DBRS Morningstar Confirms All Ratings of CSMC 2019-SKLZ, Changes Trends to Stable from Negative

DBRS Limited (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2019-SKLZ issued by CSMC 2019-SKLZ as follows:

-- Class A at AAA (sf)
-- Class B 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)

DBRS Morningstar changed all trends to Stable from Negative.

DBRS Morningstar previously changed the trends to Negative in September 2020 as a reflection of concerns with the Coronavirus Disease (COVID-19) pandemic, which has been particularly impactful for healthcare properties such as those that collateralize the loan contributed to the subject transaction. However, with this review, the Stable trends reflect the improved outlook given the stable performance of the underlying collateral since the last DBRS Morningstar review, as well as the increased vaccination rates in the United States that are generally viewed as a positive for these property types.

The rating confirmations reflect the stable overall performance of the transaction, which remains in line with the expectations at issuance. The subject loan is secured by a portfolio of 83 healthcare properties comprising 81 skilled nursing centres and two assisted-living facilities in 12 states. As of the June 2021 remittance report, the trust balance remained unchanged from issuance at $335.0 million. The largest concentration of assets is in Texas at 49.9% of the available beds and 33.2% of the aggregate appraised value. According to the May 2020 portfolio update, SavaSeniorCare, LLC (Sava) reported at least one positive coronavirus test by a patient or employee across 73 facilities, along with a considerable number of active and pending cases on a cumulative basis. Comparatively, according to the July 2021 servicer update, there are no current outbreaks as the number of reported coronavirus cases appears to be largely manageable at the subject facilities.

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 are part of the subject portfolio. The collateral properties tend to be older, with 54 built in the 1960s and 1970s. The star ratings for the properties—which are issued by the Centers for Medicare & Medicaid Services and 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 Sava, which owns and operates skilled nursing and assisted-living centres in 21 states and has operated 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.

As of December 2020, the portfolio reported an occupancy of 74.0%, which has declined from 81.0% reported at issuance. Since bed utilization peaked at 2.9 million bed days in 2016, the assets have experienced a decrease in utilization with occupancy falling to 81.1% at issuance from 84.0%. The further occupancy decline (to 74.0% as of December 2020) is likely attributed to the challenges associated with the coronavirus pandemic. However, as of December 2020, the servicer reported a net cash flow (NCF) figure of $145.9 million, reflective of a 37.2% increase from the December 2019 reporting where the NCF was reported at $106.4 million. The increase in NCF was driven by a 9.0% increase in total revenue over the same reporting period.

DBRS Morningstar has been closely monitoring the potential impact of coronavirus-related litigation for the subject properties; however, to date, there has not been much activity reported by the sponsor or servicer. As of July 2021, the servicer noted there is only one active legal claim, which was filed against the Lake Mead Health and Rehabilitation Center. In addition, the servicer confirmed there is no current outbreak at that facility, as 79.3% of employees and 78.2% of residents have been vaccinated. It is also important to note that the sponsor is self-insured against liability claims, which DBRS Morningstar considers a structural weakness in the transaction.

DBRS Morningstar has reached out to the servicer to confirm the vaccination protocols relating to staff and if there are any reported cases of the Delta variant at the subject facilities. As of the date of this press release, a response is pending and DBRS Morningstar will continue to monitor for updates as information becomes available.

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.

Class X-NCP is an interest-only (IO) certificate that references 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 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 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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