Morningstar DBRS Confirms Credit Ratings on All Classes of FS Commercial Mortgage Trust 2023-4SZN

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2023-4SZN issued by FS Commercial Mortgage Trust 2023-4SZN as follows:

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

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction, which remains in line with Morningstar DBRS' expectations. In the relatively short time since closing, the underlying collateral -- Four Seasons Palm Beach and Four Seasons at The Surf Club -- have demonstrated improvements in operating performance with increases in occupancy and net cash flow (NCF) that, as of the most recent reporting, have surpassed the Morningstar DBRS and issuer's underwritten figures.

The two luxury hotel and resort properties consist of 309 keys, including 25 condominium units that are owned by third parties and managed by the sponsor subject to a revenue-sharing program. The properties are well located on the eastern seaboard of South Florida and offer a combined 1,300 feet of direct ocean frontage. In addition to exceptional accommodations, the properties offer luxurious amenities, including outdoor resort-style swimming pools, beachfront cabanas, a full-service spa, and food and beverage (F&B) outlets run by world-renowned chefs. Both properties carry the prestigious AAA Five Diamond designation. Since 2019, the sponsor has invested more than $80.0 million towards upgrading the Four Seasons Palm Beach property, having renovated all 207 rooms and suites, the F&B outlets, and the ballrooms and meeting space.

The $410.0 million whole-loan refinanced existing debt with approximately $56.5 million of cash-out proceeds returned to the sponsor, Fort Hospitality Group (Fort). Fort owns several other luxury hotels and resorts in Florida, including Four Seasons Hotel Miami, Four Seasons Hotel Fort Lauderdale, and The Surf Club at Norman's Cay. The four-year fixed-rate loan is interest-only (IO) through its maturity in November 2027. Prepayment of the loan is locked out except for the last 12 months of the loan term.

According to the financial reporting for the trailing 12 (T-12) months ended June 30, 2024, the collateral generated NCF of $56.6 million (a debt service coverage ratio (DSCR) of 1.52 times (x)), 76.0% higher than the Morningstar DBRS NCF figure of $32.1 million (a DSCR of 0.89x). However, the growth in NCF was driven by a decrease in expenses, with income relatively in line with Morningstar DBRS' expectations. The servicer reported revenue figure of $180.7 million for the T-12 months ended June 30, 2024, was only marginally higher than the Morningstar DBRS figure of $174.7 million at issuance. The decline in expenses reported for the T-12 month period ended June 30, 2024, is unlikely to be sustained given that the historical reporting made available at issuance shows expenses were significantly higher than the servicer's most recently reported figures. Morningstar DBRS requested STR reports for the collateral properties, but those files have not been received as of the date of this press release. According to the most recent servicer reporting, the portfolio was 62.6% occupied as of June 2024, a nominal increase from the YE2023 and issuance figures of 60.3% and 58.7%, respectively. Comparatively, Morningstar DBRS assumed an occupancy rate of 58.1% at issuance.

At issuance, Morningstar DBRS derived a value of $450.3 million based on a capitalization rate of 7.14% and the Morningstar DBRS NCF noted above. The Morningstar DBRS value represents a -43.7% variance from the issuance appraised value of $799.8 million. The resulting Morningstar DBRS loan-to-value ratio (LTV) was 91.1% compared with the LTV of 51.3% based on the appraised value at issuance. Morningstar DBRS maintained positive qualitative adjustments totaling 7.0% to reflect the exceptional quality of the portfolio and its strong historical performance and management under Four Seasons, which is deemed one of the best luxury hotel operators in the world. There is limited competition, construction, or development of similar products in the area and, as such, Morningstar DBRS believes that the portfolio will continue to perform well.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS 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 Morningstar DBRS 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, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

Class X is an IO certificate that references 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 Morningstar DBRS.

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

The principal methodology is North American CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

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.

Morningstar DBRS 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 Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- North American Single-Asset/Single-Borrower Ratings Methodology (September 19, 2024), https://dbrs.morningstar.com/research/439699

-- Rating North American CMBS Interest-Only Certificates (June 28, 2024), https://dbrs.morningstar.com/research/435294

-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702

-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623

-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283

-- Legal Criteria for U.S. Structured Finance (October 28, 2024), https://dbrs.morningstar.com/research/441840

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.