.0% to -4.0%, updated the interest rate cap and adjusted the stabilized underwriting analysis to account for the updated management fee, which resulted in a stabilized cash flow of $86.7 million.

DBRS Morningstar Perspective
The BX 2023-DELC transaction is a $950 million IO, 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 and leasehold interests held by the borrower and the fee-simple interest held by HdC North Beach Development, LLP in the Hotel del Coronado, a full-service luxury hotel with 681 guest rooms and 220 third-party condominium owned keys on Coronado Island in San Diego. The resort has served as an iconic American landmark since opening in 1888, highlighted by the resort’s Victorian architecture, and spans across 29 acres on the beachfront of the Pacific Ocean. DBRS Morningstar has a positive view on the collateral and believes the NCF on Hotel del Coronado is sustainable and will continue to grow over the term of the loan considering the hotel's irreplaceable beachfront location, the significant capital invested into the property with continued near-term investment, and the property’s strong financial performance.

The resort offers several guest room buildings, and all offer a unique guest room experience with different price points depending on the size, distinctive exterior and interior designs, and architectural styles. The guest room selections include standard hotel rooms with various ocean and courtyard views; connected and community-based condominium hotel units; and private and exclusive condominium villas and cottages with their own entrance, restaurants, and concierge services. The Victorian building, for instance, currently has 367 rooms, but no two rooms are alike in layout and configuration. The resort blends Victorian architecture that exudes historic charm and simultaneously offers a wide array of modern amenities. Some buildings still preserve certain sections of the original wooden architecture dated back more than 100 years ago. The resort features 10 F&B outlets, 10 retailers, poolside bars/lounges, and approximately 237,000 sf of indoor/outdoor function space catered for various events. In addition to a variety of outdoor activities including surf lessons, sailing, a virtual reality snorkeling experience, biking, and golf outings, there is also a historic Ice House Museum and various tours on site to learn about the Hotel del Coronado’s rich heritage. DBRS Morningstar believes the resort will continue to attract targeted guest groups by fulfilling their various needs and providing them with unique experiences within the multitude of activities it offers. In addition to room and F&B revenue, the resort has also consistently generated approximately 15% of its total revenue in ancillary income from beach and recreation operations, its spa and fitness offerings, retail outlets, club membership dues and related services fees, etc. over the past few years including 2020 amid the Coronavirus Disease (COVID-19) pandemic. DBRS Morningstar views the diversification of operations as a credit positive because the resort’s cash flow will be less susceptible to revenue swings than that of traditional resort hotels, making it more resilient during economic downturns.

The sponsor has invested heavily in the property since acquiring it in 2015, and the improvements have bolstered the property’s position within the luxury hospitality segment on the West Coast. DBRS Morningstar views the value-add renovation and constant upkeep of the resort as a key element to sustain and enhance the hotel’s performance because luxury resorts’ guests typically demand new, high-quality, and exceptional guest rooms and amenities. DBRS Morningstar also expects to see the resort benefiting from the recent addition of the Shore House and Southpointe Event Center, which is projected to add condominium profit-sharing, meeting, banquet, and F&B revenue from both transient and group guests. According to the property manager, about 50% of the F&B patrons are not guests at the Hotel del Coronado, demonstrating strong local F&B demand at the resort. There is a remaining $166.8 million ($412,978/key based on 404 keys) in planned capital improvements at the iconic Victorian building. Part of the project involves converting some of the suites into 37 standard rooms given the group segmentation at the resort and at the same time complementing and optimizing the revenue at the newly built suite product, the Shore House. While the capital improvements could ultimately boost the resort’s room rates, room nights, and F&B revenue, the renovation funds have not been reserved at closing. Instead, the sponsor is expected to deliver to the lender a $142.5 million Construction Guaranty to fund the remaining renovations of the Victorian building which, after the borrower has contributed $16.3 million towards the outstanding work, will be decreased by the amount of funds contributed by the borrower. DBRS Morningstar projects a 10% per night ADR increase once the renovation is completed and stabilized,IIch is a 50% discount to the appraisal’s estimated ADR premium.

The property was previously securitized in the BBCMS 2017-DELC transaction, and it has been a consistent and solid performer in the market, achieving RevPAR penetrations of above 100% since 2016. The rate growth at the property was partly due to the overall market’s recovery from the pandemic, but it was also due to the increased pricing power management has achieved following the extensive renovations. DBRS Morningstar forecasts minimal growth in occupancy of 71.3% upon stabilization for the hotel (excluding the Shore House property), which is in line with its long-term performance. DBRS Morningstar’s stabilized ADR of $690.95 per key is based on a 10% growth rate for the Victorian building (excluding the Shore House property). DBRS Morningstar’s stabilized RevPAR estimate of $492.80 per key represents a 7.7% increase over the property's (excluding the Shore House) T-12 ending March 2023 RevPAR. The DBRS Morningstar Stabilized EBITDA for the property (excluding the Shore House) is less than 1.0% above the property's T-12 ended March 2023 EBITDA.

The local market benefits from its strong base in tourism, proximity to the Pacific Ocean, and access to surrounding areas of San Diego County. Local demographics are generally favorable and show an affluent community. There is limited competition and currently no new construction or development for similar product in the area. The resort's performance has risen year over year, and DBRS Morningstar expects the recent and planned renovations will continue to keep the property competitive.

ENVIRONMENTAL, SOCIAL, 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 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/396929 (May 17, 2022).

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

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

The principal methodology is North American Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023; https://www.dbrsmorningstar.com/research/410191).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 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.

The rating was initiated at the request of the rated entity. The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action. This is a solicited credit rating.

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.

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://www.dbrsmorningstar.com/about/methodologies.

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022)
https://www.dbrsmorningstar.com/research/402646)

Legal Criteria for U.S. Structured Finance (December 7, 2022)
https://www.dbrsmorningstar.com/research/407008

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022)
https://www.dbrsmorningstar.com/research/402153

North American Commercial Mortgage Servicer Rankings (September 8, 2022)
https://www.dbrsmorningstar.com/research/402499