DBRS Morningstar Assigns Ratings to Hilton USA Trust 2016-HHV, Places Certain Classes Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2016-HHV issued by Hilton USA Trust 2016-HHV as follows:

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

The trends for Classes A, B, X-A, and X-B are Negative because the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic.

DBRS Morningstar has also placed Classes C, D, E, and F Under Review with Negative Implications, given the negative impact of the coronavirus on the underlying collateral.

These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about October 8, 2020. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, at www.dbrsmorningstar.com. On March 27, 2020, DBRS Morningstar placed the ratings on its outstanding SASB transactions secured by hospitality properties Under Review with Negative Implications while MCR placed the ratings on its outstanding SASB transactions secured by hospitality properties Under Review Negative as the global shelter-in-place and travel restrictions related to the coronavirus have had an extreme impact on the short-term performance of this asset class. For further information on these rating actions, please see the DBRS Morningstar press release dated March 27, 2020, at www.dbrsmorningstar.com and the MCR press release dated March 27, 2020, at www.morningstarcreditratings.com.

To assign ratings to this transaction, DBRS Morningstar considered both the impact of the updated NA SASB Methodology and its scenarios attributable to the ongoing coronavirus pandemic on the ratings.

Because of the coronavirus’ significant impact on hospitality performance, DBRS Morningstar first considered the application of the updated NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology” to arrive at a baseline result, which incorporated qualitative assumptions, capitalization rates, and loan-to-value (LTV) ratio sizing benchmark quality/volatility adjustments and excluded any potential changes in current or future expected asset performance resulting from the coronavirus.

DBRS Morningstar then overlaid scenarios incorporating market value declines (MVDs) consistent with the projections in its “Global Macroeconomic Scenarios: September Update” published on September 10, 2020, on top of the baseline result to determine the impact of coronavirus-related changes in asset performance on the subject transaction on a tranche-by-tranche basis. For more information on these scenarios, please refer to the Coronavirus Impact Analysis section of this document. The global macroeconomic scenarios include a moderate decline of 15% for all commercial real estate (CRE), which acts as an average for all CRE property types. However, DBRS Morningstar expects a higher stress for hospitality properties, ranging from 25% to 45% based on the type of demand segmentation and asset location, and expects corporate demand and remote fly-to locations to be at the higher end of the value decline.

LOAN/PROPERTY OVERVIEW
The Hilton USA Trust 2016-HHV transaction is backed by a single, 10-year, fixed-rate, interest-only (IO) first mortgage loan on the Hilton Hawaiian Village, a full-service luxury resort hotel in Waikiki, Hawaii. The mortgage loan has a principal balance of $1.275 million, of which $750.0 million was contributed to the trust, and a fixed interest rate of 4.1995%. The initial maturity date was set at November 1, 2026. The refinancing returned $10.6 million of cash equity back to the sponsor.

Since construction in 1961, the Hilton Hotel organization has owned and managed the property as an upscale resort hotel. The 2,860 hotel rooms are contained within five oceanfront guest towers with views of Waikiki Beach. The resort has the longest stretch of beach along Waikiki and the largest amount of meeting space among its competitors. The predominant area of collateral land is owned fee simple. The only leased parcel is used for staff housing. Amenities at the hotel complex include 65,373 square feet (sf) of indoor meeting space, three restaurants, four lounges and several other food and beverage (F&B) outlets, five outdoor pools, fitness centers, a full-service spa, a boat dock, a lagoon, a 1,978-space garage, and 138,000 sf of leased commercial space. The hotel has the largest meeting and conference facilities in the Pacific. According to management, the hotel attracts 75% of its guests from North America and 25% from Japan.

The hotel was renovated and updated almost continuously from 2008 to 2016. Over that time period, Hilton spent $232.2 million, or $81,188 per room, on capital improvements to guest rooms, public space and lobby, F&B outlets, meeting space, back-of-house facilities, and other discretionary improvements.

The sponsor for the transaction is Park Intermediate Holdings, LLC, a wholly owned subsidiary of Park Hotels & Resorts. In 2017, Hilton Worldwide Holdings Inc., formerly Hilton Hotels Corporation, spun off Park Hotels & Resorts, which is now one of the largest publicly traded real estate investment trusts in the U.S. hospitality industry. Hilton Management LLC, a subsidiary of Hilton Worldwide, manages the hotel under a management contract with an initial term of 30 years and two 20-year extension options. Ownership has limited termination rights.

The Oahu, Hawaii, hotel market is a historically strong performer and had been one of the best-performing markets in the country. Occupancy at the hotel had been very strong both before and after loan origination, running between 93% and 95% since 2016, and outperforming its competitive set. The net operating income for 2019 was up 12% from loan origination. Average daily rates had been slowly on the uptick and exceeded $270 per occupied room by the trailing 12 months ended June 30, 2020, while average occupancy was reported at 84%.

This year has seen a drastic change to the Oahu hotel market. The coronavirus pandemic and economic lockdown in mid-March crushed the local economy. The governor responded to the pandemic by closing the island’s tourism-related industry and has now further delayed the reopening date for the tourism sector from September to October 2020.

The Hilton Hawaiian Village hotel temporarily shut down operations on April 13, 2020, and remains closed. Website reservations are closed until mid-December 2020. Upon reopening, the hotel will institute health and safety procedures for all employees and hotel guests.

DBRS Morningstar reanalyzed the net cash flow (NCF) derived at issuance for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The resulting NCF figure was $134.0 million and DBRS Morningstar applied a cap rate of 8.0%, which resulted in a DBRS Morningstar Value of $1.68 billion, a variance of 24.9% from the appraised value of $2.23 billion at issuance. The DBRS Morningstar Value implies an LTV of 76.1% compared with the LTV of 57.2% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the middle end of the range of DBRS Morningstar Cap Rate Ranges for lodging properties, reflecting the hotel’s quality, high barriers to entry, and predominately fee-simple ownership structure.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis totaling 4.50% to account for cash flow volatility, property quality, and market fundamentals.

CORONAVIRUS IMPACT ANALYSIS
DBRS Morningstar overlaid various scenarios incorporating MVDs consistent with the projections in the “Global Macroeconomic Scenarios: September Update” (https://www.dbrsmorningstar.com/research/366542) to estimate the impact of coronavirus-related changes in asset performance on a tranche-by-tranche basis for the subject transaction. The scenarios included subjecting the most recent appraised collateral value to generalized CRE asset value decline projections with an assumption of approximately 45% under the moderate scenario. In cases where the rated debt exceeded the scenario value, DBRS Morningstar assumed that a principal writedown had occurred to account for the difference. Because of the reverse-sequential allocation of losses in commercial mortgage-backed security (CMBS) transactions, DBRS Morningstar’s analysis considered the most subordinate certificate first and, if a complete principal writedown of the certificate had occurred during the scenario, DBRS Morningstar repeated the analysis for the second-most subordinate certificate and so on until the rated debt no longer exceeded the scenario value.

Under the moderate scenario, the cumulative rated debt through Class F exceeded the scenario value and DBRS Morningstar presumed that the coronavirus had affected the class.

The DBRS Morningstar ratings assigned to Classes C and D vary by three of more notches from the results implied by the LTV sizing benchmarks when MVDs are assumed under the Coronavirus Impact Analysis. These classes are Under Review with Negative Implications as DBRS Morningstar continues to monitor the evolving economic impact of the coronavirus-induced stress on the transaction.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Classes X-A and X-B are IO certificates that reference 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 ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2020) and North American CMBS Surveillance Methodology (March 6, 2020), which can be found on www.dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on www.dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. 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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

DBRS Morningstar’s North American CMBS analytical team will continue to monitor the transaction to evaluate the increased risk factors related to the coronavirus pandemic. As information (e.g., updated property-level financials, Smith Travel Research Reports, new valuations for specially serviced loans, and workout and/or modification specifics, if applicable) becomes available, DBRS Morningstar will address the Under Review with Negative Implications rating actions over the near to moderate term. DBRS Morningstar typically endeavors to resolve an Under Review rating action within 90 days, but the circumstances surrounding these rating actions (i.e., the unknown length of the pandemic-related downturn) may result in a prolonged resolution period.

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

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