DBRS Morningstar Confirms All Ratings on CSMC 2019-SKLZ, Removes Under Review with Developing Implications Status

DBRS Limited (DBRS Morningstar) confirmed the ratings on the following classes of the Commercial Mortgage Pass-Through Certificates, Series 2019-SKLZ issued by CSMC 2019-SKLZ (the Issuer):

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class X-NCP at AAA (sf)
-- Class C at AA (high) (sf)
-- Class D at A (high) (sf)
-- Class HRR at A (high) (sf)

All trends are Negative, which reflect the performance challenges of the underlying collateral associated with the Coronavirus Disease (COVID-19) global pandemic. The ratings have been removed from Under Review with Developing Implications, where they were placed on November 14, 2019.

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 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, on the DBRS Morningstar website at www.dbrsmorningstar.com.

Prior to the finalization of the NA SASB Methodology, the DBRS Morningstar ratings for the subject transaction and all other DBRS Morningstar-rated transactions subject to the methodology in question were previously placed Under Review with Developing Implications, as the proposed methodology changes were material.

Because of the coronavirus’ significant impact on skilled nursing/healthcare property 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 LTV ratio sizing benchmark quality/volatility adjustments and excluded any potential changes in current or future expected asset performance resulting from the coronavirus. Following the conclusion of the baseline review, DBRS Morningstar may make adjustments to ratings based on a review of the coronavirus impact on a particular transaction. For more commentary on the potential impact on healthcare collateral please see https://www.dbrsmorningstar.com/research/361859/historical-excess-loss-in-cmbs-suggests-small-markets-skilled-nursinghealthcare-properties-and-regional-malls-are-most-at-risk and
https://www.dbrsmorningstar.com/research/366024/legal-liability-creates-concern-for-skilled-nursing-industry.

The subject loan is secured by a portfolio of 83 healthcare properties comprising 81 skilled nursing centers and two assisted-living facilities in 12 states. As of the September 2020 remittance report, the current trust balance remains unchanged from issuance at $335.0 million. The largest concentration of assets is in Texas at 49.9% of the available beds and 33.2% of the aggregate appraised value. The portfolio loan is a partial refinancing of the COMM 2016-SAVA transaction, which was transferred to the Special Servicer in June 2018, after a drop in cash flow from issuance. Of the original 155 properties from that transaction, 83 properties are part of this portfolio, while the lender has made a balance sheet loan secured by 32 assets. Forty assets were released from the collateral. The properties tend to be older, with 54 built in the 1960s and 1970s. The star ratings for the properties, which are issued by the Centers for Medicare & Medicaid Services and focus on quality of care, staffing, and health inspection results, are scattered, with a small majority at one- and two-star ratings.

The operator of the facilities is SavaSeniorCare, LLC (Sava), which owns and operates skilled nursing and assisted-living centers in 21 states and has operated the portfolio assets since 2004. Sava invested $39.7 million ($4,011 per licensed bed) in capital improvements between 2015 and 2018. The borrower has also reserved $9.3 million ($942 per licensed bed) for additional capital work over the loan term.

As of June 2020, the portfolio reported an occupancy of 74.0%, which has declined from 81.0% reported at issuance. Since bed utilization peaked at 2.9 million bed days in 2016, the assets have experienced a decrease in utilization with occupancy falling to 81.1% at issuance from 84.0%. The further occupancy decline (to 74.0% as of June 2020) is likely attributed to the challenges associated with the coronavirus global pandemic. According to the May 2020 portfolio update, Sava reported at least one positive test by a patient or employee, across 73 facilities. In addition, the operator reported a considerable number of active and pending cases on a cumulative basis. As of July 2020, DBRS Morningstar reached out to the servicer and an update was provided relating to liability claims and coverage. The borrower noted that there were four liabilities claims filed in total against either Sava or any of the properties in the transactions. In addition, the borrower noted that they are self-insured in regards to liability coverage, which DBRS Morningstar considers a structural weakness in the transaction. Further, the borrower noted that there were low-level deficiencies reported at some of the properties as a result of infection control surveys that were conducted. DBRS Morningstar will continue to monitor for updates as information becomes available.

The DBRS Morningstar net cash flow (NCF) derived at issuance was applied for the subject rating action. The NCF figure was $94.1 million and a cap rate of 14.4% was applied, resulting in a DBRS Morningstar Value of approximately $654.8 million, a variance of -23.1% from the appraised value at issuance of $855.8 million. The DBRS Morningstar Value implies an LTV of 51.2% on the first mortgage, as compared with the LTV on the issuance appraised value of 39.1%. The NCF figure applied as part of the analysis represents a -16.1% variance from the Issuer’s NCF, primarily driven by Quality Incentive Payment Program revenue; a lower census mix from private-pay beds, Medicare beds, and health maintenance organization (HMO)/insurance beds; and public liability/general liability insurance. As of June 2020, the servicer reported a NCF figure of $125.8 million, a +33.7% variance from the DBRS Morningstar NCF figure.

The cap rate DBRS Morningstar applied is at the upper end of the range of DBRS Morningstar Cap Rate Ranges for healthcare properties, reflecting the DBRS Morningstar Market Rank of the underlying assets. However, the cap rate applied is consistent with other transactions with a concentration in the skilled nursing asset subtype.

DBRS Morningstar made negative qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totalling 8.0% to account for cash flow volatility, property quality, and market fundamentals in response to ongoing concerns on the asset class with regard to the coronavirus impact. In addition, a majority of the underlying properties were noted to have a star rating of one or two.

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.

The DBRS Morningstar rating for Class HRR varies by three or more notches from the results implied by the LTV sizing benchmarks when qualitative adjustments are assumed to reflect the increased stress from the coronavirus. DBRS Morningstar continues to monitor the evolving economic impact of the coronavirus-induced stress on the transaction.

Class X-NCP is an 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 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 info@dbrsmorningstar.com.

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.

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 info@dbrsmorningstar.com.

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