Note: On September 2, 2021, DBRS Morningstar corrected the ratings on Classes X-NCP and X-E in the ratings table to reflect the correct ratings as stated in the text of the press release.
DBRS Limited (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2016-SFP (the Certificates) issued by Hilton USA Trust 2016-SFP as follows:
-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (low) (sf)
-- Class F at B (high) (sf)
-- Class X-NCP at A (low) (sf)
-- Class X-E at BB (low) (sf)
All trends are Negative because the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic. DBRS Morningstar also designated Class F as having Interest in Arrears.
These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about October 8, 2020. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.
On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, at www.dbrsmorningstar.com. On March 27, 2020, DBRS Morningstar placed the ratings on its outstanding SASB transactions secured by hospitality properties Under Review with Negative Implications while MCR placed the ratings on its outstanding SASB transactions secured by hospitality properties Under Review Negative as the global shelter-in-place and travel restrictions related to the coronavirus have had an extreme impact on the short-term performance of this asset class. For further information on these rating actions, please see the DBRS Morningstar press release dated March 27, 2020, at www.dbrsmorningstar.com and the MCR press release dated March 27, 2020, at www.morningstarcreditratings.com.
To assign ratings to this transaction, DBRS Morningstar considered both the impact of the updated NA SASB Methodology and its scenarios attributable to the ongoing coronavirus pandemic on the ratings.
Because of the coronavirus’ significant impact on hospitality performance, DBRS Morningstar first considered the application of the updated NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology” to arrive at a baseline result, which incorporated qualitative assumptions, capitalization rates, and loan-to-value (LTV) ratio sizing benchmark quality/volatility adjustments and excluded any potential changes in current or future expected asset performance resulting from the coronavirus.
DBRS Morningstar then overlaid scenarios incorporating market value declines (MVDs) consistent with the projections in its “Global Macroeconomic Scenarios: September Update” published on September 10, 2020, on top of the baseline result to determine the impact of coronavirus-related changes in asset performance on the subject transaction on a tranche-by-tranche basis. For more information on these scenarios, please refer to the Coronavirus Impact Analysis section of this document. The global macroeconomic scenarios include a moderate decline of 15% for all commercial real estate (CRE), which acts as an average for all CRE property types. However, DBRS Morningstar expects a higher stress for hospitality properties, ranging from 25% to 45% based on the type of demand segmentation and asset location, and expects corporate demand and remote fly-to locations to be at the higher end of the value decline.
The Certificates are backed by a $725.0 million, seven-year, interest-only (IO), fixed-rate, first-mortgage loan on two hotel properties in San Francisco’s Union Square—the Hilton San Francisco Union Square and the Hilton Parc 55 San Francisco. The loan is structured with a term of 84 months that is set to mature in November 2023. The sponsor is Park Intermediate Holdings LLC which, along with the borrower special-purpose entities, is owned by Park Hotels & Resorts Inc. (PK). According to its Q2 2020 earnings press release, PK continues to take proactive measures to preserve cash and improve liquidity. Since the beginning of 2020, PK has experienced a significant decline of over 50% in market capitalization; however, it recently raised $725 million of 5.875% senior secured notes to repay outstanding debt. Amid the ongoing coronavirus pandemic, PK reported a portfolio wide pro forma revenue per available room (RevPAR) of $7.85, representing a decrease of 95.9% from the prior year, and an occupancy rate of 20.8% for its 18 hotels that remained open for all of Q2 2020. Hilton Management LLC manages the Union Square hotel while HLT Conrad Domestic LLC manages the Parc 55 hotel, and both management companies are affiliated with the borrowers.
The loan is secured by the borrowers’ fee and leasehold interests and the operating lessees’ leasehold interest in two adjacent full-service hotels. The loan was part of the financing package that repaid $3.4 billion of debt secured in the Hilton USA Trust 2013-HLT securitization (not rated by DBRS Morningstar) and returned $300.0 million of equity to the borrower. The allocated loan amounts (ALAs) are $470.0 million for the Union Square hotel and $255.0 million for the Parc 55 hotel.
The hotels are well located in San Francisco’s Tenderloin District, just off Market Street and within 0.5 miles of the Moscone Center. The 1,919-key, three-building Hilton San Francisco Union Square hotel is a convention-oriented hotel that offers the largest meeting space in the city. Tower 1, built in 1971, is a 46-floor building that contains 575 guest rooms, a lounge, and meeting space. Tower 2, built in 1988 in an L shape to connect Towers 1 and 3, contains 389 rooms, three food and beverage (F&B) outlets, and 547,000 square feet (sf) of meeting space. Tower 3, built in 1964, contains 955 rooms, one restaurant, and 48,000 sf of meeting space. The outdoor pool, whirlpool, and 505-stall parking garage are located in Tower 3.
The 1,024-key, 32-storey Hilton Parc 55 hotel is the fourth-largest full-service hotel in San Francisco. The hotel opened in 1984 and has undergone several renovations since. The hotel opened as a Wyndham hotel until the sponsor purchased the hotel in 2015 and converted it into a Hilton-branded hotel. The previous sponsor executed a $30.0 million renovation between 2008 and 2009 and upgraded some guest-room furnishings in 2015. The hotel offers three F&B outlets, a fitness centre, and a FedEx business centre.
The sponsor is the nonrecourse carveout guarantor and, under certain circumstances, becomes fully recourse subject to a 10% cap on the whole-loan amount. A release of either hotel from the loan security is subject to payment of the ALA and a yield maintenance premium plus payments to effect a debt yield requirement.
According to the YE2019 reporting, the collateral reported strong year-over-year improvements in cash flow performance. The Hilton Union Square hotel reported a 16.1% increase in net cash flow (NCF) from 2018 to 2019 while the Hilton Parc 55 hotel reported an increase of 31.4% from 2017 to 2019. As of YE2019, the Hilton Union Square hotel reported an occupancy, average daily rate (ADR), and RevPAR of 93.8%, $354, and $332, respectively, while the Hilton Parc 55 hotel reported operating figures of 83.5%, $275 and $229, respectively.
Because of the coronavirus pandemic, the lodging sector has experienced an unprecedented decline in demand across multiple revenue segments, which will likely put substantial stress on the collateral in the short to medium term. As of the trailing 12-month period ended March 31, 2020, occupancy at the properties dropped to 83% and ADR fell to $228. No payment delinquencies have been reported and, in September 2020, the borrower submitted, and the servicer approved, coronavirus-related relief. The borrower was granted a deferral of the monthly furniture, fixtures, and equipment deposit for six months and a waiver of the debt yield test through June 2021. Debt service payments remain current.
DBRS Morningstar reanalyzed the NCF derived at issuance for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The resulting NCF figure was $77.6 million and DBRS Morningstar applied a cap rate of 7.75%, which resulted in a DBRS Morningstar Value of $1,001 million, a variance of 35.8% from the appraised value of $1,561 million at issuance. The DBRS Morningstar Value implies an LTV of 72.4% compared with the LTV of 46.4% on the appraised value at issuance.
The cap rate DBRS Morningstar applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for lodging properties, reflecting the hotels’ excellent location close to their demand generators and the San Francisco Bay Area’s high barriers to entry.
DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totalling 2.00% to account for cash flow volatility, property quality, and market fundamentals.
CORONAVIRUS IMPACT ANALYSIS
DBRS Morningstar overlaid various scenarios incorporating MVDs consistent with the projections in the “Global Macroeconomic Scenarios: September Update” (https://www.dbrsmorningstar.com/research/366542) to estimate the impact of coronavirus-related changes in asset performance on a tranche-by-tranche basis for the subject transaction. The scenarios included subjecting the most recent appraised collateral value to generalized CRE asset value decline projections with an assumption of approximately 45% under the moderate scenario. In cases where the rated debt exceeded the scenario value, DBRS Morningstar assumed that a principal writedown had occurred to account for the difference. Because of the reverse-sequential allocation of losses in commercial mortgage-backed security (CMBS) transactions, DBRS Morningstar’s analysis considered the most subordinate certificate first and, if a complete principal writedown of the certificate had occurred during the scenario, DBRS Morningstar repeated the analysis for the second-most subordinate certificate and so on until the rated debt no longer exceeded the scenario value.
Under the moderate scenario, the cumulative rated debt was insulated from loss.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
Classes X-NCP and X-E are 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 ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.
DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.
For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.
All figures are in U.S. dollars unless otherwise noted.
The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2020) and North American CMBS Surveillance Methodology (March 6, 2020), which can be found on www.dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on www.dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.
For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.
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 firstname.lastname@example.org.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at email@example.com.
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