DBRS Morningstar Confirms Ratings on BHMS 2018-ATLS, Maintains Ratings Under Review with Negative Implications

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

-- Class A 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)

DBRS Morningstar has also maintained all classes Under Review with Negative Implications, given the negative impact of the Coronavirus Disease (COVID-19) on the underlying collateral and the lowering of DBRS Morningstar’s internal assessment on The Commonwealth of the Bahamas.

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 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.

As it reviewed the ratings for 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 stress 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 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-foot (sf) casino; the 141-acre Aquaventure water park; 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, neither of which are part of the collateral. 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 extension options that are also fully IO.

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.

At issuance, DBRS Morningstar noted the opening of the 2,019-key Baha Mar, a competing resort that began its 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. At issuance, Baha Mar did not offer water and marine attractions that are key demand and revenue drivers at the subject. However, Baha Mar is developing its own $300 million water park set to open in 2021, which could pose additional competition for the subject property. 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.

Between 2012 and 2017, the sponsor completed approximately $213.0 million ($73,020/key) in capital improvements, including a $25.4 million ($40,448/key) renovation in 2018 to The Coral (629 keys) that 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 news articles, a renovation of The Reef (495 keys; noncollateral) was completed in 2020, with the borrower planning an 18- to 24-month renovation of The Royal Tower (1,201 keys).

The subject’s reliance on international tourism is particularly important given the global travel disruptions currently underway amid the coronavirus pandemic. The Bahamas’ Ministry of Tourism responded to the virus by closing the island’s tourism industry and has now further delayed the reopening date for this industry to October 2020 from September 2020. As of October 15, 2020, beaches and hotels are able to be open on all major islands in Bahamas; however, some resorts such as Baha Mar are opting to delay reopenings until the winter. The Atlantis Resort reopened as of October 15, 2020. Currently there are no pandemic-related relief requests and the loan is performing.

Based on the trailing 12-month (T-12) financials ended 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 due to a decline in departmental income from a large discrepancy in Other Income, which captures most of the casino revenue for the resort.

Based on the T-12 ended 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 ended March 2018 occupancy rate, ADR, and RevPAR of 59.7%, $241, and $144, respectively. According to the T-12 ended 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 ended March 2018 occupancy rate, ADR, and RevPAR of 70.1%, $429, and $300, respectively. YE2020 financials may drop quite substantially because of the prolonged closures of the resorts and the decline in tourism.

DBRS Morningstar updated its internal assessment of The Commonwealth of the Bahamas in Q2 2020, resulting in a lower internal assessment than previously assigned. This lowered rating could result in a ceiling to this transaction’s rating which was originally mitigated and may continue to be mitigated by the political risk insurance of $560.0 million, the transaction’s securitized bonds by cash flows that are largely (95%) denominated in U.S. dollars, and DBRS Morningstar’s increased capitalization rate to account for decreased value in an elevated probability of default situation. The transaction remains Under Review with Negative Implications as a result of this updated assessment in addition to going concern regarding the impact the pandemic has had on the tourism industry.

DBRS Morningstar reanalyzed the 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 $147.8 million and DBRS Morningstar applied a cap rate of 9.0%, which resulted in a DBRS Morningstar Value of $1,642 million, a variance of 33.9% from the appraised value of $2,485 million at issuance. The DBRS Morningstar Value implies an LTV of 73.1% compared with the LTV of 48.3% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the middle of the range of DBRS Morningstar Cap Rate Ranges for lodging properties. At issuance, DBRS Morningstar applied a stressed cap rate in its analysis to account for the additional decline in value associated with default tied to sovereign risk associated with The Commonwealth of the Bahamas. DBRS Morningstar maintained its additional cap rate stress with the October 2020 surveillance review. Additionally, DBRS Morningstar considered the dominant nature of the collateral, good property quality, and capital improvements recently made to the property in determining the final cap rate of 9.0%.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis totalling 5.25% 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% 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 was insulated from loss.

The DBRS Morningstar rating assigned to Class C had variances that were generally higher than those results implied by the LTV sizing benchmarks when MVDs are assumed under the Coronavirus Impact Analysis. This class remains Under Review with Negative Implications as DBRS Morningstar continues to monitor the evolving economic impact of coronavirus-induced stress on the transaction.

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-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 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.

DBRS Morningstar’s North American CMBS analytical team will continue to monitor the transaction to evaluate the increased risk factors related to the coronavirus pandemic, including the effect on the pandemic to the creditworthiness of The Commonwealth of the Bahamas. As information (e.g., updated property-level financials, Smith Travel Research Reports, new valuations for specially serviced loans, and workout and/or modification specifics, if applicable) becomes available, DBRS Morningstar will address the Under Review with Negative Implications rating actions over the near to moderate term. DBRS Morningstar typically endeavors to resolve an Under Review rating action within 90 days, but the circumstances surrounding these rating actions (i.e., the unknown length of the pandemic-related downturn) may result in a prolonged resolution period.

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

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