Morningstar DBRS Confirms Credit Ratings on Hilton USA Trust 2016-HHV

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2016-HHV issued by Hilton USA Trust 2016-HHV as follows:

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

All trends are Stable.

The credit rating confirmations reflect the overall stable-to-improved performance of the underlying collateral, as evidenced by year-over-year (YOY) growth in net cash flow (NCF), occupancy, and revenue per available room (RevPAR) figures. While the outlook on the transaction remains positive, Morningstar DBRS believes that some of the YoY growth may be attributable to the demand diverted away from Maui following the wildfires that broke out on the island in August 2023 until West Maui was reopened to tourism in November 2023. As such, growth in 2024 is expected to be more moderate and Morningstar DBRS did not update the loan-to-value (LTV) sizing benchmarks as part of this review.

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 the 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 in the property and appears committed to continuing that trend through further reinvestment in the resort's offerings. According to the servicer, the borrower is in the process of obtaining permits to demolish a restaurant building adjacent to the resort in order to construct a sixth guest tower, while local news sources indicate the owner also plans to add 26 rooms to the beachfront Rainbow Tower. Neither project is slated to begin until late 2025 or early 2026, with minimal business interruptions to guests expected while construction is ongoing.

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 with healthy YOY growth , exceeding pre-pandemic levels. The YE2023 NCF of $170.9 million (reflecting a DSCR of 3.15 times (x)), represents an 8.9% increase from the YE2022 figure of $157.0 million and a 16.4% increase from the YE2019 figure of $146.8 million. The largest drivers for the increase in cash flows over the last several years include continued growth in room revenue, F&B revenue, and other departmental revenue, contributing to a 12.4% increase in effective gross income; however, as noted above, Morningstar DBRS anticipates that 2024 growth may be moderated following the reopening of West Maui in November 2023

According to the State of Hawaii's Department of Business, Economic Development and Tourism, the total number of visitors to the Hawaiian Islands was 9.4 million in 2023, reflecting a 4.4% increase over the 2022 figure of 9.2 million. While visitor numbers on the other islands remained relatively static YOY, the islands of Oahu and Maui welcomed 5.6 million (+15.6% YOY) and 2.5 million tourists in 2023 (-15.2% YOY), respectively, during 2023. Although Maui's tourist figure from December 2023 was still depressed when compared with figures from December 2022 and December 2019, reflecting declines of -24.8% and -28.7%, respectively, it was the highest number of visitors to the island in the previous five months, with figures expected to increase further in 2024. In contrast, Oahu's December 2023 visitor total slowed to a growth of just 6.0%.

Per the STR report for the trailing 12 months (T-12) ended December 31, 2023, the occupancy rate, average daily rate (ADR), and RevPAR were reported at 90.8%, $302, and $275, respectively, compared with the YE2022 figures of 85.4%, $288, and $246, respectively. As expected, the property showed a moderate decline in performance metrics over the T-3 and T-1, with the T-1 occupancy ADR and RevPAR figures reported at 82.7%, $340, and $281, respectively; however, the property's RevPAR is still operating well above historical levels and the property continues to outperform its competitive set with a T-12 RevPAR penetration rate of 117.0%.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS 
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030).

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 credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

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

The principal methodology is the North American CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798.

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

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.

Morningstar DBRS 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
DBRS Tower, 181 University Avenue, Suite 700
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://dbrs.morningstar.com/about/methodologies.

North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428799

Rating North American CMBS Interest-Only Certificates (December 13, 2023), https://dbrs.morningstar.com/research/425261

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023), https://dbrs.morningstar.com/research/420982

North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592

Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205/legal-criteria-for-us-structured-finance

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279. (July 17, 2023)

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