DBRS Finalizes Provisional Ratings on GS Mortgage Securities Corporation Trust 2018-HULA

DBRS, Inc. (DBRS) finalized the provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-HULA issued by GS Mortgage Securities Corporation Trust 2018-HULA:

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

The trends are Stable.

All classes will be privately placed. The Class X-CP, X-FP and X-NCP balances are notional.

The subject property is an ultra-luxury hotel and resort located on the Big Island of Hawaii. In addition to a full range of amenities, the hotel and resort benefit from 725 acres of prime frontage along the Kohala Coast of the Big Island. Of the total 725-acre master-planned Hualālai Resort at Historic Kaʻūpūlehu, the collateral for the loan consists of 530.1 acres, with the balance being the residential lots that have already been sold off. The hotel component of the loan collateral includes a 243-key hotel spread across approximately 39 acres, which includes four pools; 37,000 square feet (sf) of indoor and outdoor event space and five food and beverage (F&B) outlets. The resort component of the loan collateral includes a private membership club (currently with 337 members); two 18-hole golf courses and clubhouses; the 30,700 sf Hualālai Sports Club & Spa; the Beach Club and watersports program; three additional pools; eight tennis courts; three retail outlets; five F&B outlets; Hualālai Realty Company and HVH Rental and Property Management Company; and water utility companies. The residential land component includes the remaining lots from the total 483-unit master-planned community, which now includes 26 improved and unimproved single-family lots as well as three bulk land parcels. Loan proceeds of $450.0 million are being used to retire outstanding debt of $373.3 million ($300.0 million commercial mortgage-backed securities loan securitized in GSMS 2015-HULA), return $62.2 million of equity to the sponsor and cover reserves as well as closing and origination costs. The $450.0 million loan has been split into a senior $350.0 million A-note that backs this securitization and a subordinate $100.0 million B-note that will reside outside the trust.

The property has performed very well over the past several years, and as of the trailing 12-month period ending April 2018, the hotel reported an occupancy rate and average daily rate of 86.7% and $1,242.13, respectively, resulting in a revenue per available room (RevPAR) figure of $1,077.54, which represents a 3.6% increase over YE2017, a 9.8% increase over YE2016 and an 11.8% increase since DBRS last saw the hotel in the 2015 transaction. The property has performed exceptionally well compared with its competitive set, with a current March 2018 Smith Travel Research report exhibiting RevPAR penetration of 421.4%. DBRS notes that the competitive set does not truly compete given the quality of the subject, the extreme exclusivity of the brand, the high level of service and the strength of the location; therefore, it is difficult to directly compare. The hotel has achieved AAA Five Diamond and Forbes Five-Star ratings for over ten years and maintained the highest RevPAR among all hotels within the islands for the past several years. A key differentiator for the subject and support for the consistently positive revenue growth is its extremely high quality, diverse amenities and connection to the greater master-planned community that caters to, and draws in, the ultra-high-end target demographic.

In addition to the general economic downturn having an impact, the tsunami of March 2011 temporarily set back the hotel’s operations; however, subsequently, it achieved major gains, with RevPAR growing by a total of 93.6% since 2011. While RevPAR has shown substantial growth over the past few years, occupancy has been relatively stable since 2012, only having dipped below 70.0% for a few years from 2008 to 2011 while the hotel and resort were undergoing substantial renovations and the downturn was hampering growth. Additionally, while the hotel did not directly incur any damage from the Kīlauea Volcano that began erupting on May 3, 2018, the hotel experienced an increase in canceled room nights for May 2018 and June 2018. While, on average, the hotel experiences approximately five to ten daily cancelations, that number jumped to 25 to 35 cancelations for those two months. However, based on the site inspection and analysis of additional information provided by the sponsor, DBRS notes that the spike in cancelations was driven by sensationalized headlines in the media that have since subsided. At 76.5% break-even occupancy, the hotel can withstand a relatively large 9.0% drop in vacancy and still cover debt service, assuming no paydowns from lot sales occur and relatively flat performance in all other aspects.

The DBRS value of $335.0 million represents a notable 53.4% discount to the as-is appraised value of $718.6 million, which comprises $641.0 million for the hotel component, $35.7 million for the club operations component and $41.9 million for the residential component. In addition, the DBRS cap rate of 10.260% is likely at least 400 basis points above the current market cap rate, allowing for significant reversion to the mean in lodging valuation metrics. In comparison with the 2015 transaction, the subject’s aggregate as-is market value based on the appraisal of $718.6 million represents a $87.0 million value increase over the estimated aggregate value of $631.6 million in the 2015 transaction. This 13.8% value increase is greater than the 4.8% net cash flow (NCF) growth over the same time period; however, this does not necessarily reflect the recent residential lot sales since the 2015 transaction. As a result of the property’s excellent quality and strong sponsorship and management, in combination with the expected increase in NCF as the residential lots are sold off and club memberships correspondingly increase, DBRS expects transaction performance to be positive during the seven-year term (fully extended) and refinance risk on the A-note to be manageable given the loan’s moderate refinance metrics.

Classes X-CP, X-FP and X-NCP 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 ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

For more information on this transaction and supporting data, please log into www.viewpoint.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS Viewpoint platform.

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

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains the description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not require due diligence services outlined in Form-15E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

The principal methodology is the North American Single-Asset/Single-Borrower Methodology, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. 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.

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

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrs.com.