DBRS Morningstar Confirms All Classes of CHC Commercial Mortgage Trust 2019-CHC

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates issued by CHC Commercial Mortgage Trust 2019-CHC:

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

The trends on Classes E and F remain Negative because of concerns associated with the Coronavirus Disease (COVID-19) pandemic and the significant impact it is having on skilled nursing facilities (SNF) and healthcare properties. The trends on all other Classes remain Stable, with the exception of Class HRR, which does not carry a trend.

The rating confirmations reflect the stable overall performance of the transaction. At issuance, the subject loan was backed by a portfolio of 156 healthcare properties. Since issuance, two properties (Yuma SNF and North Bend & Mt Si SNF) were released from the collateral, resulting in a collateral reduction of just 0.72%. 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), SNF, and hospital-related properties. The properties fall under three operating segments: (1) MOB, (2) Triple Net (NNN) Leased, and (3) Real Estate Investment Trust (REIT) Investment Diversification and Empowerment Act (RIDEA) Facilities.

The majority of the portfolio is backed by the MOB segment, which comprises 3.0 million square feet across 88 buildings in 18 states. The NNN Leased segment includes 55 properties that skew toward more operationally intensive uses and includes 35 SNF, 11 ALF, and nine hospital/long-term acute-care properties. DBRS Morningstar based the net cash flows (NCFs) for the NNN Leased portfolio on the underlying properties’ look-through cash flows rather than the NNN rent.

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 and Medicaid reimbursements. SNF revenue accounted for approximately 16.3% of total RIDEA revenue, according to the trailing 12 months ended 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 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 an $8.1 million renovation in 2018 and early 2019 and is budgeted to contribute more than $2.0 million of additional revenue to the portfolio. The RIDEA properties benefit from a higher portion of private-pay sources; however, DBRS Morningstar did factor in additional conservatism in its determination of NCFs.

The portfolio’s overall occupancy decreased to 75% as of the March 2021 rent rolls, compared with 80% as of year-end 2020, which may be attributable to the challenges associated with the pandemic. Furthermore, the year-end 2020 NCF of $118.0 million reflects a -5.3% decrease compared with the year-end 2019 NCF of $124.5 million. While revenue remained in line compared with 2019, the decrease in cash flow is because of an increase in payroll and benefits expenses.

According to published reports, the loan’s sponsor, Colony Capital (Colony), has expressed interest in selling its senior housing healthcare portfolio by 2021. The portfolio is valued at $3.3 billion and includes 118 senior housing properties and 83 SNF, in addition to medical office and hospital assets. (It is unclear if the subject properties are included in this portfolio.) The news comes on the heels of the investment firm’s decision to sell its remaining 48-hotel portfolio in August 2021. The move is part of Colony’s overall plan to divest its real estate holdings and focus on digital infrastructure.

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 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 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.

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.

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

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