DBRS Morningstar Places the Ratings on All Classes of Hilton USA Trust 2016-SFP Under Review With Negative Implications

DBRS Limited (DBRS Morningstar) placed its ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2016-SFP issued by Hilton USA Trust 2016-SFP Under Review with Negative Implications 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)

There are no trends for these rating actions.

The certificates are backed by a $725 million, seven-year, interest-only (IO), fixed-rate, first-mortgage loan on two hotel properties in San Francisco’s Union Square. At the last review in July 2022, DBRS Morningstar confirmed the ratings with Stable trends, excluding Classes E, X-E, and F, which carried Negative trends. The Negative trends reflected the lasting effects of the Coronavirus Disease (COVID-19) pandemic, which resulted in temporary closures of the underlying properties between 2020 and 2022. The rating confirmations reflected the sponsor’s commitment to the properties to keep the loan current despite negative net cash flow and DBRS Morningstar’s expectations that the performance of the underlying assets would continue to stabilize during the remainder of the loan term. Following the June 5, 2023, press release in which the loan’s sponsor, Park Hotels & Resorts Inc., stated that it would no longer make payments toward the subject loan, DBRS Morningstar expects the imminent transfer of the loan to special servicing. Consequently, DBRS Morningstar has placed all classes Under Review with Negative Implications until more information regarding the loan’s workout strategy becomes available in the coming months. DBRS Morningstar’s expects to evaluate the information as part of the process to resolve the Under Review with Negative Implications status within a 90-day period, but the resolution period may extend further, depending on the information received from the servicer.

The transaction is secured by the borrower’s fee and leasehold interest and the operating lessees’ leasehold interest in two full-service hotels—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-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. The loan is scheduled to mature in November 2023.

The coronavirus pandemic caused economic strain on both hotels for most of 2020, 2021, and 2022 as bookings declined substantially given the reliance on business and corporate as well as leisure travel, which have all been slower to recover relative to other markets. Conferences and large groups drive demand for these hotels as they are within walking distance of the Moscone Center, where most events were cancelled from 2020 to 2021. Demand has not recovered to pre-pandemic levels as only 33 events were booked in 2022. According to the San Francisco Travel Association, in 2023, hotel rooms associated with Moscone Center events are projected to nearly double from 2022 levels, with 35 events already confirmed for the year. Despite the increase in event bookings, however, the San Francisco Travel Association does not project bookings and visitor numbers to reach pre-pandemic levels until 2024 or 2025. Although both properties reported notable performance increases in 2022, the Parc 55 hotel did not reopen until May 2022 and the loan continued to produce negative cash flow as of YE2022. According to the STR report or the trailing 12 months ended February 28, 2023, the properties reported a weighted-average occupancy rate of 52.0%, an average daily rate of $241, and revenue per available room of $126, representing significant increases from March 2022 figures, but well below DBRS Morningstar issuance values of 87.7%, $253, and $222, respectively.

San Francisco continues to be one of the slowest markets to recover from the effects of the coronavirus pandemic, and continued delays in the return to office by employees of area-based technological companies remains a concern not only in San Francisco but also in the greater Bay Area overall. In the June 5, 2023, press release, Thomas Baltimore, Jr., the CEO of Park Hotels & Resorts Inc. said that “San Francisco’s path to recovery remains clouded and elongated by major challenges [such as] record high office vacancy; concerns over street conditions; lower return to office than peer cities; and a weaker than expected citywide convention calendar through 2027.” Given these developments, the sponsor has ceased making debt service payments immediately and will look to hand the keys back to the lender in order to improve the balance sheet.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, and Governance factors 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 (May 17, 2022).

Classes X-NCP and X-E 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 Morningstar.

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

The principal methodology is the North American CMBS Surveillance Methodology (March 16, 2023) https://www.dbrsmorningstar.com/research/410912.

Other methodologies referenced in this transaction are listed at the end of this press release.

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 rating was initiated at the request of the rated entity.

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

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

These ratings are Under Review with Negative Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period. However, as previously noted, the resolution period may extend beyond the 90-day period depending on the information received from the servicer.

DBRS Morningstar notes a risk sensitivity analysis was not completed for this rating action as the ratings of all classes were placed Under Review with Negative Implications.

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

DBRS Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023)
https://www.dbrsmorningstar.com/research/410191

Rating North American CMBS Interest-Only Certificates (December 19, 2022)
https://www.dbrsmorningstar.com/research/407577

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022)
https://www.dbrsmorningstar.com/research/402646

North American Commercial Mortgage Servicer Rankings (September 8, 2022)
https://www.dbrsmorningstar.com/research/402499

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023)
https://www.dbrsmorningstar.com/research/415687

Legal Criteria for U.S. Structured Finance (December 7, 2022)
https://www.dbrsmorningstar.com/research/407008

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