DBRS Morningstar Confirms Ratings on All Classes of HONO 2021-LULU Mortgage Trust

DBRS, Inc. (DBRS Morningstar) confirmed the following ratings of the Commercial Mortgage Pass-Through Certificates, Series 2021-LULU issued by HONO 2021-LULU Mortgage Trust:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class X-EXT at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

All trends are Stable.

The rating confirmations reflect the stable performance of the transaction, which has remained in line with DBRS Morningstar’s expectations since issuance. The subject transaction has experienced limited seasoning since it closed in October 2021. Given the recent vintage, there are minimal updates to the financial reporting, but based on the updated STR metrics, the collateral has illustrated consistent growth in revenue per available room (RevPAR) year over year.

The transaction is collateralized by the borrower’s leasehold interest in Hyatt Regency Waikiki Beach Resort and Spa (Hyatt Regency Waikiki), a 1,230-key, full-service luxury resort with 94,961 square feet (sf) of retail space in Honolulu’s Waikiki neighborhood. Built in 1976, the property underwent a complete renovation in 2014 and 2015 for a reported $100.0 million ($81,300 per key) and was subsequently acquired by the sponsor in 2016 for $780.0 million (approximately $634,000 per key). The property is managed by the Hyatt Corporation (Hyatt) under a management agreement that runs through December 2062. The sponsor is an affiliate of Mirae Asset Global Investments Co., Ltd., a global real estate investment firm that owns a portfolio of various property types, including office, industrial, multifamily, and hospitality.

The whole-loan proceeds of $450.0 million and sponsor equity of $118.6 million were used to refinance existing debt, fund upfront reserves, and cover closing costs. The whole-loan consists of $302.2 million of senior debt, which is held in the trust, while the $147.8 million of junior debt is held outside of the trust. The float-rate loan is interest-only (IO) and has a two-year initial term, with three one-year extension options, with a fully extended maturity date in October 2026. According to the servicer, the borrower has expressed its intention to exercise the first extension option in October 2023. A new interest rate cap agreement must be purchased with each extension and considering the current interest rate environment, the costs of new interest rate cap agreements have increased significantly in the last year.

The collateral consists of a high-quality full-service hotel and resort in Waikiki, a high-barrier-to-entry urban neighborhood in Honolulu. The property features 1,230 guest rooms, nearly 95,000 sf of open-air retail space, 20,510 sf of meeting and event space, and various other amenities, including a 10,000-sf full-service spa. In addition to room revenue, the subject generates revenue from alternative sources, including food and beverage, retail, resort fees, space rentals, and commissions, among other items.

The resort’s retail space in the Pualeilani Atrium Shops includes approximately 84,000 sf on three levels encircling an open-air atrium, with approximately 10,000 sf remaining on the ground floor of the nearby convention centre/parking garage. As of the May 2023 rent roll, the retail component featured about 35 local and national shops and restaurants. Some of the largest and better-known retailers at the property include Urban Outfitters, Billabong, UGG Australia, Dylan’s Candy Bar, Sunglass Hut, and ABC Discount Stores.

The primary hotel and retail structure is subject to two separate ground leases, while the convention space and parking garage are each subject to a separate ground lease. All four ground leases are scheduled to expire on December 21, 2087, and contain rent provisions that escalate at five- and 10-year intervals.

According to the STR report for the trailing 12 months (T-12) ended March 31, 2023, the hotel’s occupancy, average daily rate (ADR), and RevPAR were 84.7%, $255.00, and $215.87, respectively, an improvement over the T-12 period ended March 31, 2022, and T-12 period ended July 31, 2021, RevPAR figures of $127.73 and $46.56, respectively. The most recent metrics are nearing the pre-pandemic YE2019 RevPAR of $250.03, although occupancy is lagging slightly in comparison.

Based on the most recent financials, the YE2022 net cash flow (NCF) of $14.2 million (equivalent to a debt service coverage ratio of 0.65 times), is below the DBRS Morningstar NCF of $31.5 million. The drop in NCF was mainly driven by a decrease in the retail and other revenue line items, and the servicer advised that the retail revenue may not be reflected in the reporting. Considering the deal is newer in vintage with limited seasoning, financial updates are minimal. The loan benefits from healthy reserves of approximately $24.5 million, of which $17.7 million is held in debt service reserve, a factor to mitigate fluctuations in interest rates. Other strengths of the transaction include the collateral’s prime location in Waikiki’s main shopping and dining district, long-term management agreement with Hyatt, and strong, experienced sponsorship. The significant strides in RevPAR point to recovery and stabilization in the near future. At issuance, DBRS Morningstar sized this loan based on a value of $312.6 million, which represents a haircut of -59.5% from the appraiser’s value of $771 million.

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-EXT 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 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), which can be found on 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 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, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

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].