DBRS Morningstar Assigns Ratings to GS Mortgage Securities Corporation Trust 2018-LUAU

DBRS Limited (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2018-LUAU (the Certificates) issued by GS Mortgage Securities Corporation Trust 2018-LUAU as follows:

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

All trends are Negative because the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic.

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 7, 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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.

LOAN/PROPERTY OVERVIEW
The collateral for the Certificates is a $215.0 million mortgage loan on the 466-key Ritz-Carlton Kapalua resort hotel on the island of Maui, Hawaii. The loan assisted in the sponsor’s acquisition of the hotel in September 2018 for $280.9 million. The interest-only (IO), floating-rate loan has a two-year maturity in November 2020 with five one-year extension options and DBRS Morningstar expects the borrower to exercise its first extension option. Interest is set at Libor plus 275 basis points (bps), and the spread is subject to an increase of 25 bps upon the fourth extension. The borrower purchased a Libor interest rate cap with a strike price of 3.5%. The Ritz-Carlton, Kapalua site is owned fee simple, which is highly unusual for any site on the islands.

The hotel was constructed in 1976 and opened as a Ritz-Carlton in 1992 on the 49-acre site that features a three-tiered swimming pool, multiple whirlpools, a fitness facility and 17,500-square-foot (sf) spa, six food and beverage (F&B) outlets, retail space, tennis courts, and 229,000 sf of multipurpose space, including indoor meeting space and an outdoor ballroom. The hotel has access to two championship golf courses that are not part of the collateral. The hotel features 300 hotel keys and 107 residential condominium suites that total 166 keys. Of the 466 keys, 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. In addition, the hotel owns the remaining 98 condominium units, whose income is included to support the loan. Total collateral includes the 398 keys and the revenue sharing from other units.

From 2014 to 2018, the hotel received approximately $36.0 million, or $91,000 per key, in capital improvements and upgrades to the guest rooms, pool and cabana, lobby, and certain F&B outlets. The sponsor planned to use another $5.5 million to renovate the restaurant. The sponsor implemented the renovations/upgrades to justify raising the room rates to levels that are competitive with the Four Seasons and Montage hotels, which are also located in Maui.

The sponsor is Blackstone Group Inc., one of the largest private equity real estate investment managers in the world. The guarantor of the recourse carveouts is Blackstone Real Estate Partners VIII-NQ L.P. The guarantor’s liability is capped at 15% of the loan’s outstanding principal balance. Ritz-Carlton Hotel Company, LLC manages the hotel under a management agreement in which the fully extended term expires in 2071.

The facility also has a competitive disadvantage because of its location on the far northwest of the island, somewhat distant from the main airport and the cluster of luxury resort hotels on the western shoreline. A shore road that rings a large volcanic mountain provides access to the hotel. The hotel is not inaccessible, but it is removed from the main body of hotels. Also, the weather at this location is less favourable than other parts of the island and the hotel has access to two small beaches on an otherwise rocky coastline. However, the island has one of the highest barriers to entry of any resort market in the world, which offsets its locational disadvantage. Available sites are extremely rare or nonexistent, and zoning is complex and protective.

Historic occupancy at the hotel was typically in the mid-70% range from loan origination through mid-2018. The average daily rate was plus or minus $400 until the renovation, after which it jumped to nearly $460 per room per night. As of March 2020, occupancy had risen to 82%; however, the coronavirus pandemic and economic slowdown in mid-March crushed the local economy. The governor responded to the virus by closing the island’s tourism-related industry and has now further delayed the reopening date for this industry to October 2020 from September 2020. Anyone arriving to the islands on or before September 30, 2020, must self-quarantine for 14 days or the length of their stay, whichever is shorter, and designate a hotel as their quarantine location.

At this time, the Ritz-Carlton, Kapalua is closed but the website is accepting reservations for stays from October 1, 2020, onward. Upon reopening, the hotel will institute health and safety procedures for all employees and hotel guests. The servicer reports on-time payments through September 9, 2020, with no delinquent debt payments. The borrower continues to fund the shortfall.

DBRS Morningstar reanalyzed the net cash flow (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 $13.6 million and DBRS Morningstar applied a cap rate of 7.75%, which resulted in a DBRS Morningstar Value of $175.7 million, a variance of 37.2% from the appraised value of $280.0 million at issuance. The DBRS Morningstar Value implies an LTV of 122.3% compared with the LTV of 76.8% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the middle end of the range of DBRS Morningstar Cap Rate Ranges for lodging properties, reflecting the luxury quality of the collateral, given that it is one of only four Hawaiian resorts to earn the AAA Five Diamond designation; extremely high barriers to entry for the market; and a very strong and robust sponsor for the loan.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totalling 7.0% 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 45.0% 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 through Class F exceeded the scenario value under the Coronavirus Impact Analysis and DBRS Morningstar therefore presumes that the economic stress from the coronavirus had affected the class.

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-CP and X-NCP 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.

Notes:
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 [email protected].

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 protected].

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