DBRS Morningstar Confirms All Ratings on BHMS 2018-ATLS, Removes UR-Dev. Status

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the following classes of the Commercial Mortgage Pass-Through Certificates, Series 2018-ATLS (the Certificates) 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. The ratings have been removed from Under Review with Developing Implications, where they were placed on November 14, 2019.

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, on the DBRS Morningstar website at www.dbrsmorningstar.com.

Prior to the finalization of the NA SASB Methodology, the DBRS Morningstar ratings for the subject transaction and all other DBRS Morningstar-rated transactions subject to the methodology in question were previously placed Under Review with Developing Implications, as the proposed methodology changes were material.

The subject transaction is one of four NA SASB transactions (24 classes of certificates) publicly rated by both Morningstar Credit Ratings, LLC (MCR) and DBRS Morningstar. As noted in the March 1, 2020, press release, as part of the ongoing consolidation of DBRS Morningstar and MCR, MCR previously placed its outstanding ratings on NA SASB transactions Under Review – Analytical Integration Review. Please see MCR’s press release dated November 14, 2019, on MCR’s website at www.ratingagency.morningstar.com. In conjunction with these rating actions by DBRS Morningstar for the subject transaction, the MCR ratings will be withdrawn.

The subject rating actions are the result of the application of the NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology,” as applicable. Qualitative adjustments were made to the final loan-to-value (LTV) Sizing Benchmarks used for this rating analysis.

The subject transaction’s underlying loan is secured by the Atlantis Resort, a 2,917-key luxury beachfront resort located on Paradise Island in the Bahamas. Also included in the collateral is 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 Morningstar). 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 through 2034 with Marriott International Inc. (Marriott), with the property marketed under the Marriott brand’s Autograph Collection.

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 transaction), return $148.9 million of sponsor equity, and cover closing costs, 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 extionsion options that are also fully IO.

In the analysis for these rating actions, the DBRS Morningstar NCF figure of $147.8 million derived at issuance was accepted and a cap rate of 9.0% was applied, resulting in a DBRS Morningstar Value of $1.64 billion, a variance of -33.9% from the appraised value at issuance of $2.49 billion. The DBRS Morningstar Value implies an LTV of 73.1%, as compared with the LTV on the issuance appraised value of 48.3%. The cap rate applied is around the midpoint of the range of DBRS Morningstar Cap Rates for lodging properties.

DBRS Morningstar notes the cap rate is reflective of the property’s location with no true competitor in the area, high property quality, and condition of the asset relative to the market. However, in determining the cap rate, consideration was given sovereign risk associated with the Bahamas government (currently investment-grade rated), as well as the heavy reliance on international tourism. DBRS Morningstar notes that a property of similar quality and overall appeal, but located in a market with a more diversified economy and/or location with better proximity to other travel destinations, would likely see a cap rate applied further to the low end of the DBRS Morningstar Cap Rate ranges.

The international tourism reliance factor is particularly noteworthy given the global travel disruptions currently underway amid the Coronavirus Disease (COVID-19) outbreak. If the outbreak and related travel restrictions and cancellation trends observed thus far extend for the moderate to longer term, DBRS Morningstar notes the subject will likely see a significant cash flow drop in the coming months.

Based on the trailing 12-month (T-12) financials ending in September 2019, the loan reported a net cash flow (NCF) of $178.7 million, well above the YE2018 figure of $118.3 million, and above the DBRS Morningstar NCF figure of $147.8 million derived at issuance. The drop in performance at YE2018 was primarily because of a decline in departmental income, from a large discrepancy in Other Income, which captures most of the casino revenue for the resort.

DBRS Morningstar notes the recent opening of the 2,019-key Baha Mar, a competing resort that opened the first phase of development in June 2018, located approximately seven miles from the collateral property. 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 at issuance was expected to drive down casino revenue at the subject resort. In, addition, the Baha Mar resort is newer and has higher-end finishes. However, DBRS Morningstar maintains that in terms of overall appeal for the vast majority of visitors to the island, the subject is generally superior to the Baha Mar because of the longer list of amenities that appeal to families, recent capital improvements, and more budget-friendly price point.

Approximately $213.0 million ($73,020/key) in capital improvements were completed by the sponsor between 2012 and 2017, including a $25.4 million ($40,448/key) renovation in 2018 to The Coral (629 keys), which targeted newly designed rooms and a pool area, as well as a brand new lobby in order to compete with the Baha Mar. According to recent news articles, a renovation of The Reef (495 key; non-collateral) was recently completed, with the borrower planning an 18- to 24-month renovation of The Royal Tower (1,201 keys). At issuance, the sponsor had plans to complete an $8.0 million ($32,000/key) renovation to The Royal Tower, to upgrade soft and case goods; however, that money was not reserved upfront. Per the servicer’s most recent update, the budget had been increased to $9.0 million ($36,000 key).

Based on the T-12 ending March 2019 Smith Travel Research (STR) report (most recent on file with DBRS Morningstar), The Royal Tower (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 Tower’s figures were an improvement from the T-12 ending March 2018 occupancy rate, ADR, and RevPAR of 59.7%, $241, and $144, respectively. According to the T-12 ending April 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 2018 occupancy rate, ADR, and RevPAR of 70.1%, $429, and $300, respectively.

The DBRS Morningstar NCF figure applied as part of the analysis represents a -18.5% variance to the Issuer’s NCF, primarily driven by occupancy and other sources of revenue from hotel and nonhotel items, including food and beverage outlets, casino operations, water/marine attractions, retail stores, the water plans, and other miscellaneous income. The Issuer assumed an occupancy rate of 72.2% in its underwritten cash flow, while DBRS Morningstar used a 70.0% occupancy rate. For other sources of revenue, DBRS Morningstar sourced the T-12 ending March 2018 ratio to total revenue or dollar amount, with the exception of casino income that was concluded to a historical average because of general volatility and a recent spike, and the impact of the Baha Mar.

While performance is currently above DBRS Morningstar’s issuance expectations, hotels typically exhibit higher cash flow volatility, particularly amid events like the ongoing coronavirus outbreak. If the outbreak’s impact on global travel continues to escalate and extends into a longer term, significant cash flow declines at the subject and other hotel properties around the world can be expected, at least temporarily. DBRS Morningstar notes the subject transaction benefits from strong sponsorship, which has shown an interest in maintaining the competitiveness of the property through continually investing in capital improvement, and the overall strong competitive stance for the collateral resort, both of which should be conducive to the ability to weather any short- to medium-term effects of the coronovirus outbreak.

Classes X-CP and X-NCP are IO certificates that reference a single rated tranche or multiple rated tranches. The IO ratings 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.

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

The principal methodology is the North American Single-Asset/Single-Borrower Ratings 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 Morningstar 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 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

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