Commentary Seas the Day: Hawaii's Hotel Sector Remains Buoyant Despite Slower Return to Normal
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Commentary
Seas the Day: Hawaii’s Hotel Sector Remains Buoyant Despite
Slower Return to Normal
DBRS Morningstar This commentary is part of a series providing insights on six U.S. hotel markets DBRS Morningstar views as
March 30, 2021
significantly exposed to the Coronavirus Disease (COVID-19) outbreak.
CMBS Regional Report: U.S. Hotels DBRS Morningstar Perspective
Hawaii
Quite possibly, no destination has epitomized the pandemic's effect on global tourism as clearly as
Hawaii. The Aloha State's significant exposure to the industry resulted in an unprecedented downturn in
the lodging market. According to the Hawaii Tourism Authority (HTA), tourism is the largest single source
of private capital for Hawaii’s economy, bringing in nearly $18.00 billion, representing about 21.0% of
the state’s economy in 2019. After a record 10.4 million people visited the state in 2019, a mere 2.7
million visitors trickled in throughout 2020. Because of this, visitor expenditures were down 71.4% as
hotels struggled to keep occupancy at 37.1%. Although tourism is down dramatically and occupancies
remain low, loans on Hawaii hotels packaged in commercial mortgage-backed securities (CMBS) have
Contents
held up well. As of February 2021, delinquency and special servicing rates were just 7.4% each,
1 DBRS Morningstar Perspective
2 Hawaii Lodging Market compared with the nationwide delinquency and special servicing rates of 16.4% and 25.4%, respectively.
3 CMBS Exposure
5 Looking Ahead
Exhibit 1 Hotel Loan Status in Hawaii
Performing Delinquent Specially Serviced
Romir Agarwal
7.4%
Author
+1 312 244-7263 7.4%
romir.agarwal@morningstar.com
Steve Jellinek
Vice President – Head of Research
North American CMBS
+ 1 312 244-7908
steven.jellinek@dbrsmorningstar.com
Erin Stafford
Managing Director
85.2%
+1 312 332-3291
erin.stafford@dbrsmorningstar.com
Source: DBRS Morningstar.
As the domestic travel restrictions begin to relax, vaccines become accessible, and summer approaches,
we expect a resurgence of leisure travel. While pent-up demand and swollen savings accounts from the
past year’s quarantine point to a likely surge in luxury vacations, a return to prepandemic tourism in
Hawaii faces challenges, including confusing and inconsistent testing and quarantine protocols,
dependence on air travel, and some countries still closed to Hawaii. Many hotels and resorts havePage 2 of 6 Seas the Day: Hawaii’s Hotel Sector Remains Buoyant Despite Slower Return to Normal | March 30, 2021
limited guest capacity because of a lower number of staff on-site and extensive cleaning measures that
came with the pandemic in the past year. According to the latest economic forecast from the University
of Hawaii, visitor expenditures in Hawaii by 2023 will remain 20.0% below 2019 levels. Because of
Hawaii's slower return to normal than the rest of the country, we have a cautious outlook on CMBS
loans backed by hotels in the state even as leisure travel looks resilient in the mainland.
Hawaii Lodging Market
The coronavirus pandemic caused a substantial disruption to Hawaii's tourism industry as travel
restrictions, quarantines, canceled conferences, and meetings choked off much of Hawaii’s visitors.
Furthermore, over the long term, we have some concerns about volatility from the condition of the U.S.
economy as well as the economy in Asia. Historically, downturns in Asia, such as those during the 2008-
09 global recession as well as the 2011 earthquake and tsunami in Japan, can exacerbate tourism woes
in Hawaii. Japan is Hawaii’s largest international market, averaging about 19.0% of the guest mix for the
past 20 years, per the HTA. Therefore, there is potential for a cascade effect in competitive areas, such
as Honolulu, as lower average daily rates (ADRs) and occupancy across the area have driven revenue
down.
According to STR, Hawaii's revenue per available room (RevPAR) was down 77.8% to $58.47 in January
2021 from $262.81 in January 2020. With Hawaii now open to tourists, many hotels have started
accepting reservations at discounted rates with relaxed cancellation policies as the ADR was down
20.2% in January 2021 compared with January 2020. As travel restrictions relaxed, with a mandated
prearrival 72-hour negative coronavirus test or 10-day quarantine upon arrival, the number of arriving air
travelers increased threefold in the first week of November compared with the prior week, per the HTA,
although this constitutes only a tiny percentage of the prepandemic numbers. While most hotels have
reopened with limited lodging capacity, the willingness of people to travel to Hawaii remains depressed.
Although U.S. hotel occupancy in the week ended March 6 hit a 20-week high, the island of Oahu had
the lowest occupancy level, at 30.9%, of all markets tracked by STR. The silver lining of the prolonged
down period is an opportunity for many hotel owners to renovate their properties with a view to increase
their competitiveness. Further, a lack of new construction should buoy the market. According to CBRE,
the supply pipeline for new properties and rooms in the state is under 5% within each hotel segment
and will remain stagnant for the next four to five years.
Hawaii's tropical location creates a low-pressure system that draws slow-moving storms. In the recent
weeks, torrential rain flooded and damaged dozens of properties, which prompted evacuation orders on
the islands of Maui and Oahu. With spring approaching and an ever-changing climate, travelers to
Hawaii will be closely monitoring their weather apps and making immediate changes to their travel
given the flexibility in air travel.Page 3 of 6 Seas the Day: Hawaii’s Hotel Sector Remains Buoyant Despite Slower Return to Normal | March 30, 2021
CMBS Exposure
CMBS Hawaii hotel exposure totals $4.28 billion among 25 loans securitized in either single-asset/single-
borrower (SASB) or conduit deals, 60% of which DBRS Morningstar rates. Hawaii is the second-largest
metropolitan statistical area in the SASB loan segment for hotels, after Las Vegas, with a total balance
of $3.39 billion backed by eight hotel properties as shown in Exhibit 2. This accounts for 79.2% of the
Hawaii hotel CMBS loan balance and 10.0% of SASB deals in the U.S. All SASB deals in Hawaii are
current, with 62.5% of them on the master servicers’ watchlist as they keep a close eye on potential
cash flow concerns from the pandemic.
Exhibit 2 Hawaii Hotel CMBS Deal Types
Deal Type as a % of Loan Balance Deal Type as a % of Total Properties
Conduit SASB Conduit SASB
20.8%
32.0%
68.0%
79.2%
Source: DBRS Morningstar.
Only four loans, with a combined balance of $49.2 million, were modified with forbearance agreements
that postponed monthly debt service or permitted borrowers to tap reserve funds to make their monthly
payments. While the smaller properties in conduit deals with lesser-known sponsors are the ones that
remain severely affected, SASB deals on larger properties continue to maintain their strong positions in
the market, such as the Ritz-Carlton in Kapalua and Hilton Hawaiian Village in Honolulu, which are
backed by well-known sponsors Blackstone and Hilton Worldwide Holdings, respectively.
Exhibit 3 displays 10 hotel properties with an increased risk to changes in loan performance.
Exhibit 3: Properties on our Radar
DBRS Morningstar Rated Deal Name Loan Name Location Balance ($) Specially Serviced Delinquent Forbearance Appraisal Value ($) % of Deal
Yes COMM 2014-CCRE18 Pagoda Hotel & King Office Honololu, HI 12,042,915 Yes Yes Yes 25,300,000 1.6
Yes BANK 2018-BNK14 Doubletree Grand Naniloa Hotel Hilo, HI 48,590,608 Yes Yes No 55,000,000 3.6
Yes GSMS 2018-LUAU Ritz-Carlton Kapalua Kapalua,HI 215,000,000 No No No 280,900,000 100.0
Yes HHT 2019-MAUI Four Seasons Maui Kihei, HI 650,000,000 No No No 963,000,000 100.0
Yes HILT 2016-HHV + 8 Loans Hilton Hawaiian Village Waikiki Beach Resort Honololu, HI 1,275,000,000 No No No 2,230,000,000 100.0
Yes CSAIL 2015-C4 Fairmont Orchid Kohala Coast, HI 112,500,000 No No No 227,200,000 13.0
Yes MSC 2019-L2 Ohana Waikiki Malia Hotel & Shops Honololu, HI 63,000,000 No No No 123,000,000 6.8
No CGCMT 2018 - TBR Turtle Bay Resort Kahuku, HI 189,100,000 No No No 347,100,000 100.0
No BBCMS 2019 - C4 + 1 loan Maui Portfolio Multiple 16,000,000 No No Yes 45,100,000 1.7
Yes JPMCC 2016-WIKI Hyatt Regency Waikiki Beach Resort & Spa Honololu, HI 400,000,000 No No No 782,000,000 100.0
Source: DBRS Morningstar.Page 4 of 6 Seas the Day: Hawaii’s Hotel Sector Remains Buoyant Despite Slower Return to Normal | March 30, 2021
Hilton Hawaiian Village Waikiki Beach Resort
With beachfront access across its 22 acres, the resort sits on the north end of Honolulu's Waikiki district
with five guest towers, 2,860 rooms, and conference space for up to 2,600 attendees. The Hilton
Hawaiian Village backs nine pari passu loans with a combined balance of $1.28 billion, nearly 60.0% of
which is in the SASB $750.0 million HILT 2016-HHV deal (rated by DBRS Morningstar).
As the pandemic emerged, the loan’s debt service coverage ratio (DSCR) dropped to -0.26x for 2020
because of a sharp decline in room revenue, food and beverage revenue, and other departmental
revenue. YE2020 occupancy was down to 55.0% from 93.0% at issuance. Previously, the property had
seen strong historical performance, with occupancy levels that boosted its DSCR to 2.70x at the end of
2019 from the issuer’s underwritten level of 2.44x. The property had also outperformed its competitive
set prepandemic. According to the September 2019 STR report, the resort’s occupancy rate of 93.6%
was well above the competition's 82.2%. Despite its ADR slightly underperforming others, the hotel
produced a RevPAR of $246.52, resulting in a RevPAR penetration index of 113.6%, roughly 10.0%
greater than the 2017 and 2018 RevPAR indexes.
While the property displayed strong performance prior to the pandemic, the loan may represent an
elevated risk. As Hawaii reopens to domestic travelers, we believe the property will take a few years to
recover completely from a year of little to no revenue. The costs associated with the property’s luxuries
in terms of size, location, and services pose barriers to a quick recovery. Although the loan's sponsor is
Park Intermediate Holdings (publicly traded spinoff of Hilton Worldwide Holdings), the property
continues to be sensitive to the effects on the global economy.
Hyatt Regency Waikiki Beach Resort & Spa
The Hyatt Regency Waikiki Beach Resort and Spa, a 1,230-room full-service resort hotel overlooking
Waikiki Beach, backs the $400.0 million JPMCC 2016-WIKI SASB deal (rated by DBRS Morningstar). The
property, comprising two 40-story oceanfront towers with 94,433 square feet of retail space on the first
three floors, saw 2020's net cash flow (NCF) tumble, prompting its May 2020 transfer to special
servicing. Three months later, the loan returned to the master servicer aided by the approval of a
coronavirus relief request following the execution of a forbearance agreement. The loan, which is
current, posted a -1.40x DSCR for 2020 on 19.0% occupancy. This follows a slight downturn in 2019,
when NCF fell nearly 20.0% from the issuer’s underwritten figure resulting in a DSCR of 1.77x.
The declining cash flow could jeopardize the loan’s maturity in September 2021, which could be further
compromised by the $145.0 million in additional mezzanine debt outside the trust. Further, even as the
United States begins to rebound, the property’s reliance on 65.0% to 70.0% of its guests from the Asia-
Pacific region could hamper its return to profitability, as these economies may be slower to recover from
the pandemic.
Doubletree Grand Naniloa Hotel
The Grand Naniloa Hotel, a 388-room hotel in Hilo on the island of Hawaii, built in 1966 and last
renovated in 2017, makes up 3.6% of BANK 2018-BNK14 (rated by DBRS Morningstar). The hotel saw itsPage 5 of 6 Seas the Day: Hawaii’s Hotel Sector Remains Buoyant Despite Slower Return to Normal | March 30, 2021
value plummet roughly 45.0% based on a November 2020 appraisal after the borrower defaulted and
requested relief. The property was reappraised at $55.5 million, down from its issuance value at $100.1
million, which raised the LTV to 88.4% from 50.0% at issuance.
The property was underperforming before the pandemic as volcanic air pollution from the nearby
Kilauea volcano in 2018 disrupted tourism on the east side of the island. Consequently, the 2018 and
2019 NCFs trailed issuance, and the 2019 NCF DSCR fell below breakeven at 0.61x, down from the
issuer’s underwritten DSCR of 1.70x. Just when the property started showing signs of improvement in
early 2020, the pandemic halted its recovery. The loan transferred to the special servicer in June 2020
after the borrower fell delinquent.
The sponsors, the founders of Tower Development, are significantly less inclined to continue injecting
capital or holding onto the property because of its below-average prepandemic performance, extended
delinquency, and significant value decline.
Looking Ahead
DBRS Morningstar expects a long road to recovery for most Hawaiian U.S. CMBS loans as tourism
trickles back. With tourism forecast to pick up in the latter half of 2021 once more people get vaccinated
and confidence picks up for leisure travel, we believe that most loans will see an incline in the
performance metrics as 2021 unfolds. However, maturing loans in 2021 could face an increased
refinance risk if investors pull back on lending under sustained poor global economic conditions and
continued travel restrictions for fly-to destinations.Page 6 of 6 Seas the Day: Hawaii’s Hotel Sector Remains Buoyant Despite Slower Return to Normal | March 30, 2021
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