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Starwood Property Trust going it alone in the CMBS market

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The first commercial mortgage securitization to hit the market after Labor Day is backed by a portfolio of 10 hotels.

Taylor Woods and Howard Wu, the founders of Urban Commons, a privately held real estate and development firm based in Los Angeles, obtained $375 million of loans from Starwood Property Trust to refinance the portfolio and buy out the equity interests of limited partners, according to Moody's Investors Service.

Starwood is using a $225 million first mortgage, which pays a floating rate of interest, and no principal, for its entire extended term of up to five years, as collateral for a transaction called STWD 2018-URB Mortgage Trust.

Starwood frequently contributes commercial mortgages it has underwritten as collateral for conduit deals underwritten by investment banks; in this case, however, it is acting as the sponsor of the transaction, and will hold a 5% economic interest in the deal in order to comply with risk retention requirements, per Moody's.

Moody's expects to assign an Aaa to the $88 million senior tranche of notes to be issued; there are also six subordinate tranches of notes with ratings ranging from Aa3 to B3.

Wells Fargo Bank will act as the servicer and AEGON USA Realty Advisors as the specialty service, according to Moody’s.

Among the strengths of the deal, according to Moody’s, are the geographic diversity of the portfolio, which contains 2,977 guest rooms located across three states and seven markets. However, California represents by far the largest state concentration with seven properties totaling 1,502 keys, or approximately 65.2% of the allocated loan amount and 80.7% of the net cash flow for the trailing 12 months.

All 10 hotels operate under one of three major brands including Marriott International (43.2% of allocated loan amount, InterContinental Hotels Group (42.2%) and Hilton Hotels & Resorts (14.6%) and benefit from the brand’s reservation systems and national marketing efforts.

However, six of the 10 properties are in a “transitional phase” after completing significant renovations and currently operating with below market occupancy. “Given this factor, we believe there is increased risk in these properties achieving stabilized cash flow in line with historical levels,” the presale report states.

The sponsors have spent approximately $98 million ($32,922 per key) on capital improvements since 2013. Each hotel with the exception of Holiday Inn & Suites Anaheim Disneyland recently underwent a major room renovation during that period. And Anaheim Disneyland is anticipated to go through a major renovation estimated at $6.9 million ($27,000/key) in connection with its franchise expiration in 2021 that will be funded from loan reserves.

Another potential concern is the fact that the borrowers used the financing from Starwood to cash out approximately $3.7 million of equity; another $67.3 million was used to buyout limited partners. Woods and Wu still have “implied” equity of $207 million, based on the as-is appraised value of $432 million, however.

Moody’s puts the loan-to-value ratio of the portfolio at 117.2%, based on its own, lower valuation, but this is based solely on the first mortgage; after taking into consideration the mezzanine debt, the LTV rises to 195.3%.

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