DBRS Morningstar Upgrades Three Classes of GS Mortgage Securities Corporation Trust 2018-HULA

DBRS Limited (DBRS Morningstar) upgraded its ratings on three classes of the Commercial Mortgage Pass-Through Certificates, Series 2018-HULA issued by GS Mortgage Securities Corporation Trust 2018-HULA as follows:

-- Class E to BBB (high) (sf) from BBB (low) (sf)
-- Class F to BB (high) (sf) from BB (low) (sf)
-- Class G to B (high) (sf) from B (low) (sf)

DBRS Morningstar also confirmed the following classes:

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

All trends are Stable. The rating upgrades reflect the strong rebound and growth in net cash flow (NCF) performance of the collateral since the Coronavirus Disease (COVID-19) pandemic and subsequent to the borrower’s nearly $100 million capital improvement plan that was completed in October 2021. The trailing 12-month (T-12) period ended March 31, 2023, financials reported a NCF of $47.3 million, which represents a positive variance of 68.9% over the figure previously derived by DBRS Morningstar in 2020, driven by significant growth in occupancy and revenue per available room (RevPAR). DBRS Morningstar re-evaluated its NCF analysis in light of the sustained cash flow growth, as described below. To further test the durability of the ratings, DBRS Morningstar performed a stressed cash flow scenario, which provides additional support for the rating upgrades.

The interest-only (IO) loan is secured by the Four Seasons Resort Hualalai, a luxury hotel and resort located on the Big Island of Hawaii. The collateral consists of a 243-key resort spread across 39 acres and the private membership Hualālai Club. At issuance, collateral also included 250 acres of a residential master-planned community; however a portion of that land was recently sold, as discussed below. The loan had an initial two-year term with five one-year extension options. To date, four of the five options have been exercised, which has extended the loan maturity date to July 2024. To exercise the fourth option, the loan was not subject to any performance-based criteria; however, the borrower must provide a replacement interest rate cap agreement for the extension period. In addition, 25 basis points will be added to the spread with both the fourth and fifth options.

The trust had an initial balance of $350.0 million at issuance, with a $100.0 million B Note held outside of the trust. As of the July 2023 reporting, the trust had an outstanding balance of $320.2 million, representing a collateral reduction of 8.5% since issuance as a result of the land that was released for residential development. With the exception of the residential land, the collateral is subject to a ground lease. The underlying land is owned by the Trustees of the Estate of Bernice Pauahi Bishop. The ground lease expires in December 2061, with no renewal options. The borrower pays a minimum rent of $4.2 million and a percentage of revenue through December 2026.

As noted, the subject underwent a $100 million renovation, which was completed in October 2021 according to a press release from the Four Seasons. The scope of the work included full renovations to all rooms, upgrades to the finishes and furniture, and a new bungalow that added six new rooms along the property’s oceanfront. Amenities were upgraded as well, with significant work to be completed at King’s Pond, the property’s swimmable aquarium, and to other pools at the property. Finally, the property’s golf course was upgraded with new features and a new turf.

According to the financials for the T-12 period ended March 31, 2023, the loan reported a NCF of $47.3 million, a substantial increase from the $28.8 million from YE2021 as a result of room revenue reporting a 39.9% increase, but below the YE2022 NCF high of $53.2 million. As of the February 2023 STR report, the subject reported T-12 occupancy, average daily rate, and RevPAR figures of 73.5%, $1,882, and $1,383, respectively, with a RevPAR penetration figure of 301.6%. This is a continued improvement over the T-12 ended April 30, 2022, figures of 71.2%, $1,774, and $1,263, respectively, and well above the T-12 ended June 30, 2021, figures of 50.7%, $1,434, and $894, 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 T-12 ended March 31, 2023, reported figure, results in a base case DBRS Morningstar value of $543.9 million, compared with the DBRS Morningstar value of $328.8 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 $444.2 million. The conservative haircut was used to evaluate the potential for upgrades given the recent improvement in collateral performance based on updated reporting. In both scenarios, DBRS Morningstar applied a cap rate of 8.5%, which is at the middle of the range of DBRS Morningstar cap rate ranges for lodging properties, reflecting the hotel’s quality, irreplaceable location, and high barriers to entry. The implied DBRS Morningstar loan-to-value (LTV) for the stressed scenario is 94.6%. 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 for this rating analysis, totaling 10% 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 at https://www.dbrsmorningstar.com/research/416784 (July 4, 2023).

Class X-NCP is an IO certificate that references 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 credit ratings are subject to surveillance, which could result in credit 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 rating assigned to Class G is lower than the results suggested by the LTV-sizing benchmarks. This variance is reflective of the higher DBRS Morningstar value applied for this review, driven by the significant cash flow increase based on updated reporting. DBRS Morningstar does recognize the significant improvement; however, it is important to note that the sustainability of the significant increase to revenue remains in question supporting the variance. In May 2018, the subject’s performance was affected by the nearby volcanic eruption and subsequently performance suffered again during the coronavirus pandemic.

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 credit rating was initiated at the request of the rated entity.

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

This is a solicited credit rating.

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

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

The credit 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)

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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