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

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on the classes of Commercial Mortgage Pass-Through Certificates, Series 2021-LULU, issued by HONO 2021-LULU Mortgage Trust as follows:

-- 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 credit rating confirmations reflect the rebound in performance of the underlying collateral to pre-pandemic levels, as demonstrated by the consistent year-over-year (YOY) growth in net cash flow (NCF) and revenue per available room (RevPAR), which was expected by Morningstar DBRS. At issuance, Morningstar DBRS elected to stabilize the property and assumed NCF reflective of an occupancy figure in line with the property's pre-pandemic performance.

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 about 95,000 square feet (sf) of open-air retail space, 20,510 sf of meeting and event space, and various other amenities, including a 10,000-sf spa situated along Honolulu's world-renowned Waikiki beach. 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 floating-rate loan is interest only (IO) and has a two-year initial term and three one-year extension options, with a fully extended maturity date in October 2026. The first extension option was exercised, and, according to the servicer, the borrower has expressed its intention to exercise the second extension option in October 2024. To mitigate the borrower's exposure to rate increases, the borrower was required to enter into a rate cap agreement resulting in a debt service coverage ratio (DSCR) of at least 1.10 times (x) and a new interest rate cap agreement must be purchased with each extension.

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.

The loan has exhibited two consecutive years of RevPAR growth after performance bottomed out during the COVID-19 pandemic, reporting a RevPAR of $249 for the trailing 12-month period (T-12) ended May 31, 2024, an improvement of more than 10% over the T-12 period ended May 31, 2023, and relatively in line with the Morningstar DBRS RevPAR of $245 assumed at issuance and the pre-pandemic YE2019 RevPAR of $250.

The servicer reported property NCF of $20.1 million for the T-12 ended March 31, 2024, equivalent to a DSCR of 0.50x, below the Morningstar DBRS NCF of $31.5 million at issuance. However, based upon performance trends and comments from the servicer, the retail revenue is likely not reflected in the reported NCF. The March 2024 rent roll is composed of more than 50 retail tenants with an aggregate annual base rent of more than $13.0 million; along with the servicer's NCF, that suggests an NCF that is relatively in line with the Morningstar DBRS NCF derived at issuance. The loan benefits from healthy reserves of more than $20.0 million, of which $17.7 million is held in debt service reserve, mitigating the impact of the rise in interest rates since securitization for the floating-rate loan. 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. At issuance, Morningstar DBRS derived a value of $312.6 million, based upon the aforementioned Morningstar DBRS NCF of $31.5 million and a capitalization rate of 10.0%, which represents a haircut of 59.5% from the appraiser's value of $771 million.

Recent increases in NCF and other performance metrics have pointed to recovery and stabilization of the underlying asset and with the recent and projected rise in tourism to the Hawaiian islands, Morningstar DBRS expects the property to continue to exhibit stable to improving performance metrics.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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 at (January 23, 2024; https://dbrs.morningstar.com/research/427030).

Class X-EXT is an interest-only (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 Morningstar DBRS.

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

The principal methodology is 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 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, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

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 (July 11, 2024; https://dbrs.morningstar.com/research/436004)

Rating North American CMBS Interest-Only Certificates (June 28, 2024; https://dbrs.morningstar.com/research/435294)

Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024; https://dbrs.morningstar.com/research/428623)

Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024; https://dbrs.morningstar.com/research/435293)

Legal Criteria for U.S. Structured Finance (April 15, 2024; https://dbrs.morningstar.com/research/431205)

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

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.