DBRS Morningstar Confirms Ratings on GS Mortgage Securities Corporation Trust 2018-HULA, Removes Ratings From Under Review With Negative Implications

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the 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-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)

DBRS Morningstar removed all classes from Under Review with Negative Implications, where they were placed on March 27, 2020. All trends are Stable. The rating confirmations and Stable trends reflect DBRS Morningstar’s current outlook on the medium- to longer-term prospects for the return to stability for the collateral for this loan, the Four Seasons Resort Hualalai. Although performance metrics for the resort hotel continue to lag historical figures amid the effects of the Coronavirus Disease (COVID-19) pandemic, DBRS Morningstar notes that the loan has remained current and a relief request has not been processed by the servicer since the start of the pandemic. In addition, the sponsor has recently invested significantly in a major renovation for the property, suggesting a long-term commitment to the asset, which should be well positioned to capture increased demand as leisure travel continues to increase around the globe.

The subject transaction closed in July 2018, with an original trust balance of $350 million. The collateral resort is an ultra-luxury hotel and resort located on the Big Island of Hawaii and consists of (1) a 243-key resort spread across 39 acres, (2) a private membership club, and (3) at issuance, 250 acres of residential master-planned community. With the exception of the residential lots, the collateral is subject to a ground lease. The underlying land is owned by the Trustees of the Estate of Bernice Pauahi Bishop. The ground lease expires in December 2061, with no renewal options. The borrower pays a minimum rent of $4.2 million and a percentage of revenue through December 2026.

The collateral property is currently undergoing a large scale renovation, which began in mid-2020 at a reported cost of $100 million. An October 7, 2020, press release issued by Four Seasons announced the project and confirmed renovations for all rooms would be completed to upgrade finishes and furniture, with a new bungalow building to be constructed that would add six new rooms along the property’s oceanfront. Amenities were to be upgraded, as well, with significant work to be completed at King’s Pond, the property’s swimmable aquarium, and to other pools at the property. Finally, the property’s golf course was to be upgraded with new features and a new turf. In March 2021, the borrower advised that approximately 85% of total rooms were available for guest use and that construction was expected to be complete in September 2021.

Loan proceeds of $450.0 million were used to retire outstanding debt of $373.3 million (including the $300.0 million commercial mortgage-backed security (CMBS) mortgage loan securitized in GSCCRE 2015-HULA), return $62.2 million of equity to the sponsor, and cover reserves as well as closing and origination costs. Total financing includes an additional $100 million B note held outside the trust. The borrower has exercised two one-year extension options since issuance, with the maturity date most recently extended to July 9, 2022. The borrower has three additional one-year extension options remaining. The borrower has not requested, or received any financial relief since the onset of the coronavirus pandemic. Since issuance, there has been a principal reduction in the Senior A note of $22.6 million, primarily as a result of land being sold for residential development. As of August 2021, the unpaid principal balance is $327.4 million.

DBRS Morningstar was previously monitoring performance declines for the property that were attributed to the eruption of the Kilauea volcano in 2018, which caused a disruption in tourism on the island. Most recently, the coronavirus pandemic and a large property wide renovation have caused additional disruptions to property performance throughout 2020 and into the first half of 2021. Net cash flow (NCF) declined by 148.5% between year-end (YE) 2019 and YE2020, a direct product of the drastic revenue decline for the resort during that time period.

It is noteworthy that, even with pandemic-driven challenges, the subject property continues to drastically outperform its competitive set in terms of average daily rate (ADR) and revenue per available room (RevPAR). According to the trailing 12-month period (T-12) ended June 2021 STR, Inc. report, the property's occupancy, ADR, and RevPAR were 50.7%, $1,434, and $894, respectively, compared with the competitive set averages of 41.2%, $523, and $215, respectively. The subject’s occupancy was reported at 64.9% as of the T-3 ended June 2021 STR report, suggesting recent bookings have ticked up, likely as a result of increased vaccination rates, demand for leisure travel, and border re-openings. As such, DBRS Morningstar expects performance metrics will likely improve in the coming financial reporting periods, assuming disruptions caused by recent surges in the Delta and other coronavirus variants do not significantly affect the property’s recent progress.

According to the YE2020 financials, the NCF and debt service coverage ratio (DSCR) were -$11.7 million and -0.78 times (x), respectively, compared with $24.1 million and 1.07x at YE2019. Revenue fell 78.2% between YE2019 and YE2020, fueled primarily by a decrease in room and food revenue. Operating expenses during the same period declined 64.5%.

The DBRS Morningstar ratings assigned to Classes B, C, D, E and F were higher than the results implied by the LTV Sizing Benchmarks from the October 2020 review. The variances were the result of conservative assumptions applied given the in-place cash flow declines prior to the onset of the coronavirus pandemic and the likelihood of continued disruption amid the pandemic.

This year’s analysis made no new adjustments to the DBRS Morningstar value derived at last year’s review, but gave credit to the $22.6 million principal repayment previously outlined. The DBRS Morningstar ratings assigned to Classes B and C with this year’s review were higher than the results implied by the LTV Sizing Benchmarks when accounting for the paydown. These variances are also generally the result of conservative assumptions made in light of the performance challenges, but as DBRS Morningstar expects the collateral will be well positioned to capture increased demand as the effects of the pandemic lessen, the variances are warranted.

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/373262.

Class X-NCP is an interest-only (IO) certificate that references 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.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans 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. The platform includes issuer and servicer 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 methodology is the North American CMBS Surveillance Methodology (March 26, 2021), 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.

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.

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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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