DBRS Morningstar Places Three Classes of CHC Commercial Mortgage Trust 2019-CHC Under Review with Developing Implications and Three Classes Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) placed its ratings on three classes of Commercial Mortgage Pass-Through Certificates issued by CHC Commercial Mortgage Trust 2019-CHC Under Review with Developing Implications as follows:

-- Class C at A (sf)
-- Class X at A (low) (sf)
-- Class D at BBB (high) (sf)

DBRS Morningstar also placed its ratings on three classes Under Review with Negative Implications as follows:

-- Class E at BB (sf)
-- Class F at B (high) (sf)
-- Class HRR at CCC (sf)

There are no trends for these rating actions. These rating actions reflect the extreme bifurcation of the transaction’s current structure following the release of 83 properties from the trust in June 2023, coupled with the lack of clarity provided by the servicer’s consolidated financial reporting for the trailing 12-month (T-12) period ended March 31, 2023, which indicates significant declines in revenue for the triple net (NNN) leased operating segment.

At issuance, the collateral was backed by the borrower’s fee and leasehold interests in 156 healthcare properties. The original sponsor, Colony Capital, sold its healthcare portfolio to Aurora Health Network in February 2022. In May 2023, a mezzanine realization event occurred, resulting in the mezzanine lender, Ventas, Inc., foreclosing and extinguishing its debt and an affiliate of the lender taking control of the borrower’s ownership interest in the asset. The lender affiliate subsequently exercised the loan’s third and final extension option in June 2023, extending the maturity date through June 2024 and converting the loan’s interest rate index from Libor to the Secured Overnight Financing Rate. In connection with this event, 83 properties were released from the trust in exchange for an unscheduled principal repayment of $656.6 million, which included a release premium of 115.0% of the original allocated loan amount (ALA) for all but three properties, with those properties being released at 100.0% of the original ALA as set forth in the loan documents.

As of the July 2023 reporting, 70 of the original 156 properties remain in the pool, with an aggregate principal balance of $360.2 million, reflecting a collateral reduction of 64.8% since issuance. By property type, the pool is concentrated by skilled nursing facilities, representing 70.1% of the pool, followed by medical office building (MOB) properties. By operating segment, 80.4% of the pool is considered NNN leased, while 19.6% is considered MOB. A third property segment, REIT Investment Diversification and Empowerment Act, was represented at issuance but repaid in full with the June 2023 property release. The pool is concentrated by properties in Pennsylvania, Georgia, and Texas, representing 31.7%, 18.1%, and 7.4% of the pool, respectively, with approximately 65% of the properties in tertiary or rural markets.

The 57 properties that fell into the NNN leased operating segment at issuance were leased across 19 individual leases, composed of either multiproperty master leases or individual leases, with the majority of leases scheduled to expire beyond the loan term. Prior to issuance, the borrower restructured two leases, considerably reducing rent payments to help offset the rise of expenses, as permitted under the original lease agreements. DBRS Morningstar has been notified of at least one additional lease amendment that has occurred since issuance, but given the significant decline in revenue for the NNN leased operating segment, it is unclear if there have been additional lease amendments.

Based on the servicer’s consolidated financials for the T-12 period ended March 31, 2023, the loan (less Greeley Professional, which had already been released) reported a net operating income (NOI) of $90.6 million, relatively in line with the YE2022 figure, but well below $108.9 million at YE2021, $122.1 million at YE2020, and the Issuer’s underwritten figure of $136.4 million. Based on the Q1 2023 reporting, the loan had an operating expense ratio of 58.4%, well above the Issuer’s underwritten figure of 43.2%, indicating a significant rise in operating expenses since issuance, which DBRS Morningstar has cited in previous rating actions. Previously, the trends on Classes E and F had been Negative since the 2020 rating action as a result of the uncertainty of the timeline for property cash flows to return to pre-pandemic levels.

Given the significant changes in the makeup of the pool to date, DBRS Morningstar re-evaluated its net cash flow and capitalization rate approach to derive a hypothetical DBRS Morningstar value, which indicates a current loan-to-value (LTV) in excess of 115.0%. This hypothetical value is heavily reliant on the servicer’s adjusted consolidated financials (less the NOI contributions of the released properties) for the T-12 period ended March 31, 2023. As part of the exercise, DBRS Morningstar also analyzed the unadjusted consolidated financials (including the NOI contributions of the released properties) and observed a large decline in revenue in excess of 40% for the NNN leased operating segment when compared with issuance figures, while revenue for the MOB segment appeared to be relatively stable.

As a result of the property releases, the capital structure is now extremely bifurcated, with upward rating pressure suggested for the senior notes and downward rating pressure suggested for the junior notes, based on the hypothetical DBRS Morningstar value and LTV sizing benchmarks. Given the significant variance in revenue indicated by the servicer’s unadjusted consolidated financials for the NNN leased operating segment, DBRS Morningstar has placed the senior notes Under Review with Developing Implications and the junior notes Under Review with Negative Implications until more clarity can be provided surrounding the discrepancy in the financial reporting. In the coming weeks, DBRS Morningstar will work to gather additional information from the servicer to clarify the financial performance of the remaining assets.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/416784 (July 4, 2023).

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

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

DBRS Morningstar notes a risk sensitivity analysis was not completed for this rating action as the ratings of all classes were placed Under Review with Developing Implications or Under Review with Negative Implications

These credit ratings are Under Review with Developing Implications and Under Review with Negative Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period. Given the nature of the collateral and the delays in receiving updated reporting to date, this process may take longer than the typical 90-day period.

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The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023; https://www.dbrsmorningstar.com/research/410191)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)

A description of how DBRS Morningstar analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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