DBRS Assigns Provisional Ratings to BHMS 2018-ATLS

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-ATLS to be issued by BHMS 2018-ATLS:

-- Class A at AAA(sf)
-- Class X-CP at AAA (sf)
-- Class X-NCP 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 (sf)
-- Class HRR at BB (low) (sf)

All trends are Stable.

All classes will be privately placed. The Class X-CP and X-NCP balances are notional. DBRS’s ratings on interest-only (IO) certificates address the likelihood of receiving interest based on the notional amount outstanding. DBRS considers the IO certificate’s position within the transaction payment waterfall when determining the appropriate rating. The Notional Amount of the Class X-CP Certificates will be equal to the aggregate Certificate Balance of the Class A Certificates. The Notional Amount of the Class X-NCP Certificates will be equal to the aggregate Certificate Balance of the Class A Certificates.

The loan is secured by the Atlantis Resort, a 2,917-room luxury hotel resort located on Paradise Island in the Bahamas. The collateral also includes the fee interest in amenities including, but not limited to, 40 restaurants and bars, a 60,000 square foot (sf) casino, the 141-acre Aquaventure waterpark, 73,391 sf of retail space and spa facilities and 500,000 sf of meeting and event space. The resort includes a luxury tower with an additional 495 rooms owned by third parties as condo-hotel units and 392 timeshare rooms located at the Harborside Resort, both of which are not a part of the collateral for the loan.

The subject property is a luxury hotel and beach village located in the Bahamas on a 171-acre beachfront parcel. The property consists of four unique hotel towers (The Beach, The Coral, The Royal and The Cove) together with a non-collateral condominium, The Reef tower, and an expansive list of amenities designed to cater to three generations of guests. The resort was reconstructed in three phases from 1994 to 2007, but acts as one massive, cohesively managed property. With the exception of two pools that have access restricted to the The Cove and one pool with access restricted to the The Cove and the The Reef, the rest of the property, including the water attractions, casinos, restaurants, spa, shops, children’s club, movie theater and gym can be accessed by all guests. The mix of older and newer guest room towers with 3,309 rooms in total (2,917 serving as collateral) provides a wide variety of options ranging in size from 260 sf to nearly 100 rooms across the property offering suites of at least 1,000 sf. As of the 12 months ending March 31, 2018, average daily rates range from $241.16 per night for a room in the most affordable towers (The Beach and The Coral) to $433.19 per night for a room at the luxury tower (The Cove), making the Atlantis an attractive destination across a breadth of demographics.

Atlantis is a destination offering a tailored experience for all ages. There is a long list of amenities included in the total room charges, including but not limited to the five beautiful beaches, 11 distinct pool areas and the 141-acre water park. A water park of this size is designed for children of all ages, with attractions such as a six-story fast-speed waterslide that shoots guests through a tunnel submerged in a lagoon of sharks; a challenger slide that allows guests to race down side-by-side, with speeds registered by clocks at the bottom; a 50-foot water slide that drops through complete darkness; and for smaller children, an elaborately decorated water playground as well as a lazy river that takes guests around a quarter-mile loop guided by gentle water currents. Access to The Dig, an underground marine exhibit, is also included. Atlantis features more than 50,000 sea animals with over 250 species, most of which can be viewed in The Dig. Guests are also able to take a guided dive with some of the unique species they care for.

The Atlantis generates significant amounts of non-room revenue, which represents 71.0% of total DBRS revenue. Cruise ships generate a substantial amount of revenue at the Atlantis, as various packages are sold that provide for the use of resort amenities while docked during the day. Atlantis also generates income on the sale of day passes for use of Aquaventure. Use is closely monitored depending on peak or non-peak seasons to be sensitive to hotel guests and overcrowding. Non-room revenue is well-diversified with food and beverage (F&B) outlets, casino, water attractions, retail and water plant representing 26.8%, 20.0%, 7.8%, 1.8% and 2.2% of DBRS total revenue, respectively. The average length of stay is reportedly 4.3 days and no tower currently offers all-inclusive packages; however, there are plans to potentially convert the Beach Tower to an all-inclusive concept. There are 40 F&B outlets ranging from high-end restaurants such as Nobu, Olives and its newest addition, Fish, which opened in May 2018, to casual counters and bars around the pool to the teens’ club and adult nightclubs. The casino is very large and spans 60,000 sf, offering table games, slots, a newer sports book and a private gambling room. For an added cost, guests can swim with dolphins and sea lions at the Dolphin Cay and Education Center, which encompasses 14 acres with nearly 7.0 million gallons of seawater pools. The retail offerings range from souvenir shops to high-end retailers such as Versace and John Bull. Additionally, the Atlantis water plants provide water to all of Paradise Island for a service fee. Management has done a good job of finding creative ways of generating revenue even when the weather is inclement or when guests just want to get out of the sun. Examples of this include movies played all day at a state-of-the-art theater with stadium seating and concessions and a drop-off kids club for ages three to 12, with miniature car racing and a clay-making shop. Amenities targeted to adults include the spa, gym, casino or shops. Although the high level of non-room revenue is viewed as a risk because it can be somewhat volatile, it benefits the property by diversifying cash flow, with both guests and non-guests willing to pay a fee to access an extensive list of property amenities.

Within DBRS’s “Rating Sovereign Governments” methodology, Appendix C addresses the impact of sovereign ratings on other DBRS ratings, including structured finance ratings. The above-mentioned methodology states that, in most cases, structured finance ratings are limited to two rating categories above the sovereign (e.g., from BBB to AA). DBRS performed an Internal Assessment of The Commonwealth of the Bahamas with the result at the BBB category. As such, typically this would result in a rating cap of AA. However, given the specific attributes of this transaction and property, DBRS is comfortable with rating three categories above the sovereign, at AAA. The rationale for such uplift is as follows: the borrower is required to maintain political risk insurance in the amount of $560.0 million covering expropriatory acts, currency inconvertibility and non-transfer, political violence and war and civil war. This is less than the amount of coverage in the previous securitization in 2014, which was $800.0 million, though DBRS considers it adequate given the country’s lack of a history of political violence and upheaval. Additionally, the transaction is a securitization of USD-denominated bonds secured by cash flows from the property that are largely collected (approximately 95%) in USD and with a majority that are never converted to Bahamian currency via cash management arrangements, ensuring those cash flows never enter the Bahamas. While the substantial portion of the revenues of the property are denominated in USD, a portion of the revenue is in Bahamian dollars, which are used to pay Bahamian-dollar budgeted or otherwise permitted expenses with respect to the property without conversion into USD. To incorporate potential for the unknown events that may be associated with prolonged workouts and additional volatility associated with a prolonged workout in a foreign jurisdiction, DBRS increased its capitalization rate on the asset to account for an elevated probability of default and/or loss given default.

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 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 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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.