DBRS Morningstar Upgrades Seven Classes of Hawaii Hotel Trust 2019-MAUI

DBRS Limited (DBRS Morningstar) upgraded seven classes of Commercial Mortgage Pass-Through Certificates, Series 2019-MAUI (the Certificates) issued by Hawaii Hotel Trust 2019-MAUI as follows:

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

DBRS Morningstar also confirmed its rating on the following class:

-- Class 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 $75.3 million represents a 71.1% 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 for the transaction is a $650.0 million mortgage loan, which is secured by the borrower’s fee-simple interest in the Four Seasons-branded luxury, five-star resort hotel in Wailea, Hawaii. The full-service luxury hotel features 383 guest rooms, with four food and beverage offerings, specialty retail shops, and 38,000 square feet of meeting space. The hotel operates under the Four Seasons flag via an agreement that expires in February 2025, and benefits from its luxury quality, strong brand affiliation, and a wide range of amenities, including a spa, three outdoor pools, tennis courts, a games room and fitness center, and preferred access to the 54-hole Wailea Golf Club directly across Wailea Alanui Drive from the hotel. The hotel also offers direct access to Wailea Beach as well as stunning views of the island’s volcanic mountains and westward to the bay and Pacific Ocean. Wailea has one of the highest barriers to entry of any resort market in the world. Available sites are extremely rare or nonexistent, and zoning is complex and protective.

The two-year interest-only loan had an initial maturity in May 2021, with five one-year extension options available. As of June 2023, the servicer confirmed that the third extension option had been exercised. There are no performance hurdles tied to extension options until the fifth and final option, which would extend the loan through May 2026 and requires the borrower to provide a replacement rate cap agreement as the existing rate cap agreement does not terminate until May 2025.

The property suffered performance declines during the pandemic, caused by the property’s closure from April 2020 to December 2020, which resulted in a negative cash flow at YE2020. The loan was added to the servicer’s watchlist in September 2020 and cash management was subsequently activated. Since then, property performance has restabilized and exceeds pre-pandemic reporting, with a debt yield of 11.6% as of YE2022, well above the required cash management debt yield threshold of 6.0%. The YE2022 NCF of $75.3 million (a debt service coverage ratio (DSCR) of 3.23 times (x)), represents a 34.9% increase from the YE2021 NCF of $55.8 million (a DSCR of 3.97x) and a 71.1% increase over the DBRS Morningstar NCF of $44.0 million derived in 2020. The largest drivers for the increase in cash flows from 2021 reporting include room revenue and food and beverage revenue, which increased by 32.1% and 24.8%, respectively, given the improved occupancy and average daily rates (ADR), which subsequently increased effective gross income by 30.0%. While total operating expenses have increased by 24.8% over the prior year, the operating expense ratio decreased by nearly 200 basis points to 63.8% at YE2022.

According to the April 2023 STR report, the property reported occupancy, ADR, and RevPAR figures for the trailing 12 months (T-12) ended April 30, 2023, of 68.8%, $1,743, and $1,199, respectively. The current reporting indicates that the property improved upon these metrics by 3.4%, 4.4%, and 7.9%, respectively, from the prior year. The subject also continues to outperform its competitive set, with occupancy, ADR, and RevPAR penetration rates of 133.6%, 184.6%, and 246.6%, 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 $1.0 billion, compared to the DBRS Morningstar value of $587.2 million previously derived in 2020. Under the stressed scenario, which was based on a 20% stress to the YE2022 NCF, DBRS Morningstar derived a stressed value of $802.8 million. The conservative haircut was used to evaluate the potential for upgrades given the year-over-year improvement in collateral performance. In both scenarios, DBRS Morningstar applied a cap rate of 7.5%, 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 high barriers to entry. The implied DBRS Morningstar loan-to-value (LTV) for the stressed scenario is 80.1%. DBRS Morningstar anticipates continued stable performance for the underlying collateral property in light of 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 8.50% to account for cash flow volatility, property quality, and market fundamentals.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or 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.

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)

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].