DBRS Morningstar Confirms All Ratings on BHMS 2018-ATLS; Removes All Classes from 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)

With this review, DBRS Morningstar removed all classes from Under Review with Negative Implications, where they were placed on March 27, 2020; DBRS Morningstar maintained the Under Review with Negative Implications status on all classes on October 21, 2020, as a result of the ongoing effects of the Coronavirus Disease (COVID-19) pandemic. The trends on Classes E and HRR are Negative, which reflects remaining risks with the underlying loan as the property begins to recover from the challenges posed by the pandemic. The trends on Classes A, X-NCP, B, C, and D are Stable.

The rating confirmations reflect DBRS Morningstar’s view that, despite a significant interruption of operations and cash flow in 2020 related to the pandemic, the property is well positioned to rebound given the sponsor’s long-term commitment to the underlying hotel displayed by the raising of additional capital to fund cash shortfalls throughout the pandemic and reinvest in the property.

The transaction’s sole loan is secured by the Atlantis Resort, a 2,917-key luxury beachfront resort 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 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 original term with five one-year extension options and is interest only (IO) for its entire loan term.

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 Brookfield Hospitality Management, an affiliate of the sponsor, under 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, which are key demand and revenue drivers at the subject. In July 2021, however, Baha Mar opened its own $300.0 million water park, increasing the competition for the subject property. Baha Mar offers the largest casino in the Caribbean, which at issuance was expected to drive down casino revenue at the subject’s casino. 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 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 Baha Mar. According to the property’s website, the borrower recently completed a renovation of The Royal in late 2020, estimated at $8.0 million ($32,000/key).

The subject’s reliance on international tourism is particularly important given the global travel disruptions resulting from the coronavirus pandemic. The Bahamas’ Ministry of Tourism responded to the pandemic by effectively shutting down the island’s tourism industry in March 2020; however, restrictions were eased over time and the properties reopened in December 2020. The Bahamian government further updated restrictions in May 2021 to allow fully vaccinated individuals and unvaccinated individuals with proof of a negative coronavirus test to enter the country, and visitors must also have a Bahamas Travel Health Visa. Based on a report from July 2021, the Bahamas has welcomed 525,224 stopover visitors year to date, compared with the 2019 figure (pre-pandemic) of 1,269,991; however, the Q2 2021 figure of 272,446 reflected a sizable increase over the Q1 2021 figure of 109,269, and July 2021 reflected the highest monthly figure to date at 143,509 stopover visitors.

Based on the trailing-12-month (T-12) financials ended March 31, 2021, the loan reported a net cash flow of -$92.6 million, compared with the YE2019 figure of $151.4 million, thus demonstrating the size of the disruption brought on by the pandemic. The borrower’s year-to-date operating statement ending in June 2021 reflects an annualized departmental revenue of $305.9 million, a significant improvement over the March 2021 T-12 figure of $65.9 million.

Based on the Smith Travel Research report for the T-3 period ended April 30, 2021, reviewed by DBRS Morningstar, The Royal Tower (1,201 keys) reported occupancy rate, average daily rate, and revenue per available room (RevPAR) figures of 63.40%, $292, and $185, respectively, compared with the competitive set’s figures of 29.9%, $226, and $68, respectively. While these figures are below historical levels, the subject property is showing signs of improvement as tourism rises, with the month of April 2021 reflecting comparable figures of 72.9%, $290, and $211, respectively, and a RevPAR penetration rate of 258.4%.

DBRS Morningstar updated its internal assessment on The Commonwealth of the Bahamas in Q3 2021, in line with its 2020 assessment. This assessment could result in a ceiling to this transaction’s rating; these concerns were 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 capitalization rate assumption when assigning ratings as a way to account for a potential decrease in value in an elevated probability of default situation.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Class 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.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer 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 methodology is North American CMBS Surveillance Methodology (March 26, 2021), which can be found on 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 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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.

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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