Morningstar DBRS Confirms All Classes of 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)

All trends are Stable.

The credit rating confirmations and Stable trends reflect the overall stable-to-improved performance of the underlying collateral, Atlantis Resort, as evidenced by the growth in net cash flow (NCF), occupancy, and revenue per available room (RevPAR) figures since Morningstar DBRS' last review.

The loan is secured by the Atlantis Resort, a 2,917-key, beachfront resort comprising four hotel towers (The Beach, The Coral, The Royal, and The Cove) 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 noncollateral luxury tower that consists of 495 condo-hotel units owned by third parties, and the Harborside Resort that consists of 392 timeshare rooms. The loan sponsor is BREF ONE, LLC, a subsidiary of Brookfield Asset Management Inc.

Whole loan proceeds of $1.2 billion along with $650.0 million in mezzanine debt spread across three loans refinanced existing debt, returned $148.9 million of sponsor equity, and covered closing costs. The $635.0 million trust loan has an initial two-year original term, with five one-year extension options and is interest only (IO) throughout its entire loan term. According to the servicer's most recent commentary, the sponsor has exercised the loan's fifth and final extension option, extending the maturity to July 2025. Per issuance documents, as a condition to exercise any of the loan's extension options, the borrower is required to purchase an interest rate cap agreement at a strike price that is the greater of 3.5% or the annual rate that would result in a debt service coverage ratio of at least 1.10 times when added to the spread.

Collateral performance has continued to improve from the lows experienced during the coronavirus pandemic, with NCF rebounding to issuance levels as of Morningstar DBRS' last review. According to the most recent financials, the collateral reported NCF of $191.1 million for the trailing 12 months (T-12) ended March 31, 2024, surpassing NCF of $182.3 million for the T-12 ended March 31, 2023, NCF of $133.8 million for YE2022, and the NCF of $147.8 million derived by Morningstar DBRS at issuance. According to the most recent financials, the combined occupancy rate, average daily rate (ADR), and RevPAR for the T-12 ended March 31, 2024, were 62.8%, $378, and $237, respectively, up from 56.2%, $355, and $200 as of the T-12 ended March 31, 2023. In comparison, at issuance, the collateral's occupancy rate, ADR, and RevPAR were 72.2%, $277, and $200, respectively.

Morningstar DBRS believes the year-over-year performance growth is driven by increased tourism demand in the Bahamas and the completion of the $150.0 million resort-wide renovation in July 2024, which included upgrades to all guest rooms and suites in The Royal Tower. As the renovations were initially announced in April 2022, Morningstar DBRS believes the below-issuance NCF reported in YE2022 was driven by the temporary closure of the rooms at the Royal Tower. Following the completion of the renovations, the collateral has been able to realize a higher ADR with the occupancy rate increasing closer to historic levels, resulting in cash flow growth above issuance levels. As noted at Morningstar DBRS' last surveillance review, The Beach Tower, which was originally scheduled to be reopened as Somewhere Else in 2024, has remained vacant since transaction closing, with discussions regarding the design plans and the scope of the renovation work ongoing. While Morningstar DBRS has asked the servicer for an update on the renovation progress, a December 2023 online article published by Travel Weekly confirmed that the tower remained closed, according to the guests at the resort. A response has yet to be provided as of the date of this press release.

In determining the credit ratings, Morningstar DBRS analyzed the cash flow under a stressed scenario based on a 20% stress to the NCF for the T-12 ended March 31, 2024, resulting in a Morningstar DBRS NCF of $152.9 million. Morningstar DBRS used the conservative haircut to evaluate the potential for upgrades, given the improvement in collateral performance over the Morningstar DBRS NCF at issuance. Morningstar DBRS maintained a 9.0% capitalization rate, which reflects the lack of direct competition in the immediate area, reliance on international tourism, and potential for sovereign risk related to the Commonwealth of the Bahamas. The resulting Morningstar DBRS value is $1.7 billion, reflecting an implied loan-to-value ratio (LTV) of 70.6% for the trust debt and 108.9% on a whole-loan basis. Morningstar DBRS maintained qualitative adjustments totaling 5.25% in consideration of the property's quality, historical cash flow volatility, and high barriers to entry.

Morningstar DBRS performed a private credit rating analysis of The Commonwealth of the Bahamas that suggested a below investment-grade credit rating category. Although this result would typically suggest a cap on the ratings achieved, given the specific attributes of this transaction and property, Morningstar DBRS is comfortable with confirming the credit ratings on the subject transaction above the credit ratings of the sovereign because the borrower is required to maintain political-risk insurance in the amount of $560.0 million covering expropriatory acts, currency inconvertibility and non-transfer, political violence and war, and civil war, which is viewed covering the AAA credit-rated bonds. Additionally, the transaction is a securitization of U.S. dollar-denominated bonds secured by cash flows from the property that are largely collected (approximately 95%) in USD, and with a majority that is never converted to Bahamian currency via cash management arrangements with daily sweeps to highly rated U.S.-domiciled bank accounts. While the substantial portion of the revenues of the property is denominated in USD, a portion of the revenue is in Bahamian dollars, which are used to pay Bahamian-dollar-budgeted or otherwise permitted expenses with respect to the property without conversion into USD. To incorporate the potential for unknown events that may be associated with a lower-rated sovereign, including prolonged workouts and the additional volatility associated with a prolonged workout in a foreign jurisdiction, Morningstar DBRS further adjusted its Large Loan Sizing Benchmarks to include additional penalties at the higher credit rating categories.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS  
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

Class X-NCP is an are interest-only (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 credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

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

The principal methodology is North American CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798.

Other methodologies referenced in this transaction are listed at the end of this press release.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

DBRS Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- North American Single-Asset/Single-Borrower Ratings Methodology (July 11, 2024)
https://dbrs.morningstar.com/research/436004

-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024)
https://dbrs.morningstar.com/research/428623

-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024)
https://dbrs.morningstar.com/research/435293

-- North American Commercial Mortgage Servicer Rankings (August 23, 2023)
https://dbrs.morningstar.com/research/419592

-- Legal Criteria for U.S. Structured Finance (April 15, 2024)
https://dbrs.morningstar.com/research/431205

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279.

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