DBRS Finalizes Provisional Ratings on CFCRE Trust 2018-TAN

DBRS, Inc. (DBRS) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-TAN issued by CFCRE Trust 2018-TAN (the Issuer):

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

All trends are Stable.

The Class X balance is notional.

The collateral for the transaction consists of the leasehold interest in an upscale oceanfront hotel located on the island of Aruba. The 411-key hotel is situated on a 10.1-acre site on the northern end of the island along Palm Beach, a two-mile strip of beach known for its white sand and turquoise waters where the majority of the upscale hotels on the island are located. The subject is part of a larger Marriott campus that includes Marriott’s Aruba Surf Club and Marriott’s Aruba Ocean Club, two timeshare projects totaling 1,200 keys (non-collateral) that are located to the south of the subject. The collateral includes nine food and beverage outlets, 34,916 square feet (sf) of meeting space, two outdoor pools, a fitness center and four retail stores. Additionally, included in the collateral is the Stellaris Casino, the largest casino (17,000 sf) on the island, featuring 523 slot machines and 27 gaming tables.

The loan is sponsored by a joint venture between DLJ Real Estate Investment Partners (DLJ) and MetaCorp International (MetaCorp). DLJ is a private equity real estate investment firm, and MetaCorp is a real estate company based in Aruba. MetaCorp previously owned and operated the Renaissance Aruba Resort & Casino. After a loan maturity default by the previous owners in October 2012, when total outstanding debt was approximately $230.0 million, Five Mile Capital Partners LLC (Five Mile), DLJ and MetaCorp converted their respective mezzanine debt into a majority equity interest. The property was previously 100.0%-owned by the Caribbean Property Group (CPG), which retained its remaining equity stake (11.6%) when ownership took over the property and refinanced the senior and mezzanine loan of $160.0 million with a $160.0 million mortgage in December 2013. Loan proceeds of $195.0 million, along with $10.0 million of borrower equity, served to refinance existing debt of $160.0 million, facilitate the $38.5 million sponsor buyout of Five Mile and CPG and cover closing costs. Five Mile will retain a $23.5 million preferred equity position at loan close.

The property has performed very well over the past several years compared with its competitive set, with a current November 2017 STR exhibiting revenue per available room (RevPAR) penetration of 153.5%. The property has experienced positive revenue growth since the economic downturn, when the property experienced a revenue decline and profit decline of 17.3% and 25.6%, respectively. Additionally, the property experienced a minimal 2.4% decline in 2016 that is attributed to the Zika virus outbreak, which affected tourism not only on the island of Aruba but the Caribbean as a whole, as the disease received significant news and media coverage. The management team is expecting an increase in revenue growth over the next year, as many islands in the Caribbean were demolished or are still dealing with the repercussions of the catastrophic 2017 hurricane season. Tourism and its related services account for the island’s largest demand generator, accounting for 50.0% to 60.0% of total gross domestic product, with over 35.0% of total employment in Aruba driven by tourism.

The subject has achieved consistent RevPAR growth over the past few years, with the trailing 12 months (T-12) ending November 31, 2017, RevPAR of $331.13, representing a 14.6% increase over the 2013 RevPAR figure of $289.05. Such RevPAR growth is attributable to ongoing renovations at the property in addition to general market conditions. In total, the property has undergone $51.9 million ($126,192 per key) in renovations since 2010, including a complete overhaul of the lobby to comply with Marriott brand standards and to modernize the space. Additionally, the island has a building moratorium on any new resort development, though some hotel construction exceptions have been made over the years. As a result, there is a new Hyatt Place under construction near the airport, though it will not be competitive with the subject, and no new competitive supply is anticipated over the next several years, as the process to obtain government approval is complicated and extensive. The Government of Aruba essentially owns almost all of the land on the island, and land can only be obtained on a long lease. The subject is currently encumbered by a ground lease with the Government of Aruba that has an initial expiration date in 2052; however, the lessor has a statutory obligation to enter into a new lease when the ground lease expires.

The DBRS value of $232.5 million represents a substantial 26.1% discount to the as-is appraised value of $315.0 million, resulting in a moderate DBRS loan-to-value of 83.9%. The DBRS cap rate of 11.25% is approximately 200 basis points above the appraiser’s cap rate on year one net cash flow (NCF), allowing for significant reversion to the mean in lodging valuation metrics. The subject loan consists of a $135.0 million senior note (Note A) and a $60.0 million subordinate note (Note B), both of which are assets of the trust, with the total exposure to the trust being equivalent to the $195 million whole loan amount. The loan benefits from additional cash equity of $6.5 million, and with a DBRS Term debt service coverage ratio (DSCR) of 2.23 times (x), DBRS considers there to be marginal term default risk, even though hotels typically exhibit higher cash flow volatility compared with other property types. The DBRS NCF is approximately 9.9% below the T-12 ending November 30, 2017, level, resulting in a DBRS Refi DSCR of 1.17x that exhibits moderate refinance risk given the very high applied refinance constant of 11.50%. As a result of the property’s strong location, the sponsors’ continued investment resulting in consistent average daily rate growth related to the recent renovations, lack of competitive new supply and relatively strong DBRS Debt Yield of 13.4%, DBRS anticipates that the mortgage loan will perform well over the five-year loan term and will have a high likelihood of refinance.

Class X is an interest-only (IO) certificate that references a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated reference tranche adjusted upward by one notch if senior in the waterfall.

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

For more information on this transaction and supporting data, please log into www.viewpoint.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS Viewpoint platform.

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

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains the description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not require due diligence services outlined in Form-15E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

The principal methodology is North American Single-Asset/Single-Borrower Methodology, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance-related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. 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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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

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

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