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

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of the Commercial Mortgage Pass-Through Certificates issued by CHC Commercial Mortgage Trust 2019-CHC as follows:

-- 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 are Negative. All other trends remain Stable, with the exception of Class HRR, which is assigned a rating that generally does not carry a trend for commercial mortgage-backed securities (CMBS) ratings.

DBRS Morningstar changed the trends on Classes E and F 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. With this review, DBRS Morningstar maintained the Negative trends given the continued uncertainty regarding the timeline for the property cash flows to return to levels achieved prior to the pandemic, as further outlined below.

At issuance, the collateral was backed by the borrower’s fee and leasehold interests in 156 healthcare properties. Since issuance, three properties (Yuma SNF, North Bend & Mt Si SNF, and Greeley MOB) were released from the collateral, resulting in a collateral reduction of just 0.7%. Mortgage loan proceeds of approximately $1.02 billion, alongside $489.8 million of mezzanine debt and $146.0 million of sponsor equity, refinanced $1.6 billion of existing debt, funded upfront reserves, and paid closing costs. The loan had an initial two-year term with three 12-month extension options. The loan recently exercised its second extension option, extending the loan maturity through June 2023.

The geographically diverse portfolio includes medical office buildings (MOB), independent living facilities (ILF), assisted living facilities (ALF), skilled nursing facilities (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 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. The RIDEA properties benefit from a higher portion of private-pay sources; however, DBRS Morningstar did factor in additional conservatism in its determination of net cash flows (NCFs).

As of March 2022, the portfolio was 85.7% occupied, improving from 75.0% at March 2021. Based on the Q1 2022 financials, the loan reported a trailing-12 month NCF figure of $105.0 million, reflecting a mortgage loan debt service coverage ratio (DSCR) of 5.21 times (x) and a whole loan DSCR of 2.01x. Despite the decline in NCF from year-end (YE) 2021 at $108.9 million and YE2020 at $122.1 million, revenue has remained relatively stable; the decline has primarily been a result of increased expenses. As of YE2021, the loan reported a 10.8% decline in NCF and a 12.2% increase in expenses, largely driven by increased management fees (+69.6% year over year (YOY)), advertising & marketing (+49.5% YOY), general & administrative (+31.9% YOY), and other expenses (+43.1% YOY). While the rise of these expense line items is notable, DBRS Morningstar views these as a response to dealing with the coronavirus pandemic given the property type and anticipates these to decline with updated financial reporting.

The sponsor, Colony Capital (Colony), sold its healthcare portfolio to Aurora, a healthcare-focused investment firm, in February 2022, which included the subject properties. Aurora currently manages over 6,000 beds in healthcare facilities across the United States. The strong sponsorship, geographical diversity, and recent occupancy gains suggest continued stable performance for the loan.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

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.

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

The principal methodology is North American CMBS Surveillance Methodology (March 4, 2022), 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.

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 info@dbrsmorningstar.com.

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.

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 info@dbrsmorningstar.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577