DBRS Finalizes Provisional Ratings on GSCCRE Commercial Mortgage Trust 2015-HULA

DBRS, Inc. (DBRS) has today finalized its provisional ratings on the following classes of GSCCRE 2015-HULA Mortgage Trust. The trends are Stable.

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

The loan is secured by the fee simple and leasehold interests in three distinct components of Hualalai at Historic Ka’upulehu, a master-planned luxury resort community situated on a 724.9-acre site along the desirable Kohala Coast in Kailua-Kona on the Big Island of Hawaii. The collateral includes the leasehold interest in (1) the Four Seasons Resort Hualalai (Hotel Component), a 243-key ultra-luxury resort hotel and (2) the private membership Hualalai Club operated by the Four Seasons (Resort/Club Component) as well as the fee simple interest in (3) the remaining 55 acres of residential land within the larger 250.0-acre master-planned residential resort community (Residential Land Component). Improvements for the Hotel and Resort/Club Components are situated on land owned by trustees of a private family trust (Trustees of the Estate of Bernice Pauahi Bishop), under a ground lease extending through December 2061. Ground lease payments are determined on an annual basis based on the greater of a minimum base rental fee or total percentage rent calculations. Percentage rents are calculated from annual sales for applicable Hotel and Resort/Club revenue streams using pre-determined rates that are mutually agreed upon every ten years by both parties.

The loan sponsor is a joint venture between MSD Capital, L.P. (MSD), an investment vehicle for Michael Dell and family (approximately 50% interest), and Lake Avenue Investments, an investment vehicle for a high-net worth family (approximately 50% interest). MSD was founded in 1998 and currently has $13.0 billion of capital under management, including similar luxury resorts – the Four Seasons Maui and Fairmont Miramar hotel in Santa Monica. In 2006, MSD along with Rockpoint Group, LLC acquired all three components of the loan collateral for redevelopment at a total estimated purchase price of $561.6 million. Upon acquisition, the sponsors developed an extensive capital improvement plan along with Four Seasons, which was implemented during 2008 and 2009. The total cost of improvements was estimated at $49.5 million ($203,843 per key) and included the conversion of 20 oceanfront standard guest rooms to suites; upgrades to all other standard guest rooms and suites; extensive renovations to select hotel and Resort/Club amenities, including the spa, two of the restaurants and one of the swimming pools; and the addition of new retail boutiques. In keeping with the sponsors’ plan to continue increasing the average daily rate and occupancy, the sponsors plan to invest an additional $10.0+ million ($41,000 per key) on guest room and common area upgrades/renovations over the next two years.

Loan proceeds of $375.0 million are being used to refinance existing mortgage debt of $198.4 million, retire preferred equity of $112.1 million, return $55.4 million of equity to the sponsors (pro rata repatriation), pay closing costs of over $6.6 million as well as fund upfront reserves of nearly $1.4 million and prepaid interest of $1.1 million. The total mortgage loan has a floating interest rate and consists of a $300.0 million senior note (Note A or Trust Asset) and $75.0 million in subordinate notes ($35.0 million for Note B and $40.0 million for Note C). The loan is interest-only and has an initial two-year term with various options to extend by another five years.

As a result of the high-quality luxurious resort property, irreplaceable beachfront location with extremely high barriers to entry and subordinate B and C notes, the certificates backed by the $300.0 million Note A are assigned ratings of between AAA and B (low). The resulting DBRS net cash flow (NCF) was $31,249,452, a variance of -3.3% to the Issuer’s NCF. Additionally, the DBRS underwritten (UW) NCF represents a -9.6% variance from the trailing 12-month period ending July 31, 2015, which is primarily driven by the higher UW ground lease expense that occurs in 2017 as well as a more conservative view of the Resort/Club operations. DBRS applied a 9.0% cap rate to the DBRS UW NCF, resulting in a DBRS value of $347.2 million. The cap rate utilized by DBRS matches the lowest cap rate DBRS has used for hotels, including the Fontainebleau Resort Hotel in Miami Beach, which was securitized in 2012. This cap rate allows for significant reversion to the mean in lodging valuation metrics as it is likely at least 300 basis points wide of the current market cap rate according to the appraisal’s concluded cap rate of 6.0% for the hotel. DBRS value represents a notable 44.8% discount to the appraiser’s as-is value of $631.6 million, which comprises $532.0 million for the hotel component, $57.0 million for the Club component and $42.6 million for the Residential Land Component.

On October 7, 2015, DBRS was notified that a lawsuit had been filed on October 5, 2015, against the borrower of the loan for this transaction and Four Seasons management in relation to the Resort/Club Component. The lawsuit was brought forth by one of the residential home owners within the Hualalai resort community who has been a property owner and private member of the Hualalai Resort Club since 2000. The Plaintiff is alleging, among other things, that (1) certain characteristics of the Hualalai Resort Club were falsely represented (i.e., quality, cost, etc.), (2) the borrower continues to build and sell new homes despite overcrowding at the Resort facilities and (3) the water rates charged to homeowners are significantly higher than elsewhere on the island. The Plaintiff seeks declaratory and monetary relief, including treble damages. Actual dollar amounts sought by the Plaintiff were not disclosed in the documents that DBRS has received as of the closing of this transaction. DBRS believes that the pending litigation would have at most a very minimal impact on the cash flow from the Hualalai Resort Club operations, which currently represents only 6.2% of the total DBRS UW NCF. Furthermore, DBRS’s underwriting approach, which significantly haircuts the Resort/Club NCF, could likely offset any adverse effects that the pending litigation might have on the sale/resale of residential homes within the community and ultimately the cash flow achieved from the Resort/Club operations. Based on the rationale above, DBRS analysis and stabilized NCF was not affected.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is North American CMBS Rating Methodology, which can be found on our website under Methodologies.

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains the description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not require due diligence services outlined in Form-15E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.

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