DBRS Assigns Provisional Ratings to Cherrywood SB Commercial Mortgage Loan Trust 2016-1

DBRS, Inc. (DBRS) has today assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-1 (the Certificates) to be issued by Cherrywood SB Commercial Mortgage Loan Trust 2016-1. The trends are Stable.

-- Class A-FL at AAA (sf)
-- Class A-FX at AAA (sf)
-- Class M-1 at AA (sf)
-- Class M-2 at A (sf)
-- Class M-3 at BBB (sf)
-- Class M-4 at BBB (low) (sf)
-- Class B-1 at BB (sf)
-- Class B-2 at B (sf)

Classes B-1 and B-2 will be privately placed.

The collateral consists of 151 individual loans, of which 136 are secured by individual properties, and 15 of which are cross-collateralized borrowing groups that DBRS treats as six loans, secured by 205 (estimated by DBRS) commercial and multifamily properties. Furthermore, one of the crossed loans (2.7% of the pool) is backed by the interest in 37 single-family rental homes and one medical office building. The conduit pool was analyzed to determine the ratings, reflecting the long-term probability of loan default within the term and, if applicable, its liquidity at maturity. Of the 141 individual loans, 148 have a fixed interest rate for the first five years of the loan term, two have a fixed interest rate for the first seven years of the loan term and one has a fixed interest rate for the first 15 years of the loan term. After the fixed period, the interest rate floats over the six-month LIBOR index and resets every six months. The loans are structured with interest rate floors ranging from 5.75% to 9.25% with a weighted average (WA) of 7.64% and interest rate caps ranging from 11.75% to 15.25% with a WA of 13.64%. DBRS applied a stress to the index (six-month LIBOR) that corresponded to the remaining fully extended term of the loans and added the respective contractual loan spread to determine a stressed interest rate over the loan term. DBRS looked to the greater of the interest rate floor or the DBRS stressed index rate when calculating stressed debt service. The loans all amortize on a 360-month basis with term lengths ranging from 15 to 30 years. When the cut-off loan balances were measured against the DBRS net cash flow and their respective actual constants or stressed interest rates, there were 76 loans, representing 59.5% of the pool, with term DSCRs below 1.15x, a threshold indicative of a higher likelihood of term default.

The pool is relatively diverse based on loan size, with an average balance of $744,407 or $791,588, based on the DBRS 136 individual and six portfolio loans, and a concentration profile equivalent to that of a pool of 78 equal-sized loans, which helps to insulate the higher-rated classes from event risk. Furthermore, the loans are secured by traditional property types (i.e., retail, multifamily, office and industrial), with no exposure to higher-volatility property types, such as hotels. The pool also has a relatively high concentration of properties located in urban markets, given the small balance of the loans. DBRS identified 24 loans, representing 16.1% of the pool, as being located in urban markets, including the second-largest loan, representing 3.5% of the pool.

The sponsors are generally less sophisticated operators of commercial real estate with limited real estate portfolios and experience, but all loans are structured with full recourse to the sponsor. Of the 34 loans DBRS sampled, DBRS identified 20 loans (57.9% of the DBRS sample based on loan balance) with sponsors reporting derogatory credit history, bankruptcies or other negative financial concerns, which were modeled with an increased probability of default (POD). Furthermore, five loans (4.9% of the pool balance) have had a delinquent pay history in the last 12 months, which were modeled with a significant increased POD. Thirty loans were identified as occupied by a single tenant, owner occupied or both, representing 16.7% of the pool. Loans secured by properties occupied by single tenants or by the owner have been found to have higher losses in the event of default. As such, DBRS modeled single-tenant properties with a higher POD and cash flow volatility compared with multi-tenant properties.

The DBRS sample included 34 of the 142 DBRS aggregated loans in the pool. Site inspections were performed on 47 of the 205 properties in the pool (35.9% of the pool by allocated loan balance). DBRS conducted meetings with the on-site property manager, leasing agent or representative of the borrowing entity for 21.1% of the pool. DBRS identified 28 loans, representing 21.5% of the pool, as being located in rural or tertiary markets. Properties located in tertiary and rural markets are modeled with significantly higher loss severities than those located in urban and suburban markets. Furthermore, DBRS classified ten loans in the sample (33.8% of the DBRS sample by loan balance) as having Below Average or Poor property quality. Lower-quality properties are less likely to retain existing tenants, resulting in less stable performance. DBRS increased the POD for the loans identified with less than Average property quality.

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

The applicable methodology is North American CMBS Rating Methodology, which can be found on our website under Methodologies.

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

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.