DBRS Morningstar Confirms Ratings on Greystone Commercial Real Estate Notes 2018-HC1, Ltd.

DBRS, Inc. (DBRS Morningstar) 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. The collateral consists of 25 floating-rate mortgages with a trust balance of $289.3 million. The transaction is structured with a maximum loan balance of $300.0 million and a reinvestment period that expires in September 2021. During this reinvestment period, the collateral manager can substitute collateral in the pool subject to certain eligibility criteria, including rating agency confirmation by DBRS Morningstar. The transaction pays sequentially after the reinvestment period ends.

All loans were structured with two-year initial terms with two six-month extension options subject to certain performance-based criteria. There are 13 loans, representing 42.3% of the current trust balance, that have initial loan maturities in 2021 and an additional 11 loans, representing 31.6% of the current trust balance, with fully extended loan maturities in 2021. DBRS Morningstar has received status updates for all loans with upcoming maturities; there are four loans with final maturities in 2021 where the borrower has requested an additional short-term extension from the servicer to obtain permanent financing. The servicer noted the borrowers of the remaining upcoming loan maturities are in the process of refinancing the debt with most obtaining financing from the Federal Housing Administration/U.S. Department of Housing and Urban Development (FHA/HUD).

The pool is geographically diverse, with properties located in 15 different states. The largest three concentrations by state are California, New York, and Texas, with loans totaling 16.7%, 13.3%, and 9.9% of the current pool balance, respectively. Notably, there are nine loans, representing 29.6% of the current trust balance, secured by properties in tertiary or rural markets, including three loans in the top 10.

As of May 2021 reporting, no borrowers have requested relief and all debt service payments are current for all facilities, including those that have been affected by the Coronavirus Disease (COVID-19) pandemic. Based on the December 2020 business plan updates provided by the servicer, most of the borrowers had received funds from the Payroll Protection Program (PPP) and/or the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). Given the guidelines of the programs, these funds are not expected require any repayment.

There are 15 loans, representing 61.4% of the current trust balance, on the servicer’s watchlist because of low occupancy and/or a low debt service coverage ratio (DSCR). While these properties are in the process of stabilizing, many have also been affected by the coronavirus pandemic. 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 have been delayed. Given these factors, DBRS Morningstar applied additional probability of default stresses in the analysis for this review to select loans; however, the resulting pool level expected losses remain generally in line with expectations at issuance given the offset by positive loan performance across the pool. Two of the loans on the servicer’s watchlist are highlighted below.

The Maclay Healthcare Center (Prospectus ID#35, 4.5% of the current trust balance) loan is secured by a 141-bed skilled nursing facility in Sylmar, California. At issuance, the borrower’s business plan was to hire a chief financial officer, recognize additional revenue, and reduce operating expenses, along with lowering pharmacy and therapy rates. The loan was added to the servicer’s watchlist in December 2019 as a result of a low DSCR of 0.55 times (x). Property occupancy experienced some volatility prior to the coronavirus pandemic, falling to 84.1% in February 2020 from 93.0% at issuance, but saw an even more drastic decline after the onset of the pandemic, falling to a low of 54.6% in June 2020. According to recent census data, occupancy has been improving, with the servicer’s most recent commentary indicating that occupancy reached 75.0% as of April 2021. Despite the fluctuations in occupancy, loan performance has moderately improved from a financial perspective, primarily as a result of an increase in the facility’s Medicaid rate in November 2019, which was expected to increase annual revenue by $650,000 moving forward. While the property’s net cash flow (NCF) had improved to $714,233 (a DSCR of 0.78x) as of YE2020, the loan is still largely underperforming when compared with the Issuer’s stabilized NCF figure of $1.7 million, but improving occupancy should continue to bolster performance. The loan is structured with an interest reserve that had a balance of $697,146 as of May 2021. In addition, the borrower received a $1.4 million PPP loan in May 2020, which helped to offset increased operating expenses, and $0.9 million of pandemic-related relief funds in December 2020 from the CARES Act. The loan has an initial maturity date of July 2021 with two six-month extension options, which the servicer has indicated will likely both be exercised.

The Edenbrook of Rochester (Prospectus ID#21, 3.0% of the current trust balance) loan is secured by an 80-bed skilled nursing facility in Rochester, Minnesota. The borrower’s business plan was to increase the occupancy rate and improve the patient mix while maintaining operating expenses that are consistent with historical levels, while also upgrading 10 rooms. The collateral was considered stabilized at issuance as the property was 82.9% occupied and no value upside was given by the issuance appraisal. Per the December 2020 business plan update, the borrower remains focused on executing the original business plan and improving the occupancy rate and census mix. The loan has been on the servicer’s watchlist since December 2018 for a low occupancy rate, and a December 2020 census report noted a sharp drop in the occupancy rate to after a coronavirus outbreak at the facility in November 2020. The coronavirus vaccine was administered at the facility in January 2021, so future outbreaks should be limited. A new business development and admissions director was hired in March 2021 and the occupancy rate had improved to 67% as of April 2021. While the facility demonstrated a recent improvement in operations, the property exhibited lower-than-expected NCFs since issuance. The YE2020 NCF totaled $1.12 million, compared with $1.04 million for YE2019 and $1.61 million for YE2018. The property will not have time to season prior to the fully extended loan maturity date in August 2021; therefore, the borrower requested an additional 12-month extension to allow time for census improvement and a potential FHA/HUD refinance. DBRS Morningstar will continue to monitor the facility’s occupancy rate and census mix as the borrower returns the property to stabilized levels.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

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 the North American CMBS Surveillance Methodology (March 26, 2021), 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.

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.

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

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