DBRS Assigns Provisional Ratings to Greystone Commercial Real Estate Notes 2018-HC1, Ltd.

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Secured Floating-Rate Notes (the Notes) to be issued by Greystone Commercial Real Estate Notes 2018-HC1, Ltd. (the Issuer):

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)

All trends are Stable. The Class D Secured Floating-Rate Notes will not be offered.

With respect to the deferrable Notes (Class D), to the extent that interest proceeds are not sufficient on a given payment date to pay accrued interest, interest will not be due and payable on the payment date and will instead be deferred and capitalized. The ratings assigned by DBRS contemplate the timely payments of distributable interest and, in the case of the deferred interest Notes, the ultimate recovery of deferred interest (inclusive of interest payable thereon at the applicable rate, to the extent permitted by law).

The initial pool consists of 20 floating-rate mortgages secured by 25 health-care-related properties totaling $249.2 million. During the ramp-up acquisition period, the Issuer plans to acquire up to $50.8 million of Ramp-Up Mortgage Assets (RAMP loans) using the proceeds from the sale of the Notes, the Senior Preferred Shares and the Junior Preferred Shares that will comprise the remainder of the initial portfolio of mortgage assets. The loans in the initial pool are secured by current cash flowing assets, most of which are in a period of transition with plans to stabilize and improve the asset value. The transaction has a Reinvestment Period expected to expire in September 2021. Reinvestment is subject to Eligibility Criteria, which includes a rating agency condition (RAC) by DBRS for funded companion participations that are being acquired for more than $1.0 million and for any other mortgage assets. Additionally, DBRS assessed the RAMP loans using a worst-case pool construct, and as a result, the RAMP loans have enhancement higher than the loan pool average.

The floating-rate mortgages were analyzed to determine the probability of loan default over the term of the loan and its refinance risk at maturity based on a fully extended loan term. Because of the floating-rate nature of the loans, the index DBRS used (one-month LIBOR) was the lower of a DBRS stressed rate that corresponded to the remaining fully extended term of the loans or the strike price of the interest rate cap with the respective contractual loan spread added to determine a stressed interest rate over the loan term. When the cut-off loan balances were measured against the DBRS In-Place Net Cash Flow and their respective actual constants, five loans, representing 33.7% of the initial pool balance, had a DBRS Term debt service coverage ratio (DSCR) below 1.15 times (x), a threshold indicative of a higher likelihood of mid-term default. Additionally, to assess refinance risk given the current low-interest-rate environment, DBRS applied its refinance constants to the balloon amounts. This resulted in three loans, representing 7.3% of the pool, having refinance DSCRs below 1.00x.

While the entire pool can change as loans pay off and funds are redeployed, the Issuer is required to meet Eligibility Criteria, which include an RAC for each additional funded companion participation over $1.0 million prior to reinvestment to mitigate volatility. Following the Reinvestment Period, the transaction will have a sequential-pay structure.

All of the loans are secured by non-traditional property types (i.e., skilled-nursing and assisted living properties). The pool is concentrated by DBRS property type classification, as there are 15 loans secured by skilled-nursing facilities (SNFs), representing 82.3% of the initial pool’s collateral. The “2017 Senior Care Acquisition Report” produced by Irving Levin Associates, Inc. indicates that the average cap rate for senior-care properties in 2016 was 12.2%, which is a significant variance to the multifamily sector cap rates, which have stayed between 5.5% and 5.7% over the past eight quarters, according to the Freddie Mac “Multifamily 2018 Mid-Year Outlook” report. The SNF sector has a strong long-term outlook due to the trends in national demographics, as the aging population and prolonged life expectancy will require long-term-care solutions. Per the U.S. Census 2014 Population Projection, the population cohort in the age range of 82 to 86 years old, which is around the typical age range of new SNF residents, is expected to rise as a portion of the overall population until 2034. The cap rates for SNFs indicate the underlying value correlated with the Medicaid and Medicare determined reimbursement rate, high total operating expense ratios and U.S. Department of Housing and Urban Development (HUD) takeout parameters. Additionally, the SNF capital market does not experience the cap rate volatility that more traditional multifamily and commercial property capital markets have historically incurred during economic recessions.

The loans were all sourced by Greystone Servicing Corporation, Inc. (Greystone), a commercial mortgage originator with strong origination practices and one of the largest Fannie Mae, Freddie Mac and U.S. Federal Housing Administration (FHA)/HUD loan originators. For SNFs specifically, Greystone originates loans with an HUD loan exit in mind, and therefore, all third-parties are conforming to HUD standards as well as property-level cash flow analysis in terms of expense ratios, capital expenditures, etc. Since 2004, Greystone has not had any losses on any of its bridge loans for SNFs. Greystone’s cumulative loss over its bridge loan program’s history is approximately 0.02%. Greystone, as lender, benefits from its sister platforms that include its equity ownership of SNFs, its real estate advisory arm, its development arm and its skilled-nursing operator. The Class D Notes and the Senior Preferred Shares will be initially acquired by Greystone Bridge 2018-HC1 Holder LLC. The Junior Preferred Shares will be acquired and retained by Greystone Bridge 2018-HC1 RR Holder LLC. Both Greystone Bridge 2018-HC1 Holder LLC and Greystone Bridge 2018-HC1 RR Holder LLC are affiliates of the trust asset seller. Class D, the Senior Preferred Shares and the Junior Preferred Shares represent approximately 30.0% of the transaction balance.

There are nine loans, representing 39.1% of the initial pool, secured by properties located in tertiary or rural markets, including three of the top ten loans. The revenue source for SNFs generally is made up of 70.0% to 90.0% Medicaid reimbursement and 6.0% to 15.0% Medicare reimbursement, and some states offer Medicaid Waiver–type of reimbursement for assisted living facilities. Due to revenue being sourced from the federal and state governments, SNF year-over-year rental rates were more stable compared with other commercial real estate sectors during the recession in 2008 to 2010 because of having both a steady reimbursement source and modest growth in rates. DBRS methodology assesses properties located in tertiary and rural markets with significantly higher loss severities than those located in suburban markets.

The Centers for Medicare & Medicaid Services (CMS) has an overall Five-Star Rating System for skilled nursing based on health inspection, staffing and quality measures. SNFs with three to five stars are deemed to be average or above, while nursing homes with one and two stars are considered below average. As of August 14, 2018, the initial pool had 20 properties, or 15 loans, representing 82.3% of the initial pool balance, with Medicare.gov ratings, as the loans for the five properties without star ratings are secured by assisted living properties. The weighted-average total Medicare.gov star rating for the pool, weighted on the original balance for loans secured by properties with a star rating, is 2.4 stars, which suggests a below-average profile. A low star rating may have a material adverse impact on an SNF’s ability to attract residents, obtain referrals from hospitals and participate in hospital provider networks. Low CMS star ratings are not an impairment to permanent HUD financing if the sponsor can provide a reasonable explanation. Low CMS star ratings are the product of prior operations. The initial pool has contained 13 acquisition financings, representing 76.6% of the initial pool. All of the loan sponsors in the initial pool currently meet the experience requirements of Fannie Mae and HUD/FHA. Additionally, DBRS did not assess any of the loan sponsors with Weak or Bad/Litigious sponsorship quality.

Per the underlying ability criteria for a ramp-up mortgage asset or reinvestment mortgage asset, a funded companion participation that is being acquired for less than $1.0 million delivered to the trustee by the collateral manager does not require a No-Downgrade Confirmation from DBRS with respect to the acquisition of such mortgage. DBRS applied a transaction loss given default penalty to account for the risk associated with the Issuer’s ability to insert a funded companion participation without an RAC into the trust. The Issuer is only permitted to add participation interests less than $40.0 million inclusive of any previously acquired participation interests, and the as-stabilized loan-to-value cannot be greater than the lesser of 80.0% or the maximum percentage that would be permitted under HUD or other applicable guidelines for being an Agency Mortgage Loan. To assess future RAMP loans, which could include these companion participations, DBRS used the most conservative sampled loan metrics to create the hypothetical RAMP loans and the most concentrated pool profile permitted via the Eligibility Criteria to determine the deal credit enhancements.

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

For more information on this transaction and supporting data, please log into www.viewpoint.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS Viewpoint platform.

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

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains the description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not require due diligence services outlined in Form-15E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

The principal methodology is the North American CMBS Multi-borrower Rating Methodology, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. 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 rated entity or its related entities did participate in the rating process for this rating action. DBRS 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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrs.com.