DBRS Finalizes Provisional Ratings of CSMC 2019-SKLZ

DBRS, Inc. (DBRS) finalized the provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2019-SKLZ issued by CSMC 2019-SKLZ:

-- Class A at AAA (af)
-- Class B at AAA (sf)
-- Class X-CP 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 Stable.

All classes will be publicly placed. Classes X-CP and X-NCP are notional.

The portfolio consists of 83 health-care properties including 81 skilled nursing centers and two assisted-living facilities in 12 states. 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 1960’s and 1970’s. The Medicare Star Ratings for the properties, which 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 214 skilled-nursing and assisted-living centers in 21 states and has owned 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.

DBRS reviewed the portfolio’s net cash flow (NCF), which dipped by 11.8%, or about $13.6 million, in 2017 from 2016, but began to recover the following year and was at $104.5 million for the trailing 12-month period ending October 2018. The DBRS NCF was $94.1 million, a -16.1 variance from the issuer’s NCF of $112.1 million. DBRS’s adjustments to the issuer’s cash flow included a change to the patient census mix to reflect negative trends in the portfolio, exclusion of revenue from the Quality Incentive Payment Program which provides quality incentive payments to facilities and an inflated assumption for professional and general-liability insurance. DBRS expects that the portfolio could see continued migration of patients away from higher-yielding Medicare, private pay and private insurance payment schemes to Medicaid, which provides significantly lower reimbursement rates. With many of the properties situated in Texas and Colorado, neither of which has a certificate-of-need law in place, there is risk that new competition in the skilled nursing space could continue to attract patients that bring higher reimbursements, leaving lower-yielding cohorts to older properties such as those in the portfolio.

DBRS considers the term default risk to be low as the DBRS Term debt service coverage ratio (DSCR) is a healthy 4.77 times (x), which is derived using a stressed LIBOR of 3.24%, based on the “Interest Rate Stresses for U.S. Structured Finance Transactions” methodology and a spread of 2.65%. While the DBRS Refi DSCR is high at 1.92x, there could be some risk at maturity, especially as the collateral is encumbered by two mezzanine loans totaling $270.0 million. However, the loan benefits from low leverage, with an appraised loan-to-value (LTV) ratio of 39.1% and a DBRS LTV of 51.2%. The DBRS Going-In Debt Yield is 28.1%.

The DBRS Value is $654.8 million, a -23.5% variance from the appraised value. The DBRS value is based on the DBRS NCF divided by the DBRS Cap Rate of 14.4%. The cap rate is developed on a weighted-average basis across market types and a tiered cap rate of 13.00% for markets classified as “Urban” versus 15.50% for those markets classified as “Rural.” As additional support for the rating analysis, the 15 largest properties in the portfolio have an aggregate value of $356.5 million, which is greater than the balance of the mortgage loan. Several of these large assets are also located in major markets including Las Vegas, Philadelphia, Baltimore, Oakland and Los Angeles, which are more constrained in terms of supply and may continue to show sustained demand for skilled nursing services.

Classes X-CP and X-NCP are interest-only (IO) certificates that reference 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.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrs.com.

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

The principal methodology is the North American Single-Asset/Single-Borrower Methodology, which can be found on www.dbrs.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 Global Structured Finance Related Methodologies document, which can be found on www.dbrs.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.

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS’s methodology, DBRS used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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