DBRS Morningstar Assigns Ratings to Morgan Stanley Capital Citigroup Trust 2016-SNR

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2016-SNR issued by Morgan Stanley Capital Citigroup Trust 2016-SNR as follows:

-- Class D at A (sf)
-- Class E at BBB (sf)

All trends are Negative because the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic.

These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about October 7, 2020. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

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, at www.dbrsmorningstar.com.

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 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 information on the potential impact on healthcare collateral, please see the following DBRS Morningstar commentaries: “Historical Excess Loss in CMBS Suggests Small Markets, Skilled Nursing/Healthcare Properties, and Regional Malls Are Most at Risk” (June 1, 2020) at 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 “Legal Liability Creates Concern for Skilled Nursing Industry” (August 21, 2020) at https://www.dbrsmorningstar.com/research/366024/legal-liability-creates-concern-for-skilled-nursing-industry.

LOAN/PROPERTY OVERVIEW
At issuance, the $555.0 million loan was secured by the leased fee interest in 64 skilled nursing homes, totaling 7,786 beds across eight states. The sponsor used loan proceeds to finance the acquisition of the portfolio properties for $1.1 billion on November 1, 2016, and contributed $342.4 million of cash equity or 30.4% of the total acquisition price. The loan sponsors are Lindsay Goldberg, a private equity firm, and Omega Healthcare Investors, Inc., a self-administered real estate investment trust. As of the September 2020 remittance report, the ending loan balance is $77.2 million as 47 properties have been released since issuance.

Currently, 17 properties remain in the trust, totaling 2,137 licensed beds. The loan is backed by the payments due under an absolute triple-net master lease with a third-party skilled nursing facility operator, Genesis HealthCare (Genesis), a provider of short-term post-acute, rehabilitation, skilled nursing, and long-term care services with nearly 400 facilities in 26 states across the U.S. The master lease runs through January 2032. The remaining 17 facilities are in Pennsylvania, Massachusetts, Maryland, and New Jersey. The largest four assets by allocated loan balance comprise 39.7% of the remaining portfolio. The average DBRS Morningstar Market Rank of the portfolio properties is 2.6, indicative of more secondary and tertiary locations.

DBRS Morningstar derived the net cash flow (NCF) using the latest reported servicer NCF, annualizing the trailing nine-month period ended September 30, 2019, with an adjustment for the properties that have been released. The resulting NCF figure was $21.6 million and DBRS Morningstar applied a blended cap rate of 13.7%, which resulted in a DBRS Morningstar Value of $157.7 million, a variance of -46.3% from the appraised value of $293.8 million at issuance (adjusted for property releases). The DBRS Morningstar Value implies an LTV of 48.9% compared with the LTV of 26.3% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the upper end of the range of DBRS Morningstar Cap Rate Ranges for healthcare properties, reflecting the DBRS Morningstar Market Rank of the remaining assets. However, the cap rate DBRS Morningstar applied is consistent with other transactions that are concentrated in the skilled nursing asset subtype.

DBRS Morningstar made negative qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 7.0% to account for cash flow volatility and market fundamentals in response to ongoing coronavirus-related concerns for the asset class. This portfolio benefits from a significant paydown since issuance and some overcollateralization as a result of the release premiums on individual assets.

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 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 www.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 www.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.

DBRS Morningstar’s North American CMBS analytical team will continue to monitor the transaction to evaluate the increased risk factors related to the coronavirus pandemic. As information (e.g., updated property-level financials, Smith Travel Research Reports, new valuations for specially serviced loans, and workout and/or modification specifics, if applicable) becomes available, DBRS Morningstar will address the Under Review with Negative Implications rating actions over the near to moderate term. DBRS Morningstar typically endeavors to resolve an Under Review rating action within 90 days, but the circumstances surrounding these rating actions (i.e., the unknown length of the pandemic-related downturn) may result in a prolonged resolution period.

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

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