DBRS Finalizes Provisional Ratings on Bank of America Merrill Lynch Commercial Mortgage Trust 2016-UBS10

DBRS, Inc. (DBRS) has today finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-UBS10 (the Certificates) issued by Bank of America Merrill Lynch Commercial Mortgage Trust 2016-UBS10. The trends are Stable.

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class X-D at AAA (sf)
-- Class X-E at AAA (sf)
-- Class X-F at AAA (sf)
-- Class X-G at AAA (sf)
-- Class X-H at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (sf)
-- Class E at BB (high) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

Classes X-D, X-E, X-F, X-G, X-H, D, E, F, G and H have been privately placed.

The Class X-A, X-B, X-D, X-E, X-F, X-G and X-H balances are notional. DBRS ratings on interest-only (IO) certificates address the likelihood of receiving interest based on the notional amount outstanding. DBRS considers the IO certificate’s position within the transaction payment waterfall when determining the appropriate rating.

The collateral consists of 52 fixed-rate loans secured by 84 commercial and multifamily properties. The transaction is a sequential-pay pass-through structure. The conduit pool was analyzed to determine the provisional ratings, reflecting the long-term probability of loan default within the term and its liquidity at maturity. When the cut-off loan balances were measured against the DBRS Stabilized net cash flow (NCF) and their respective actual constants, five loans, representing 16.3% of the total pool, had a DBRS Term debt service coverage ratio (DSCR) below 1.15 times (x), a threshold indicative of a higher likelihood of mid-term default. Additionally, to assess refinance risk given the current low interest rate environment, DBRS applied its refinance constants to the balloon amounts. This resulted in 22 loans, representing 51.7% of the pool, having refinance DSCRs below 1.00x; however, the DBRS refinance (Refi) DSCRs for the loans are based on a weighted-average (WA) stressed refinance constant of 9.75%, which implies an inter¬est rate of 9.18%, amortizing on a 30-year schedule. This represents a significant stress of 4.3% over the WA contractual interest rate of the loans in the pool. The loans’ probability of default (POD) is based on the more constraining of the DBRS Term or Refi DSCR.

The pool is relatively diverse based on loan size, with a concentration profile equivalent to that of a pool of 28 equal-sized loans, though the top ten represent 51.5% of the pool. Diversity is further enhanced by seven loans, representing 20.2% of the pool, that are secured by multiple properties (39 in total). Eight loans, representing 26.1% of the pool, are located in urban markets, which benefit from consistent investor demand and increased liquidity even in times of stress. Urban markets represented in this deal include Los Angeles, New York, Dallas, Boston, Chicago and Cincinnati. Although there are 15 loans, totaling 17.7% of the transaction balance, located in tertiary/rural markets, 41.4% of this concentration is attributed to two retail properties anchored by national tenants that are both dominant centers in their respective markets. Additionally, one of these properties is operated by Simon Property Group, Inc. (Simon), which DBRS considers to be a strong operator.

The transaction has a high concentration of loans suffering from elevated refinance risk, as evidenced by the pool’s WA DBRS Refi DSCR of 1.02x. Twenty-two loans, representing 51.7% of the pool, have DBRS Refi DSCRs less than 1.00x. Eleven of these loans, comprising 25.9% of the pool, have DBRS Refi DSCRs less than 0.90x. The DBRS Refi DSCRs for these loans are based on a WA stressed refinance constant of 9.75%, which implies an inter¬est rate of 9.18%, amortizing on a 30-year schedule. This represents a significant stress of 4.3% over the WA contractual interest rate of the loans in the pool. DBRS models POD based on the more constraining of the DBRS Term DSCR and the DBRS Refi DSCR. Nine loans, representing 16.4% of the pool, are secured by hotel properties, including three of the top 15 loans. To further mitigate the more volatile cash flow of hotels, the loans in the pool secured by hotel properties have WA DBRS Going-In and Exit Debt Yields of 10.8% and 12.6%, respectively, which compare quite favorably with the WA DBRS Going-In and Exit Debt Yields of 8.5% and 9.5%, respectively, for the non-hotel properties in the pool. Additionally, 72.1% of the hotel concentration are located in urban markets, and 30.4% of these hotels are considered to be of Above Average property quality by DBRS. Eight loans, representing 16.6% of the pool, including four of the top 15 loans, are structured with IO payments for the full term. An additional 19 loans, representing 49.7% of the pool, have partial IO periods remaining ranging from 11 to 116 months.

The DBRS sample included 25 of the 52 loans in the pool. Site inspections were performed on 34 of the 84 properties in the portfolio (71.4% of the pool by allocated loan balance). DBRS conducted meetings with the on-site property manager, leasing agent or a representative of the borrowing entity for 64.7% of the pool. The DBRS sample had an average NCF variance of -11.3% and ranged from -28.7% to -4.2%. Six loans, comprising 21.1% of the DBRS sample (17.7% of the pool), were considered to be of Above Average property quality based on physical attributes and/or a desirable location within their respective markets. Five of these loans are within the top 15 (Twenty Ninth Street Retail, Gateway Plaza, Renaissance Cincinnati, Le Meridien Cambridge MIT and AvidXchange), while the remaining loan, Newberry Street Portfolio, is the 16th largest in the pool. Higher-quality properties are more likely to retain existing tenants/guests and more easily attract new tenants/guests, resulting in a more stable performance. Six loans, representing 19.0% of the pool, have sponsorship with negative credit history and/or loan collateral associated with a borrowing structure that DBRS deemed to be weak. Such sponsors were associated with a prior DPO, loan default, foreclosure, voluntary bankruptcy filing, limited net worth and/or liquidity, a historical negative credit event, a non-standard borrower structure and/or inadequate commercial real estate experience. DBRS increased the POD for the loans with identified sponsorship concerns.

The ratings assigned to the Notes by DBRS are based exclusively on the credit provided by the transaction structure and underlying trust assets. All classes will be subject to ongoing surveillance, which could result in upgrades or downgrades by DBRS after the date of issuance.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are North American CMBS Rating Methodology and Unified Interest Rate Model for Rating U.S. Structured Finance Transactions, which can be found on our website under Methodologies.

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form 15-E), which contains the description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not rely on the due diligence services outlined in Form 15-E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.