DBRS Morningstar Changes Trends on Five Classes to Stable from Negative, Confirms All Classes of Hilton USA Trust 2016-SFP

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2016-SFP issued by Hilton USA Trust 2016-SFP as follows:

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

DBRS Morningstar also changed the trends on Classes A, B, C, D, and X-NCP to Stable from Negative. The trends on Classes E, F, and X-E remain Negative as the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) pandemic. DBRS Morningstar also maintained its Interest in Arrears designation on Class F. The rating confirmations are reflective of the generally stable performance since the last DBRS Morningstar rating actions for this transaction, with no delinquencies or defaults reported by the servicer.

The $725 million transaction is secured by the borrower’s fee and leasehold interest and the operating lessees’ leasehold interest in two full-service hotels within San Francisco’s Union Square—Hilton San Francisco Union Square and Hilton Parc 55 San Francisco. The hotels are well located in San Francisco’s Tenderloin District, just off Market Street and less than 0.5 miles from the Moscone Convention Center. The Hilton Union Square property is a 1,919-room, convention-oriented hotel that includes 130,000 square feet (sf) of meeting space. The hotel is the largest in San Francisco and derives about 40% of its demand from the meetings and group segment.

The 32-story Parc 55 property is the fourth-largest full-service hotel in San Francisco, with 1,024 guest rooms and 28,000 sf of meeting space. After acquiring the property in 2015, the sponsor invested $5.5 million in upgrades to meet Hilton standards. According to the appraisal, the guest rooms, lobby, and meeting space were renovated for $30 million between 2008 and 2009.

The coronavirus pandemic caused economic strain on both hotels for most of 2020, with bookings likely still quite low compared with historical trends given the reliance on business and corporate travel and the continued depressed demand in that sector. While leisure travel has experienced a slight recovery in recent months, corporate and business travel will likely continue to remain stagnant in the near term given the likelihood that event bookings for the nearby Moscone Convention Center will continue to be minimal until the coronavirus pandemic has been largely controlled. The facility previously served as a vaccination site for the city, but that site was closed in July 2021.

As of August 2021, the loan was on the servicer’s watchlist for coronavirus-related issues. A loan modification was granted in September 2020, allowing for the deferral of monthly furniture, fixture, and equipment reserve collections for a period of six months and a waiver of the debt yield test through June 2021. As expected, the loan produced negative cash flow in 2020 given that both hotels were closed for most of 2020 and during the first quarter of 2021 before reopening in May 2021 and June 2021. The loan has remained current during the pandemic. Historically, the loan maintained strong performance with a debt service coverage ratio of 3.10 times as of year-end 2019.

According to STR, Inc. reports on file with DBRS Morningstar, both hotels lagged behind competitors in term of average daily rate (ADR) and revenue per available room (RevPAR) during 2019 and 2020. According to an April 2021 STR, Inc. report, during 2020 the Union Square hotel had penetration rates of 91.0% for ADR and 93.2% for RevPAR, while the 55 Parc hotel had penetration rates of 93.2% for ADR and 91.9% for RevPAR. The lags in performance as compared with the competitive set prior to the pandemic could suggest a longer runway for stabilization as travel picks back up to pre-pandemic levels, further supporting the Negative trends on the lowest-rated classes as of this review.

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 C and D 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.

Classes X-NCP and X-E 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.

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 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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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

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