DBRS Confirms All Classes of BHMS 2018-ATLS

DBRS Limited (DBRS) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-ATLS issued by BHMS 2018-ATLS (the Trust) as follows:

-- 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.

The rating confirmations reflect the overall stable performance of the transaction since issuance. The $1.2 billion Trust loan closed in July 2018 and is secured by the Atlantis, a 2,917-key luxury beachfront 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 feet (sf) casino, the 141-acre Aquaventure waterpark, 73,391 sf of retail space and spa facilities and 500,000 sf of meeting and group 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. The loan is sponsored by BREF ONE, LLC, a subsidiary of Brookfield Asset Management Inc. (rated A (low) with a Stable trend by DBRS). The hotel is managed by the sponsor-affiliate Brookfield Hospitality Management with a 20-year management agreement that expires in 2034. There is also a franchise agreement in place with Marriott International, under the Autograph Collection that runs through 2034.

Loan proceeds of $1.2 billion along with $650.0 million in mezzanine debt spread across three loans were used to refinance existing debt of $1.7 billion (previously secured in the BHMS 2014-ATLS Mortgage Trust transaction), return $148.9 million of sponsor equity and cover closing costs, thus leaving $635.0 million of cash equity remaining behind the transaction. The loan has a two-year interest-only (IO) original term with five one-year extension options that are also fully IO. Approximately $213 million ($73,020 per key) in capital improvements were completed by the sponsor between 2012 and 2017 in order to compete with newly constructed competition. The sponsor had plans at issuance to complete an $8.0 million ($32,000 per key) renovation to upgrade soft and case goods for The Royal; however, proceeds were not reserved upfront. Per the servicer, the budget increased to $9.0 million and the renovation will begin in August 2019 with a completion date in December 2019.

Per the year-end (YE) 2018 financials, the loan reported a net cash flow (NCF) figure of $118.3 million, well below the DBRS NCF figure of $147.8 million derived at issuance and the normalized YE2017 NCF of $173.2 million. The YE2018 departmental income decreased $30.5 million from the DBRS NCF and decreased $25.9 million from the YE2017 departmental income. While revenues have been declining year over year since 2015, the considerable drop in 2018 could be due to a discrepancy in Other Income reported by the servicer. DBRS is verifying whether all Other Income is being reported by the servicer in the YE2018 financials.

The revenue declines over since 2017 is most likely due to the opening of the 2,019-key Baha Mar, a direct competitor that opened 7.3 miles from the collateral in April and November 2017. Baha Mar’s highest-luxury tower, Rosewood, opened in June 2018. Baha Mar is a $3.5 billion luxury resort that features three towers of different hotel brands, including the Grand Hyatt, SLS and Rosewood, as well as a 100,000 sf casino. Baha Mar caters to a more affluent adult clientele, rather than families, and does not offer water and marine attractions that are key demand and revenue drivers at the subject. Baha Mar does offer the largest casino in the Caribbean, which is expected to drive down casino revenue at the subject.

Based on the trailing 12-month (T-12) ending March 31, 2019, Smith Travel Research (STR) report, The Royal (1,201 keys) reported occupancy rate, average daily rate (ADR) and revenue-per-available room (RevPAR) figures of 68.2%, $240 and $164, respectively, compared with the competitive set’s figures of 65.7%, $266 and $175, respectively. The Royal’s figures were an improvement from the T-12 ending March 31, 2018, occupancy rate, ADR and RevPAR of 59.7%, $241 and $144, respectively. According to the T-12 ending April 30, 2019, STR report, The Cove (600 keys) reported T-12 occupancy rate, ADR and RevPAR figures of 74.0%, $441 and $326, respectively, compared with the competitive set’s figures of 63.6%, $379 and $241, respectively. The Cove’s figures were a moderate improvement from the T-12 ending March 31, 2018, occupancy rate, ADR and RevPAR of 70.1%, $429 and $300, respectively.

The Tourism Today Network, run by the Bahamas Ministry of Tourism, noted that international visitors to Nassau/Paradise Island were up 23.4% between January 2019 to May 2019, and air arrivals increased every month of 2018 as a result of the new resorts that opened on the island between 2017 and 2018. It is likely that much of the new tourist traffic is being drawn to the new Baha Mar due to the brand-new amenities and accommodations on the island. DBRS performed an internal assessment of The Commonwealth of the Bahamas on June 25, 2019, and rated it BBB category, the same rating at issuance.
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.

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

The principal methodology is North American CMBS Surveillance Methodology, which can be found on www.dbrs.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 Global Structured Finance Related Methodologies document, which can be found on www.dbrs.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.

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.com.

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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS 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.

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