DBRS Morningstar Upgrades Six Classes of Hilton USA Trust 2016-HHV

DBRS Limited (DBRS Morningstar) upgraded six classes of Commercial Mortgage Pass-Through Certificates, Series 2016-HHV (the Certificates) issued by Hilton USA Trust 2016-HHV as follows:

-- Class X-B to AA (low) (sf) from A (high) (sf)
-- Class B to A (high) (sf) from A (sf)
-- Class C to A (sf) from A (low) (sf)
-- Class D to BBB (high) (sf) from BBB (sf)
-- Class E to BB (high) (sf) from BB (sf)
-- Class F to B (sf) from B (low) (sf)

DBRS Morningstar also confirmed ratings on the following classes:

-- Class A at AAA (sf)
-- Class X-A at AAA (sf)

All trends are Stable.

The rating upgrades reflect the strong rebound in net cash flow (NCF) performance of the collateral since the Coronavirus Disease (COVID-19) pandemic, driven by significant growth in occupancy and revenue per available room (RevPAR). The YE2022 reported NCF of $158.3 million represents an 18.1% positive variance over the figure previously derived by DBRS Morningstar in 2020. DBRS Morningstar re-evaluated its NCF analysis in light of the sustained cash flow growth, as described below. In order to test the durability of the ratings, DBRS Morningstar performed a stressed cash flow scenario, which provides additional support for the rating upgrades.

The collateral 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 trophy-quality property is situated on world-renowned Waikiki beach, which benefits from a lack of seasonality, high barriers to entry, and the strongest lodging market of all eight Hawaiian islands. The subject 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 and the largest amount of meeting space among its competitors. Amenities at the resort include 65,373 square feet (sf) of indoor meeting space, 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, a 1,978-space garage, and 138,000 sf of leased commercial space.

The sponsor, Park Intermediate Holdings LLC, is a wholly owned subsidiary of Park Hotels & Resorts. In 2017, Hilton Worldwide Holdings Inc., formerly known as Hilton Hotels Corporation, spun off Park Hotels & Resorts, which is now one of the largest publicly traded real estate investment trusts in the U.S. hospitality industry. The sponsor has historically invested significant capital into the property; expenditures on renovations between 2008 and 2016 exceeded $230.0 million. According to an inspection conducted in November 2022, the sponsor was in the process of obtaining permits to demolish a restaurant building adjacent to the resort to construct a sixth 350-foot tower, which would add an additional 515 keys to the resort total. DBRS Morningstar awaits an update from the servicer.

The property suffered performance declines as a result of the coronavirus pandemic, caused by the property’s closure from April 2020 through December 2020. A cash sweep period was triggered in March 2021 as a result of the debt service coverage ratio (DSCR) remaining below the required threshold. Since then, property performance has restabilized and currently exceeds pre-pandemic reporting. The YE2022 NCF of $158.3 million (reflecting a DSCR of 3.26 times (x)), represents a 140.0% increase from the YE2021 figure of $65.9 million (a DSCR of 1.21x). In comparison, the reported YE2019 NCF was $146.8 million. The largest drivers for the increase in cash flows include room revenue, F&B revenue, and other departmental revenue, which increased by 76.0%, 162.5%, and 42.7%, respectively, contributing to a 74.4% overall increase in effective gross income. Decreasing expenses have also contributed to the improved performance.

According to the YE2022 Smith Travel Research (STR) report, trailing twelve months (T-12) ended March 2023, occupancy, average daily rate (ADR), and RevPAR were reported at 88.5%, $295, and $261, respectively. The current reporting indicates that the property improved upon these metrics by 27.9%, 14.9%, and 46.9%, respectively, from the prior year. The subject also continues to outperform its competitive set, with occupancy, ADR, and RevPAR market penetration rates of 118.6%, 102.9%, and 121.9%, respectively.

In determining the ratings, DBRS Morningstar analyzed the cash flow under both a base case and stressed scenario. The base case scenario, which is based on a standard surveillance haircut to the YE2022 reported figure, results in a base case DBRS Morningstar value of $1.94 billion, compared with the DBRS Morningstar value of $1.68 billion previously derived in 2020. Under the stressed scenario, which included a 20% haircut to the YE2022 NCF, DBRS Morningstar derived a stressed value of $1.58 billion. The conservative haircut was used to evaluate the potential for upgrades given the significant year-over-year improvement in collateral performance. In both scenarios, DBRS Morningstar applied a cap rate of 8.0%, which is at the middle of the range of DBRS Morningstar Cap Rate Ranges for lodging properties, reflecting the hotel’s quality, superior location, and predominately fee-simple ownership structure. The implied DBRS Morningstar loan-to-value (LTV) for the stressed scenario is 80.5%, on a whole-loan basis. DBRS Morningstar anticipates continued stable performance for the underlying property in light of its strong market positioning, continued capital expenditures on development, and the return of Hawaii’s tourism industry to post-pandemic normalcy.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis totaling 4.50% to account for cash flow volatility, property quality, and market fundamentals.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/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 (May 17, 2022) at https://www.dbrsmorningstar.com/research/396929.

Classes X-A and X-B 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.

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

The principal methodology is 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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

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].