DBRS Morningstar Changes Trends on Two Classes, Confirms All Ratings on BHMS 2018-ATLS

DBRS Limited (DBRS Morningstar) confirmed its 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 also changed the trends on Classes E and HRR to Stable from Negative. All other trends remain Stable. The previous Negative trends on Classes E and HRR were a reflection of concerns surrounding the increased risks as a result of the Coronavirus Disease (COVID-19) pandemic, which heavily affected the tourism industry.

The collateral consists of the Atlantis Resort, a 2,917-key luxury beachfront resort comprising four hotel towers on Paradise Island in the Bahamas and the fee interest in amenities including 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 also 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.

The rating confirmations and trend changes reflect stable to improving performance following a period of interrupted operations and cash flow related to the pandemic. The sponsor has demonstrated its commitment to the subject, with renovations of the Royal Tower slated to be completed by early 2023 and ongoing upgrades to the property’s numerous amenities, including a refresh of the casino and updated dining offerings. In January 2022, it was announced that one of the four collateral towers, The Beach, will undergo a complete redevelopment and reopen as Somewhere Else in 2024.

As of the trailing 12-month (T-12) period ended June 2022, the property achieved a net cash flow of $100.0 million, up from $37.7 million at YE2021. The property reported negative cash flows at YE2020 as a result of closures and decreased revenue stemming from the pandemic. According to the servicer, the combined occupancy and revenue per available room (RevPAR) for the T-12 period ended June 2022 were 64.2% and $285, respectively, up from 51.7% and $126 at YE2021. The year-over-year growth in RevPAR indicates continued restabilization to pre-pandemic levels; however, overall revenues remain below YE2019 levels, which had already experienced some dropoff from issuance.

The property’s demand is driven by tourism, and the Bahamas recently lifted travel restrictions in June 2022. The Bahamas saw more than 3.6 million visitors year to date for the period ended July 2022, a 36.4% increase from 2.1 million visitors at YE2021. While figures remain below issuance expectations, the subject is well positioned to see an uptick in performance given the oncoming peak tourism season and recent updates to the property’s room and amenities package.

While the property has not yet achieved the revenues experienced at issuance, a stressed valuation scenario was considered with this review to evaluate the possibility of a sustained performance decline. Based on that analysis, DBRS Morningstar determined that the current ratings are adequately supported and changed the trends on the two lowest-rated classes to Stable from Negative.

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). Whole loan proceeds of $1.2 billion along with $650.0 million in mezzanine debt spread across three loans were used to refinance existing debt, return $148.9 million of sponsor equity, and cover closing costs. The $635.0 million loan has a two-year original term with five one-year extension options and is interest only (IO) throughout its entire loan term.

DBRS Morningstar updated its internal assessment on The Commonwealth of the Bahamas in Q4 2022. This assessment could result in a ceiling to this transaction’s rating; these concerns are 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.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

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.

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

The principal methodology is North American CMBS Surveillance Methodology (October 3, 2022), 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.

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.

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577