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Senior-care properties part of Colony Capital's $1B CMBS

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Private equity real estate investment giant Colony Capital will sponsor nearly $1 billion in bonds backed by a single commercial mortgage secured by a 7.3 million-square-foot portfolio of mostly senior-care housing properties.

According to presale reports from Fitch Ratings and DBRS, the loan backing the single-asset/single-borrower CHC Commercial Mortgage Trust 2019-C deal is secured by 156 properties in 28 states owned by Los Angeles-based Colony (NYSE: CLNY). The portfolio includes nontraditional property types such as assisted living, skilled-nursing and memory care properties, alongside medical office buildings and facilities.

The loan, underwritten by Citibank, Barclays and Deutsche Bank’s German American Capital Corp., is part of a $1.66 billion refinancing package that retires the existing $1.62 billion of debt remaining from a 2015 securitization that previously included the properties as collateral, according to presale reports. Along with the $1.02 billion primary loan, the refi structure is covered by $489.8 million in mezzanine loans held outside the trust and $146 million in sponsor equity paid into the transaction.

The properties are split between three categories in the asset pool. Most of the collateral involves Colony-owned medical office buildings that will contribute tenant-lease receivables to the transaction. Also included are properties leased to third-party companies under triple-net operating agreements, and properties operating under a special "RIDEA" operating lease that entitles Colony Capital to part of the operational revenue of lessors.

Eleven of the facilities operate under RIDEA (or REIT Investment Diversification and Empowerment Act ) leases. These leases permit the property owner's participation in net operating revenues, rather than solely relying on rent escalators in standard triple-net agreements for income growth.

The presale reports note 23.1% of the properties are secured by RIDEA-leased properties, with cash flows directly tied to senior housing, independent living and assisted living facilities. These have greater risk of cash flow disruption, Fitch cautioned, and also pose a higher risk of liability claims “given the large number of elderly residents and employees.”

The remainder of the pool consists of owned medical-office building cash flow or that from the triple-net lease agreements. Triple-nets are leases which provide receivables for property owners but impose all taxes, insurance and maintenance (or “net/net/net”) costs on the leasing operators themselves.

These medical-office and NNN properties include 88 medical buildings and 57 healthcare properties, respectively. The NNN leases have average remaining terms of 8.8 years.

The CHC 2019-CHC trust will market six classes of notes. The Class A notes totaling $446 million have preliminary AAA ratings from Fitch and DBRS. The agencies agree on ratings for a Class B tranche sized at $98 million (double-A), a $66 million Class C tranche (single-A) and $163 million in Class E notes (double-B) but differ slightly on the remaining subordinate notes.

A Class D tranche totaling $93 million is rated A (low) by DBRS but BBB- by Fitch and a Class F tranche of $107 million in notes has a B- Fitch rating and a higher BB (low) from DBRS. The agencies also diverge on the investment-grade ratings for two classes of interest-only notes: DBRS assigned an early A rating both the $205.6 million Class X-CP notes and the $257 million in Class X-NCP bonds; Fitch rated those notes at BBB-.

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CMBS Colony Capital