Standard & Poor’s and Morningstar have notably different views on the latest securitization of a single, large commercial mortgage.
CFCRE 2015-RUM CMBS is backed by a $140 million loan secured by the Ritz-Carlton Grand Cayman Hotel located in George Town, Grand Cayman, Cayman Islands. The property, which is secured a $35 million mezzanine loan (not used as collateral for this deal), is owned by Five Mile Capital Partners, a firm known for investing in distressed real estate. Five Mile acquired the Cayman hotel property at auction in October 2012 for the reserve price of $177.5 million.
The mortgage loan was made by Cantor Commercial Real Estate Lending to the borrower on July 9, 2015 and has an initial maturity date of July 9, 2017 but allows for three 12-month extensions for a total five-year term. It pays only on interest for the entire term at a spread of 3.69% over one-month Libor.
Standard & Poor’s plans to rate the senior notes issued by the securitization trust at AA+’; while Morningstar takes a rosier view, rating the notes one notch higher, at AAA.’
The divergence in views is partly a result of differing methodologies.
S&P said in the presale report that the transaction is the first it has rated with its updated CMBS rating methodology for global CMBS. The methodology, which was published on April 6, 2015, limits the ratings of a deal to four notches above the sovereign rating.
Since S&P does not rate the Cayman Islands, it took into consideration publicly available information on the British Overseas Territory to assess the risks associated with operating there; it decided to cap the transaction rating at AA+’. S&P is only rating the $52 million class A tranche, which benefits from 62.34% credit support.
However, S&P also took a more conservative approach when assessing the loan metrics than did Morningstar.
Using the property’s appraised value results in a loan-to-value (LTV) ratio of 47%. However, both rating agencies calculate LTVs using a “through the cycle” methodology, which takes into account long term averages for cap rates rather than current market cap rates. This methodology moderates the effect of the dramatic rise in prices without the corresponding cash flow growth by literally discounting the cash flows by historical averages rather than the subsidized low discount rates of today.
Morningstar based its preliminary rating on its view that the LTV is 65%; S&P’s rating is based on a more conservative LTV calculation of 89.6%. In its presale report, the rating agency said that the LTV is actually 112% when the mezzanine loan is taken into account.
The two rating agencies also calculated the property’s net cash flow (NCF) differently; Morningstar’s calculation is more favorable at $18.2 million compared to S&P’s calculation of $13.5 million.
S&P will not rate the subordinate notes offered from the transaction trust. Morningstar has assigned preliminary ratings of AA-’ to $32.8 million class B notes; A-’ to $15.9 million of class C notes; and BB’ ratings to $12 million of class E notes.
Despite the ratings differences, both rating agencies state in their presale reports that the performance of the Ritz Carlton Cayman property is strong. Annual daily rate, or ADR, occupancy and revenue per available room, or RevPAR have both been trending upwards, with increases of 28.2%, 16.7% and 49.6%, respectively from 2010 through April 2015 trailing 12 months. However S&P noted that although RevPAR grew between 2011 and 2014, the region's 2014 RevPAR was still 12.2% below the prior peak level in 2007.
The deal is expected to close on July 28, 2015.
