DBRS Confirms Ratings of GS Mortgage Securities Corporation Trust 2018-HULA

DBRS Limited (DBRS) confirmed all classes of Commercial Mortgage Pass-Through Certificates, Series 2018-HULA issued by GS Mortgage Securities Corporation Trust 2018-HULA as follows:

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

All trends are Stable.

The rating confirmations reflect the continued stable performance of the collateral since the transaction closed in July 2018. The loan is secured by the fee simple and leasehold interests in three distinct components of the master-planned luxury resort community at the Four Seasons Resort Hualālai, situated along Kohala Coast in Kailua-Kona on the Big Island of Hawaii. Loan proceeds of $450.0 million were used to retire outstanding debt of $373.3 million ($300.0 million CMBS mortgage loan securitized in GSCCRE 2015-HULA), to return $62.2 million of equity to the sponsor and to cover reserves as well as closing and origination costs. The whole loan originally consisted of a $350 million trust note and a subordinate note of $100.0 million. As of the July 2019 remittance, there has been principal repayment of $2.3 million, as portions of undeveloped land that had been included in the collateral were sold for residential development. The loan is structured with an initial two-year interest-only (IO) term with five one-year extension options.

The collateral consists of a 243-key resort spread across 39 acres, a private membership club, and at issuance, 250 acres of residential land planned to become a 483-unit community. The five-star resort and membership club offer eight restaurants, a 30,700-square foot (sf) world-class spa and sports club, seven pools, over 37,000 sf of indoor and outdoor meeting and event space, five retail outlets and two golf courses. The loan was added to the servicer’s watchlist in June 2019, as the debt yield on the whole loan decreased to 5.0% in Q1 2019. As a result, the loan will be subject to a cash trap until the debt yield exceeds 6.25% for two consecutive quarters.

According to the trailing 12-month (T-12) March 2019 STR report, the property's occupancy, average daily rate (ADR) and revenue per available room (RevPAR) were 69.2%, $1,268 and $877, respectively, compared with the competitive set’s reported figures of 70.4%, $370 and $261, respectively. The subject is in line with the competitive set in terms of occupancy; however, it did experience a 19.4% year-over-year occupancy decline primarily driven by the May 2018 volcano eruption. Although the property is 55 miles away from the volcano and was not directly affected, many guests cancelled or postponed their trips to the resort. The subject is drastically outperforming its competitive set in terms of ADR and RevPAR, consistent with its elite brand and offerings. It is DBRS’s opinion that the true competitive set for the subject consists of other luxury resorts found on Hawaii’s other islands.

According to YE2018 financials, the debt service coverage ratio (DSCR) was 1.79 times (x) compared with the DBRS Term DSCR of 1.86x, with the difference mainly driven by a decline in room revenue. The Big Island is a severely supply-constrained market with high barriers to entry given the lack of available zoned resort land and arduous entitlement process. Since the subject was constructed in the 1990s, there have been no new luxury hotels constructed, and there are no new developments planned in the near future. Although the property did experience a substantial decline in occupancy compared with the previous period, due to the subject’s impressive accreditations and high barriers to entry on the Big Island, DBRS expects the property to remain the premier hotel destination for the foreseeable future.

Classes X-CP, X-FP, X-NCP 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.

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

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

The principal methodology is North American CMBS Surveillance Methodology, which can be found on www.dbrs.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 Global Structured Finance Related Methodologies document, which can be found on www.dbrs.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 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@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS 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 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.

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

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