DBRS Morningstar Confirms Ratings on All Classes of Hilton USA Trust 2016-SFP

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-SFP issued by Hilton USA Trust 2016-SFP:

-- 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)

Classes A, B, C, X-NCP, and D have Stable trends. DBRS Morningstar maintained the Negative trends on Classes E, F, and X-E as the underlying collateral continues to face performance challenges because of the lasting effects of the Coronavirus Disease (COVID-19) pandemic, which resulted in temporary closures of the underlying properties between 2020 and 2022. DBRS Morningstar also maintained its Interest in Arrears designation on Class F. The rating confirmations reflect the generally stable performance since DBRS Morningstar’s last review of 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 (Union Square) and Hilton Parc 55 San Francisco (Parc 55). The hotels are well located in San Francisco’s Tenderloin District, just off Market Street and less than 0.5 miles from the Moscone 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-storey 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.

The coronavirus pandemic caused economic strain on both hotels for most of 2020 and 2021 as bookings declined substantially given the reliance on business and corporate as well as leisure travel which have remained depressed since the start of the pandemic. As such, the loan produced negative cash flow in 2020 and 2021 as both hotels were closed for most of 2020 and during the first quarter of 2021 before reopening in May 2021 and June 2021. As of September 2020, the loan was placed on the servicer’s watchlist for low debt service and coverage ratio and coronavirus-related issues. During the same period, a loan modification was granted, 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 noted by the loan sponsor in discussions with the servicer as well as various reports, San Francisco continues to be one of the slowest markets to recover from the effects of the coronavirus pandemic, and continued delays for the return to office for employees of area-based technological companies remains a concern not only in San Francisco but in the greater Bay Area overall. However, according to an article published by The Real Deal on May 24, 2022, the San Fransico hotel submarket has been showing signs of rebound in Q2 2022, with occupancy reaching 67.2% in April 2022, nearly double of the rate reported in April 2021 of 35.5%. Additionally, the subject portfolio’s management remains optimistic for Q2 2022 given the return of larger group events and traditional business travel, and demand generators in close proximity to the hotel such as the Asian Art Museum, and Westfield San Francisco Centre, and Alcatraz Island tours, which are now open. According to the calendar of events at the Moscone Center, event bookings have been increasing since the start of Q2 2022, suggesting some rebound in demand toward pre-pandemic levels. According to the servicer, the subject Hilton complex continues to see increases in group volume, reporting 200 to 500 room nights during peak times in March and April, with association meetings experiencing stronger improvements relative to corporate group programs.

Despite more recent signs of life for the area market, both of the subject hotels continued to face performance challenges throughout 2021, with the sponsor suspending operations at the Parc 55 property between October 2021 and May 2022 from lack of demand. According to the trailing 12 months (T-12) ended March 31, 2022, the properties reported a combined occupancy rate of 12.7%, average daily rate (ADR) of $91, and revenue per available room (RevPAR) of $23. While low occupancy is predominantly attributed to the temporary closure of both properties, demand when the properties have been open has been quite low. According to the T-12 ended March 31, 2022, STR, Inc. report for Union Square, the penetration rates of occupancy, ADR, and RevPAR figures remained depressed at 52.2%, 99.5%, and 51.9%, respectively; on a trailing three-month basis for the same period, the figures are not materially better, suggesting performance for 2022 did not begin on a trajectory that suggests significant improvement for the year as a whole.

Given these factors and the general unknowns with regard to meaningful improvements in demand over the near to moderate term, DBRS Morningstar expects the portfolio’s stabilization to be delayed compared with hotels in other markets serving similar demand bases, supporting the maintenance for Negative trends for three classes with this review. However, it is also noteworthy that the sponsor continues to support the loan and properties by funding shortfalls out of pocket, and has kept the loan current throughout the coronavirus pandemic. The commitment is likely a factor of historical performance, which was quite strong, and the expectation that as the effects of the pandemic continue to subside, room revenues will begin to increase.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or Governance factor(s) that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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.

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

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.

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

The principal methodology is North American CMBS Surveillance Methodology (March 4, 2022), 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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.

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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