DBRS Assigns Provisional Ratings to CHC Commercial Mortgage Trust 2019-CHC Commercial Mortgage Pass-Through Certificates

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates to be issued by CHC Commercial Mortgage Trust 2019-CHC:

-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (high) (sf)
-- Class D at A (low) (sf)
-- Class X-CP at A (sf)
-- Class X-NCP at A (sf)
-- Class E at BB (high) (sf)
-- Class F at BB (low) (sf)
-- Class HRR at B (high) (sf)

All trends are Stable.

The Class X-CP balance is notional and based on the aggregate Certificate Balance of the Class B Portion 2, Class C Portion 2 and Class D Portion 2 certificates. The Class X-NCP balance is notional and based on the aggregate Certificate Balance of the Class B, Class C and Class D certificates. Class HRR represents the Eligible Horizontal Residual Interest that is to be purchased by a third-party purchaser. The third-party purchaser of the HRR certificates is ACREFI Mortgage Lending, LLC, an affiliate of Apollo Commercial Real Estate Finance, Inc.

The loan is secured by the borrower’s fee and leasehold interests in 156 properties located 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) REIT Investment Diversification and Empowerment Act (RIDEA) Facilities.

The MOB segment comprises approximately 3.0 million square feet 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 located on or near a health-care campus or anchored by a health-care 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 multi-property master leases or individual leases with a total base rent of $64.8 million. Based on the operators’ trailing 12 months (T-12) ending March 2019 property financials, the look-through cash flows (EBITDAR) cover 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. Weakness, particularly due to higher expenses in the SNF properties, has caused the sponsor to reset rents at levels that the properties can support. In 2019, two leases were restructured lower by a total of nearly $5.0 million. DBRS took into account the declining EBITDAR trends and added additional conservatism to the net cash flows (NCFs). Additionally, DBRS’s NCFs for the NNN Leased portfolio are based on the underlying properties’ look-through cash flows rather than the NNN rent, with relatively high cap rates applied based on the operating business nature of the properties.

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 in Medicaid reimbursements. SNF revenue accounted for approximately 16.3% of total RIDEA revenue according to the T-12 ending 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 has 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 is budgeted to contribute over $2.0 million of additional revenue to the portfolio. The RIDEA properties benefit from a higher portion of private-pay sources; however, DBRS did factor in additional conservatism in its determination of NCFs.

Mortgage loan proceeds of approximately $1.02 billion, $489.8 million of mezzanine loans and sponsor equity of $146.0 million will refinance existing debt of $1.62 billion, fund upfront reserves and pay closing costs. The existing debt is the remaining portion of a $2.6 billion securitization in 2015, GARH 2015-NRF. The collateral in that transaction totaled 217 properties, and over time, the number of properties has decreased due to sales or releases. The 2015 securitization has performed as agreed.

The DBRS loan-to-value (LTV), based on a weighted-average (WA) DBRS cap rate of 11.72%, is 90.8% and supports the last dollar of mortgage debt rated at B (high). While the DBRS LTV is relatively high, the DBRS Term Debt Service Coverage Ratio (DSCR) on the mortgage debt is still quite high at 2.91x, and the DBRS LTV at the last dollar of investment-grade-rated debt is much lower at 62.3% through Class D (rated A (low) (sf)). When the $489.8 million of subordinate mezzanine debt is added to the first mortgage, the DBRS LTV is much higher at 134.3%. Despite the increase in total leverage, the DBRS Term DSCR on the entire $1.51 billion financing package still covers at 1.47x.

The loan collateral consists of the fee and leasehold interest in 156 health-care-related properties located in 28 states. The properties fall under the following three categories: (1) MOB, (2) NNN and (3) RIDEA Facilities.

The loan is sponsored by Colony Capital, an international investment firm that has been active in the real estate industry since 1991 and was founded concurrently with the acquisition of a portfolio from Resolution Trust Corporation. Colony Capital’s 27 years of investment experience have led to its current real estate interests being valued at approximately $43.0 billion as of year-end 2018. The sponsor’s health-care portfolio included 413 properties scattered across the United States, consisting of 192 ILFs, 108 MOBs, 99 SNFs and 14 hospitals as of Q4 2018. The non-recourse carveout guarantor for the loan is NorthStar Healthcare JV, LLC, which is required to maintain a minimum net worth of $300.0 million throughout the loan term, exclusive of the subject properties.

In aggregate, the WA DBRS cap rate is 11.72%, which results in a DBRS value of $1,127,726,732 based on the concluded NCF of $132,170,120. This results in a DBRS LTV of 90.84% on the mortgage loan and 134.27% on the total debt stack of $1,514,234,681. The assumed WA DBRS cap rate is a significant stress over the appraiser’s WA cap rate of 7.4%.

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.

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 principal methodology is 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.

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.

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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