Brookfield Asset Management is turning to the commercial mortgage bond market for a cash- out refinancing of a luxury resort in the Bahamas that it took control of six years ago through a deed in lieu of foreclosure.

In June, an investment fund controlled by Brookfield obtained a $1.2 billion first mortgage from Citigroup and Goldman Sachs as well as three tranches of subordinate mezzanine debt totaling $650 million; the combined proceeds were used to retire $1.87 billion of debt encumbering the property and return $149 million of equity to the sponsor, according to Morningstar Credit Ratings.

The first mortgage, which pays a floating rate of 200 basis points over one-month Libor, and no principal, for its fully extended term of seven years, is being used as collateral for an offering of mortgage bonds called BHMS 2018-ATLS.

The loan is backed by the Atlantis Paradise Island Resort, which Morningstar describes as an “iconic” property consisting of 2,917 guestrooms across four towers on Paradise Island in the Bahamas. (The resort also includes 495 room luxury condominiums at The Reef and the 392-room timeshare Harborside Resort, which are not included in the collateral but generate revenue for the borrower through management and access fees.) Amenities include a 60,000 square foot casino, 40 food and beverage outlets, 500,000 square feet of indoor and outdoor meeting, convention and event space, 39 retail outlets, a 62-slip marina, a full-service spa, a 141-acre waterpark, a 14-acre dolphin habitat and the largest open-air marine habitat in the world.

Brookfield took ownership of the property in April 2012 when it entered into an assignment in lieu of foreclosure with the previous owner, Kerzner International, and the other previous lenders, and exchanged its $175 million B note for a 100% ownership interest in the property as well as the Bahamas One & Only Ocean Club and a 50% ownership interest in the One & Only Palmilla resort in Mexico. With the assignment in lieu of foreclosure, BREF also retained the rights to use the Atlantis brand with respect to the Property in perpetuity.

In its presale report, Morningstar cited the equity cash out as a potential concern, since it leaves Brookfield with less “skin in the game” of the property. On the other hand, the sponsor has invested approximately $213 million in capital improvements since taking possession of the property, and these improvement s have contributing to the increase in the property’s net operating income from approximately $133.2 million in 2012 to approximately $162.6 million as of the trailing 12-month period ending March 2018.

In addition, the transaction poses several distinct risks and complications that are associated with cross-border lending, including the legal system, country/sovereign risk, banking, and currency. “These factors could make it less likely that numerous lenders will be competing to refinance this loan when it reaches maturity,” the presale report states.

However Morningstar considers the biggest threat to Atlantis’ performance and ultimately to the transaction is the opening of the 2,332 room, $3 billion Baha Mar resort. This will be the first direct competitor to Atlantis to open in the Bahamas, and it features three towers of different hotel brands including the Grand Hyatt, SLS and Rosewood as well as a 100,000 square foot casino. The Baha Mar's Grand Hyatt (1,800 rooms) opened in April 2017. In the fall of 2017, the SLS (299 rooms) opened. The third hotel, the Rosewood (233 rooms), is expected to fully open this summer.

Morningstar values the collateral is $1.81 billion based on its underwritten net cash flow and a capitalization rate of 9.0%. The valuation resulted in a loan-to-value ratio of 66.2% on the trust notes and 102.1% when factoring in the non-trust mezzanine debt.

Both Morningstar and DBRS expect to assign triple-A ratings to the senior tranche of notes to be issued, which benefit from 49.67% credit support.

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