Morningstar DBRS Changes Trends on Four Classes of GS Mortgage Securities Corporation Trust 2018-LUAU to Negative From Stable

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-LUAU issued by GS Mortgage Securities Corporation Trust 2018-LUAU:

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

Morningstar DBRS changed the trends on Classes D, E, F, and X-NCP to Negative from Stable. The trends on the remaining classes are Stable.

The Negative trends reflect the continued decline in the operational performance of the property, Ritz-Carlton Maui, Kapalua, which reported a negative net cash flow (NCF) as of YE2024. At the prior credit rating action in May 2024, Morningstar DBRS noted that the property benefitted from high barriers to entry given its location on the island of Maui and its luxury quality. Additionally, while performance dipped during the Coronavirus Disease (COVID-19) pandemic and again during the 2023 wildfires, which prompted the hotel to temporarily close between August and September 2023, Morningstar DBRS expected performance to rebound by the end of 2024, with the return of tourism. However, despite these aspects, which Morningstar DBRS previously expected to contribute to cash flow stability over the remaining loan term, operating performance dropped further, predominantly due to higher expenses.

The $215.0 million floating-rate interest-only (IO) loan is secured by the fee-simple interest in the 466-key Ritz-Carlton Maui, Kapalua, a luxury resort hotel in Hawaii. The property consists of 300 hotel keys and 166 residential condominium suites. Of the 166 condominium suites, 68 are owned by third parties that rent their units on the Ritz-Carlton hotel website. The unit owners pay all expenses and share revenue in a 50/50 split with the hotel. Additionally, the hotel owns the remaining 98 condominium units, and that income is included as collateral for the loan. The hotel, which was constructed in 1976 and opened as a Ritz-Carlton in 1992, was last renovated in 2017. The hotel has access to two championship golf courses that are not part of the collateral. The sponsor is Blackstone Real Estate Partners (Offshore) VIII-NQ L.P., a leading global asset manager with over $1.2 trillion assets under management as of Q1 2025, and $320.0 billion of real estate assets under management, and remains to be one of the largest owners of hotels in the world.

Based on the servicer's reporting, the borrower has exercised the loan's fifth and final maturity extension option, extending loan maturity to November 2025. Morningstar DBRS has requested an update regarding the exit strategy but has yet to receive a response. While the loan remains current, Morningstar DBRS believes the borrower may face challenges with refinancing the outstanding debt given the hotel's negative cash flow, further supporting the Negative trends.

Because the hotel did not sustain any physical damage from the outbreak of wildfires and had been performing above issuance levels as of YE2022, with a NCF of $16.4 million, after performance bottomed out during the COVID-19 pandemic, Morningstar DBRS expected NCF to recover following the reopening of the hotel in October 2023. Instead, the hotel generated negative cash flow as per the YE2024 financials, a significant drop when compared to the YE2023 NCF of $12.0 million. The decline from YE2023 NCF has been driven in large part by significant increases in operating expenses, which have increased 10.2% year over year and imply a 96.0% operating expense ratio. The increases in operating expenses are specifically tied to general and administrative expenses, advertising and marketing, and franchise fees, which is related to the recent 10-year franchise extension. Despite these increases, Morningstar DBRS considers these expenses to be one-time costs and they are not expected to recur in the near term. Additionally, revenue as of YE2024 remains relatively in line with issuance levels, as does the average daily rate (ADR) and revenue per available room (RevPAR) figures of $668 and $380, respectively. While the hotel's occupancy penetration remains below 100%, at 89.3%, it continues to outperform its competitive set in terms of ADR and RevPAR, based on the corresponding penetration rates of 124.8% and 111.4%, respectively, per the trailing 12 months (T-12) ended December 31, 2024, STR report. In comparison, last year's penetration rates were 98.5%, 89.1%, and 87.8%, respectively.

Given the negative cash flow, Morningstar DBRS does not believe the hotel can rebound to issuance levels prior to the loan's final maturity. However, as the hotel continues to benefit from the return of tourism, institutional sponsorship, the various mitigants noted above, and as it is continuing to outperform the competitive set with respect to RevPAR, Morningstar DBRS does not expect the hotel to sustain a valuation loss large enough to default the loan, but rather pursue a loan modification to further extend its maturity. As such, Morningstar DBRS maintained the 2020 valuation approach, which was based on a capitalization rate of 7.75% applied to the Morningstar DBRS NCF of $13.6 million. The Morningstar DBRS value of $175.7 million was derived, representing a variance of -37.2% from the issuance appraised value of $280.0 million and implies a whole-loan loan-to-value (LTV) ratio of 122.3%. In addition, Morningstar DBRS maintained total qualitative adjustments of 7.0% to the LTV sizing benchmarks to reflect the potential for cash flow to recover in the medium to long term, given the strong barriers to entry, strong property quality, and superior market fundamentals.

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 Factors in Credit Ratings at (August 13, 2024): https://dbrs.morningstar.com/research/437781.

Class X-NCP is an 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 (February 28, 2025) https://dbrs.morningstar.com/research/448963.

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 info-DBRS@morningstar.com.

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.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

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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 (February 28, 2025)
https://dbrs.morningstar.com/research/448962
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024)
https://dbrs.morningstar.com/research/439702
-- Legal Criteria for U.S. Structured Finance (December 3, 2024)
https://dbrs.morningstar.com/research/444064
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024)
https://dbrs.morningstar.com/research/438283
-- Interest Rate Stresses for U.S. Structured Finance Transactions (March 27, 2025)
https://dbrs.morningstar.com/research/450750

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

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