DBRS Morningstar Assigns Provisional Credit Ratings to KSL Commercial Mortgage Trust 2023-HT

DBRS, Inc. (DBRS Morningstar) assigned provisional credit ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2023-HT (the Certificates) to be issued by KSL Commercial Mortgage Trust 2023-HT (KSL 2023-HT).

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

All trends are Stable.

KSL 2023-HT is secured by the fee-simple and/or leasehold interests in 19 hospitality properties across six states and Washington, D.C. The portfolio consists of 3,102 total keys, including seven properties (732 keys, representing 29.0% of allocated loan amount (ALA)) as independent brands; six properties (1,228 keys, representing 38.5% of ALA) operating under the Marriott brand family; three properties (549 keys, representing 15.3% of ALA) operating under the Hilton brand family; two properties (365 keys, representing 11.3% of ALA) operating under the Hyatt brand family; and one property (228 keys, representing 5.9% of ALA) operating under the IHG brand family. The properties were constructed between 1904 and 2015 and have a weighted-average (WA) year built of 1990 and WA renovation year of 2020.

The subject financing of $736.0 million, along with a $204.0 million mezzanine loan, $375.6 million equity infusion from the transaction sponsor, and $47.4 million of rolled preferred equity from the seller, Hersha Hospitality Trust, will facilitate the $1.18 billion acquisition price, establish a $25.5 million upfront property improvement plan (PIP) reserve, and cover closing and financing costs totaling approximately $157.4 million. The loan is a two-year floating-rate (one-month Secured Overnight Financing Rate (SOFR) plus 3.668% per annum) interest-only (IO) mortgage loan with three one-year extension options. The Borrower is expected to purchase an interest rate cap agreement through December 15, 2025, with a one-month Term SOFR strike price of 3.9%.

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 operations 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 150 businesses across the world.

Since 2016, approximately $194.6 million in capex was invested in the properties. An additional $34.6 million ($30,687 per key) of planned capex is budgeted for six of the properties for 2024 through 2026. The planned capex is part of brand-mandated PIPs over the fully extended five-year loan term, which will partially be funded by the PIP reserve. In addition, the loan has been structured with a $10.0 million line of credit from the sponsor to fund the remaining portion of the planned renovations. Once/if performed, these improvements would allow the portfolio to maintain its competitive position and improve its overall financial performance. DBRS Morningstar applied a $10.0 million value adjustment to recognize the PIP shortfall during the initial loan term.

The top-three properties by net cash flow (NCF) for the trailing 12-month (T-12) period ended October 31, 2023, are The Envoy Hotel, Autograph Collection, which represents approximately 9.8% of the T-12 October 2023 NCF; The Cadillac Hotel & Beach Club, Autograph Collection, which represents approximately 9.7% of the T-12 October 2023 NCF; and the Hilton Garden Inn New York-Midtown East, which represents approximately 9.1% of the T-12 October 2023 NCF. No other property represents more than 9.0% of portfolio NCF. The 19 properties average approximately 163 keys and the largest hotel, The Cadillac Hotel & Beach Club, Autograph Collection, contains 357 keys, or approximately 11.5% of the total aggregate keys in the portfolio. The portfolio is located across six states and Washington, D.C., with the largest concentration by ALA in New York and Florida, which account for approximately 35.0% and 24.3% of the loan balance by ALA, respectively. The third-largest concentration is in Pennsylvania, which accounts for approximately 11.5% of the loan balance by ALA, with no other state accounting for more than 10.0% of the loan balance by ALA. Most of these markets represent a DBRS Morningstar Market Rank of 7 or 8 with a WA Market Rank of 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. The overall portfolio appraised value is $1.49 billion, which equates to a moderate appraised total debt LTV of 63.2% (61.3% LTV based on the $1.53 bulk sale value).

In 2019, prior to the Coronavirus Disease (COVID-19) pandemic, the portfolio averaged 82.6% occupancy and reported WA average daily rate (ADR) and revenue per available room (RevPAR) of $249.31 and $205.88, respectively. While occupancy has declined, the sponsor has been successful in recovering ADR to above its pre-pandemic historical average. As of the T-12 period ended October 31, 2023, WA RevPAR penetration for the portfolio was 102.1% based on occupancy of 72.8%, ADR of $292.34, and RevPAR of $212.96. Based on a stabilized occupancy of 74.5% and ADR of $291.42, DBRS Morningstar concluded RevPAR of $216.97. DBRS Morningstar’s concluded NCF and value for the portfolio reflect a stabilized occupancy assumption of 74.5%, which is above the portfolio’s 72.8% occupancy for the T-12 period ended October 31, 2023, but still well below the 82.6% achieved in 2019.

The portfolio NCFs of $85.9 million and $84.2 million reported as of YE2022 and the T-12 period ended October 31, 2023, respectively, are significantly higher than the -$11.2 million and $46.7 million NCFs reported as of YE2020 and YE2021, respectively. The portfolio NCF decline from YE2022 to the T-12 period is the result of ongoing renovations at a number of the properties, particularly the Winter Haven Hotel, which is completely closed and not reopening until the end of November 2023. As of the T-12 ended October 31, 2023, the portfolio has surpassed pre-pandemic RevPAR levels by 3.4%, which is depressed as several of the properties have not been able to capitalize on on-going renovations. DBRS Morningstar elected to stabilize the portfolio and assumed occupancy generally in line with 2024 projections for the stabilizing assets, given that these figures are more conservative compared with the assets’ pre-pandemic performance, the nationally recognized brand affiliation of the properties as well as their steady pre-pandemic operating history, experienced management by nationally recognized management companies, strong overall locations, and KSL’s sponsorship. Although certain assets in the portfolio that are more reliant on business and group demand experience a slower recovery, those that are more focused on transient customers continue to see rapid improvement.

DBRS Morningstar’s credit ratings on the Certificates address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are listed at the end of this Press Release.

DBRS Morningstar’s credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, Yield Maintenance Premium.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar 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 DBRS Morningstar 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, GOVERNANCE CONSIDERATIONS

Environmental Factors
Four properties (Ritz-Carlton Georgetown, The St. Gregory, Hilton Garden Inn Queens/JFK, and Hyatt House White Plains) have recognized environmental conditions that are outlined in more detail in the offering document. This was considered a relevant, but not significant factor in the analysis. As a mitigant, the sponsor has put in place a $10 million Pollution Legal Liability policy to cover any potential issues.

There were no Social or Governance factors 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/416784 (July 4, 2023).

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 credit ratings are subject to surveillance, which could result in credit 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 the North American Single-Asset/Single-Borrower Ratings Methodology (October 19, 2023, https://www.dbrsmorningstar.com/research/422174).

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 credit 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 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.

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 credit rating action.

This is a solicited credit rating.

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

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 (June 09, 2023; https://www.dbrsmorningstar.com/research/415687/interest-rate-stresses-for-us-structured-finance-transactions).

North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://www.dbrsmorningstar.com/research/419592/north-american-commercial-mortgage-servicer-rankings).

Rating North American CMBS Interest-Only Certificates (December 19, 2022: https://www.dbrsmorningstar.com/research/407577).

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023: https://www.dbrsmorningstar.com/research/420982).

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

Financial Obligations of the Issuer are listed as follows:

-- Class A Principal Amount
-- Class A Interest Distribution Amount
-- Class X-CP Interest Distribution Amount
-- Class X-NCP Interest Distribution Amount
-- Class B Principal Amount
-- Class B Interest Distribution Amount
-- Class C Principal Amount
-- Class C Interest Distribution Amount
-- Class D Principal Amount
-- Class D Interest Distribution Amount
-- Class E Principal Amount
-- Class E Interest Distribution Amount
-- Class HRR Principal Amount
-- Class HRR Interest Distribution Amount