DBRS Morningstar Confirms and Downgrades Certain Classes of CHC Commercial Mortgage Trust 2019-CHC, Removes Under Review Status, and Assigns Negative Trend

DBRS, Inc. (DBRS Morningstar) confirmed and downgraded the ratings on the following classes of the Commercial Mortgage Pass-Through Certificates issued by CHC Commercial Mortgage Trust 2019-CHC:

Confirmed:
-- Class A at AAA (sf)

Downgraded:
-- Class B at AA (low) (sf)
-- Class C at A (sf)
-- Class D at BBB (high) (sf)
-- Class E at BB (sf)
-- Class F at B (high) (sf)
-- Class HRR at CCC (sf)
-- Class X at A (low) (sf)

The trends on Classes A, B, C, and D are Stable, and the trends on Classes E and F are Negative. DBRS Morningstar removed the ratings 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 (NA SASB) 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.

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

To assign ratings to this transaction, DBRS Morningstar considered both the impact of the updated NA SASB Methodology and certain qualitative adjustments attributable to the ongoing Coronavirus Disease (COVID-19) pandemic on the ratings.

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 loan-to-value (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 loan is secured by the borrower’s fee and leasehold interests in 156 properties across 28 states. The geographically diverse portfolio consists of a variety of medical and senior-housing-related property types, including medical office buildings (MOB), independent living facilities (ILF), assisted living facilities (ALF), skilled nursing facilities (SNF), and hospital-related properties. The properties fall under three operating segments: (1) MOB, (2) Triple Net (NNN) Leased, and (3) Real Estate Investment Trust (REIT) Investment Diversification and Empowerment Act (RIDEA) Facilities.

The MOB segment comprises approximately 3.0 million sf across 88 buildings in 18 states. Based on the May 1, 2019, rent rolls, the MOB properties have a total occupancy of 80.1%, which is in line with historical levels of 80.0% in 2017 and 78.1% in 2018. The MOB properties benefit from 80 of the 88 buildings being on or near a healthcare campus or anchored by a healthcare system, which has translated into an especially high renewal rate of 87.0%. Overall, the performance of the MOB portfolio has been stable for the past several years.

The NNN Leased segment includes 57 properties that skews toward more operationally intensive uses. The properties are composed of 37 SNF facilities, nine hospital/long-term acute-care hospitals, and 11 ALF properties. These 57 properties are leased across 19 individual leases, composed of either multiproperty master leases or individual leases with a total base rent of $64.8 million. At issuance, based on the operators’ trailing 12 months (T-12) ended March 2019 property financials, the look-through cash flows (EBITDAR) covered the base rent at 1.22 times (x), which is similar to the 1.20x coverage in 2018 and below the 1.35x coverage in 2017. The sponsor had to reset rents to levels that the properties can support because of higher expenses in the SNF properties. In 2019, two leases were restructured lower by a total of nearly $5.0 million. DBRS Morningstar based the net cash flows (NCFs) for the NNN Leased portfolio on the underlying properties’ look-through cash flows rather than the NNN rent.

The RIDEA portfolio consists of 11 properties that provide for a third-party management agreement and allow the landlord (borrower) to retain the income from the underlying operation without a lease in place. The 11 properties contain predominately ILF and ALF beds, which together comprise approximately 86.3% of the beds in the RIDEA facilities. ILF and ALF properties are generally private pay, limiting the portfolio’s exposure to changes in Medicare and Medicaid reimbursements. At issuance, SNF revenue accounted for approximately 16.3% of the total RIDEA revenue according to the T-12 ended March 2019 financials. The RIDEA properties experienced a considerable decline in SNF Medicare reimbursements and SNF private-pay revenue in 2017 from the prior year, and only a small portion of this decline was made up through higher Medicaid reimbursements. The declining trend continued in 2018 and 2019, albeit at a lower rate. Memory-care revenue has historically been a minor contributor to the RIDEA portfolio. However, the Lincolnwood property underwent a $8.1 million renovation in 2018 and early 2019 and will contribute more than $2.0 million of additional revenue to the portfolio. The RIDEA properties benefit from a higher portion of private-pay sources.

DBRS Morningstar based its NCF assumption on the actual level at issuance in July 2019. The resulting NCF figure was $132.17 million, and DBRS Morningstar applied a blended capitalization (cap) rate of 11.71%, which resulted in a DBRS Morningstar Value of $1.128 billion for the portfolio—a variance of -37.1% from the appraised value of $1.794 billion at issuance. The DBRS Morningstar Value implies an LTV of 90.75%, compared with the LTV of 57.09% based on the appraised value at issuance.

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

The primary drivers of the downgrades to Classes B, C, D, E, F, X, and HRR were changes to the baseline LTV Sizing Benchmarks provided in DBRS Morningstar’s updated NA SASB Methodology released on March 1, 2020, as compared with the legacy LTV Sizing Benchmarks utilized at issuance in July 2019.

DBRS Morningstar also reduced the final LTV sizing benchmarks by 4.0% to account for cash flow volatility and market fundamentals in response to ongoing concerns on the asset class regarding the coronavirus.

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.

Class X is an interest-only (IO) certificate that references 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 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.

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 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, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 212 806-3277