DBRS Morningstar Confirms Ratings on HONO 2021-LULU Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2021-LULU issued by HONO 2021-LULU Mortgage Trust as follows:

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

All trends are Stable.

The rating confirmations reflect the transaction’s overall stable performance, which remains in line with DBRS Morningstar’s expectations. The transaction is secured by the borrower’s leasehold interest in a 1,230-room, full-service luxury resort with 94,961 square feet (sf) of retail space in Honolulu’s Waikiki neighbourhood. Built in 1976, the property underwent a complete renovation in 2014 and 2015 for a reported $100.0 million ($81,300 per room) and was subsequently acquired by the sponsor in 2016 for $780.0 million (approximately $634,000 per room). The property is managed by the Hyatt Corporation (Hyatt) and has operated under the Hyatt Regency flag since it opened. The sponsor is an affiliate of Mirae Asset Global Investments Co., Ltd, a global real estate investment firm that owns a portfolio of various property types, including office, industrial, multifamily, and hospitality. The loan has a two-year initial term with three successive one-year extension options.

The collateral consists of a high-quality full-service hotel and resort in Waikiki, a high-barrier-to-entry urban neighbourhood in Honolulu. The property features 1,230 guest rooms, nearly 95,000 sf of open-air retail space, 20,510 sf of meeting and event space, and various other amenities including a 10,000-sf full-service spa. In addition to room revenue, the subject generates revenue from alternative sources including food and beverage, retail, resort fees, space rentals, and commissions, among other items.

The resort features more than 94,000 sf of retail space in the Pualeilani Atrium Shops, including approximately 84,000 sf on three levels encircling an open-air atrium, and the remaining 10,000 sf on the ground floor of the nearby convention centre/parking garage. As of the September 2021 rent roll, the retail component featured 40 local and national shops and restaurants. Some of the largest and better-known retailers at the property include Urban Outfitters, Billabong, Ugg, Dylan’s Candy Bar, Sunglass Hut, and ABC Discount Stores. Although an updated rent roll was not provided, there is generally limited near-term rollover risk within the 10 largest retail tenants.

As is the case with most beachfront development in Hawaii, the property is encumbered by ground leases. The primary hotel and retail structure is subject to two separate ground leases, while the convention space and parking garage are each subject to a separate ground lease. All four ground leases are scheduled to expire on December 21, 2087, and contain rent provisions that escalate at five- and 10-year intervals.

As of the STR report for the trailing 12 months (T-12) ended March 31, 2022, the hotel’s occupancy, average daily rate (ADR), and revenue per available room (RevPAR) were 58.0%, $220.18, and $127.73, respectively. Comparatively, the STR report for the T-12 period ended July 31, 2021, reported the hotel’s occupancy, ADR, and RevPAR at 22.1%, $210.38, and $46.56, respectively. At YE2019, the last full year of stabilized operations prior to the start of the pandemic, the hotel achieved occupancy, ADR, and RevPAR of 90.7%, $275.74, and $250.03, respectively. Historically, the property’s hotel and retail components have performed considerably well given its Hyatt brand affiliation and irreplaceable location in Waikiki’s main shopping and dining district.

Overall, the loan benefits from its prime location, long-term management, and strong, experienced sponsorship. The collateral has operated under the Hyatt Regency flag since it opened in 1976 and the current management agreement runs through December 31, 2062.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929.

Classes X-CP and X-EXT are interest-only (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.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loan including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data. For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com.

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

The principal methodology is North American CMBS Surveillance Methodology (March 4, 2022), which can be found on 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 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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@dbrsmorningstar.com.

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.

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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