DBRS Morningstar Confirms Ratings on All Classes of Hilton USA Trust 2016-HHV, Removes Four Classes From Under Review With Negative Implications

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2016-HHV (the Certificates) 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)

With this review, DBRS Morningstar removed all classes from Under Review with Negative Implications, where they were placed on September 24, 2020, as a reflection of the increased risks surrounding the Coronavirus Disease (COVID-19) pandemic. With this review, all classes now carry Stable trends, including Classes A, B, X-A, and A-B, which previously carried Negative trends. These rating actions reflect DBRS Morningstar’s view that, despite a significant interruption of operations and cash flow in 2020 related to the pandemic, the underlying hotel property is generally well positioned to rebound from the effects of declines in travel and the assigned ratings adequately reflect the risk of residual effects stemming from the coronavirus pandemic. The loan has performed as agreed since the 2016 close, and, to date, there have been no relief or loan modification requests submitted by the borrower during the pandemic.

The collateral for the Certificates is a $750 million pari passu participation interest in a $1.3 billion whole loan on the Hilton Hawaiian Village, a full-service, luxury, beachfront resort in Waikiki, Hawaii. The hotel consists of five guest towers comprising 2,860 rooms, plus conference space for up to 2,600 attendees. The resort has the longest stretch of beach along Waikiki and the largest amount of meeting space among its competitors. The collateral also includes 138,000 square feet (sf) of leased commercial space on the property.

The collateral is predominantly structured as fee-simple ownership with the only leased parcel used for staff housing. The amenities include 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, and a 1,978-space parking garage. 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, with a total of $232.2 million, or $81,188 per room, spent over that eight-year span on capital improvements to guest rooms, public spaces and lobby areas, F&B outlets, meeting spaces, back-of-house facilities, and other discretionary improvements.

The coronavirus pandemic caused economic strain on the hotel for most of 2020, when the property was closed from April to December. The lag in travel demand, particularly for international travelers, will continue to put significant stress on the hotel’s performance in the short to medium term. The lag in demand could extend longer than previously anticipated, as well, as new strains of coronavirus have caused surges in cases and the need for the reimplementation of social distancing measures. In August 2021, the governor of Hawaii issued a statement urging tourists to limit travel to the island to essential purposes only, but formal travel restrictions have not been implemented by the state or local governments to date.

As of August 2021, the loan remains on the servicer’s watchlist as the hotel’s performance remains distressed as a result of the pandemic. Although the hotel produced negative cash flow in 2020, the sponsor continues to support the loan and has funded any debt service and operating shortfalls without disruption. Furthermore, the hotel has maintained its strong historical performance among its competitors with penetration rates in for occupancy and revenue per available room (RevPAR) above 100% for the trailing 12 months (T-12) ended December in each of the previous three years. According to data for the T-12 ended September 30, 2019, reporting, the hotel achieved a penetration rate of 114.0% for occupancy and 113.6% for RevPAR. The strong historical performance metrics in comparison to similarly positioned hotels suggests the subject has an above-average outlook for recapturing demand as travel patterns stabilize.

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.

The DBRS Morningstar ratings assigned to Classes B, C, D, E, and F are higher than the results implied by the LTV Sizing Benchmarks from the September 2020 review. The variances were the result of market value declines that were assumed at that time as part of the Coronavirus Impact Analysis. For additional information on that analysis, please see the press release dated September 24, 2020.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

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. 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 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 [email protected].

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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