DBRS Morningstar Confirms All Classes of Greystone Commercial Real Estate Notes 2018-HC1, Ltd.

DBRS Limited (DBRS) confirmed the ratings on the following classes of Secured Floating-Rate Notes (the Notes) 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 rating confirmations reflect the overall stable performance of the transaction since issuance. In its analysis of the transaction, DBRS Morningstar considered the impact of the Coronavirus Disease (COVID-19) pandemic on the healthcare properties backing the loans in this transaction. As of May 27, 2020, the issuer noted that 12 healthcare facilities collateralizing loans in the transaction reported known cases of coronavirus among residents. However, the respective facility operators have confirmed with the Issuer that they are continuing to follow all Center of Disease Control and Prevention guidelines, as wells as protocols outlined by the Centers for Medicare & Medicaid Services to address the risks to residents, staff, and the visiting public.

In conversations with DBRS Morningstar, the Issuer noted that the operators at these facilities have experience managing infectious diseases and the flu virus, and borrowers for all underlying loans reported that operators have implemented comprehensive measures and protocols to manage and limit the spread of coronavirus across the facilities. Because of the transitional nature of the underlying collateral and the general state of flux amid the pandemic, proposed business plans that are necessary to bring the assets to stabilization may be delayed and, in some cases, borrowers may be in need of payment relief or other loan modification to address unforeseen cash flow disruptions. Given these factors, DBRS Morningstar applied additional probability of default stresses in the analysis for this review and the resulting pool level expected losses remain generally in line with expectations at issuance. For additional information regarding the DBRS Morningstar process for addressing the coronavirus impact to ratings, please see the press release links in the Notes at the end of this document.

At issuance, the collateral consisted of 20 floating-rate mortgages totaling $249.2 million based on the trust balance. The transaction is structured with a reinvestment period that expires in September 2021 during which Greystone can substitute collateral in the pool subject to certain eligibility criteria, including RAC by DBRS Morningstar. According to the May 2020 remittance, there were 28 floating-rate mortgages with a trust balance of $300.0 million, reaching the maximum loan balance for the transaction. As of May 2020, no borrowers have requested relief and all debt service payments are current for all facilities, including those that are affected by the coronavirus. All loans were structured with two-year initial terms that have scheduled maturities between March 2020 and March 2022, and all loans feature two six-month extension options that are performance-based.

As of May 2020, six loans, representing 19.9% of the current trust balance, are on the servicer’s watchlist because of low occupancy and/or a low debt service coverage ratio (DSCR). However, these loans are secured by properties that are in the process of executing their respective stabilization plans, which generally entail reducing operating expenses and implementing revenue growth strategies. There are nine loans, representing 26.6% of the current trust balance, secured by properties in tertiary or rural markets, including three loans in the top 10. Two loans on the servicer’s watchlist within the top 10 are highlighted below.

The Unger HCR TX Portfolio loan (Prospectus ID#31, 6.5% of the trust balance) is secured by three skilled nursing facilities and one skilled nursing/assisted living facility, totaling 471 operating beds, in four cities across Texas. The portfolio originally included a fifth skilled nursing facility in San Antonio that was released with a partial paydown in February 2020. The loan was added to the servicer’s watchlist as of September 2019 as a result of low occupancy for the combined portfolio, which was reported at 72.2% as of January 2020. At issuance, the borrower’s business plan was to reduce operating expenses and improve revenue by outsourcing therapy services. According to the January 2020 portfolio update provided by the Issuer, the borrower’s business plan was considered complete as expense reductions had been achieved and the in-place DSCR had improved to 1.90x, which is above DBRS Morningstar stabilized estimates at issuance and is also reflective of revenue increases from resident stays paid by Medicare.

The Maclay Healthcare Center (Prospectus ID#35, 4.3% of the trust balance) loan is secured by a 141-bed skilled nursing facility in Sylmar, California. The loan was added to the servicer’s watchlist as of December 2019 as a result of low DSCR, which was reported at 0.55x as of YE2019. The borrower continues to keep the loan current and the loan is structured with an interest reserve, with an outstanding balance of $215,000 as of May 2020. At issuance, the borrower’s business plan was to hire a CFO, recognize additional revenue, and reduce operating expenses, along with lowering pharmacy and therapy rates. As of the January 2020 portfolio update provided by the Issuer, the borrower was continuing to execute its business plan and expected to achieve stabilization in the near term. Although the borrower had not yet hired a CFO as of January 2020, performance was expected to improve as therapy expenses had declined since issuance and annual revenue is projected to increase by $650,000, as a result of a new Medicaid rate approved in November 2019. As such, DBRS Morningstar anticipates performance will improve over the next 12 months and stabilize by the initial maturity date of July 2021.

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.

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 the following loans in the transaction:

-- Prospectus ID#1 – Harbor Terrace Adult Living & Assisted Living (13.3% of the pool)
-- Prospectus ID#31 – Unger HCR TX Portfolio (6.5% of the pool)
-- Prospectus ID#43 – Whiting Health Care Center (5.7% of the pool)
-- Prospectus ID#38 – Golden Heights & Walden's View (5.3% of the pool)
-- Prospectus ID#19 – West Side Campus of Care (4.8% of the pool)
-- Prospectus ID#3 – Vista Cove Care Center (4.4% of the pool)
-- Prospectus ID#35 – Maclay Healthcare Center (4.3% of the pool)

The deal and accompanying loan commentary will be available on the DBRS Viewpoint platform in the near term. For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com The platform includes issuer and servicer 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 methodology is 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.

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 [email protected].

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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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