Surf's up: Iconic beachfront hotel is top loan in Barclays' next CMBS

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Barclays' next offering of commercial mortgage bonds features heavy exposure to a beachfront hotel with deep ties to Northern California's surfing culture.

A $55 million whole loan for the Dream Inn hotel in Santa Cruz, Calif., is the largest of 44 loans backing the $891.8 million transaction, called BBCMS Mortgage Trust 2018-C2. The hotel property was the site of the first branded Surf Shop store opened by the late surfing icon Jack O’Neill. As the only beachfront hotel in the Santa Cruz area about 90 miles south of the San Francisco Bay area, It has been drawing tourists since 1962.

In total, the portfolio of loans is a diversified mix both geographically (23 states) and in property type including office buildings (32.7% of the pool), retail (24.8%), lodging (19.1%) and mixed-use (14.8%).

All of the loans were originated by Barclays, Cantor Commercial Real Estate Lending, Starwood Mortgage Capital and KeyBank.

The pool has current loan-to-value ratio of 90.1%, according to S&P; the properties produce cash flow enough for a debt-to-service coverage ratio of 1.68x. Seventeen of the loans pay only interest, and no principal, for their entire terms; another are interest only for part of their terms.

Ratings agency reports show that 14 of the loans (47.8% of the pooled trust balance) have pari passu partial loan balances held outside the trust, with 10 of the loans secured by multiple properties – a portfolio approach that factors into taming net cash flow volatility. Sixteen loans are single-property tenants, including the Moffett Towers complex in Sunnyvale, Calif., that is leased to a subsidiary of Amazon. A portion of the Moffett Towers loan has already been securitized by Citibank.

At 6.2% of the pool balance, Dream Inn represents the largest loan in the portfolio, issued to longtime owner Ensemble Investments. The loan is intended to refinance $43.6 million in existing debt for the boutique 165-room hotel and pay out $9.8 million to Ensemble, a Long Beach, Calif.-based CRE investor and developer. Ensemble has expended $28.7 million in capital expenditures renovating the property since buying it in 2006.

The owners have had slowing revenue-per-room returns in recent years due to the renovations that kept 9,800 room nights offline during 2016 and 2017, but expect net cash flow to increase with more forward bookings in 2019.

Also included in the transaction is a $54.8 million loan participation for the Christiana Mall, a super-regional mall in Newark, Del.

The top five loans make up 29.5% of the pooled trust balance, and the top 10 represent 48.8%.

S&P, Fitch Ratings and DBRS all expect to assign triple-A ratings to the super senior tranches of notes to be issued in the transaction.

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