DBRS Assigns Provisional Ratings to Citigroup Commercial Mortgage Trust 2016-C2

DBRS, Inc. (DBRS) has today assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C2 (the Certificates) to be issued by Citigroup Commercial Mortgage Trust 2016-C2. The trends are Stable.

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

Classes D, X-D, E-1, E-2, E, F-1, F-2, F, EF, G-1, G-2, G and EFG will be privately placed.

The Class X-A, X-B and X-D 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 certificates’ position within the transaction payment waterfall when determining the appropriate rating.

The collateral consists of 44 fixed-rate loans secured by 53 commercial properties, comprising a total transaction balance of $609,165,022. Six of the loans are cross-collateralized and cross-defaulted into three separate portfolios or crossed groups. The DBRS analysis of this transaction incorporates these crossed groups, resulting in a modified loan count of 41, and the loan number references within the presale report reflect this total. 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, two loans, representing 12.5% 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 19 loans, representing 55.1% of the pool, having refinance DSCRs below 1.00x; however, the DBRS Refinance (Refi) DSCRs for these loans are based on a weighted-average (WA) stressed refinance constant of 9.85%, which implies an interest rate of 9.31% amortizing on a 30-year schedule. This represents a significant stress of 4.8% 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 largest loan in the pool, Vertex Pharmaceuticals HQ, exhibits credit characteristics consistent with an investment-grade shadow rating. The loan represents 9.8% of the pool and has credit characteristics consistent with an AA shadow rating. Overall, the pool exhibits a relatively strong DBRS WA Term DSCR of 1.72x based on the whole loan balances, which indicates moderate term default risk. In addition, 18 loans, representing 53.4% of the pool, have a DBRS Term DSCR in excess of 1.50x. Even when excluding Vertex Pharmaceuticals HQ, which represents 9.8% of the pool and is shadow rated AA, as well as Opry Mills, which represents another 9.8% of the pool and has a high DBRS Term DSCR of 2.04x, the deal continues to exhibit a good DBRS Term DSCR of 1.46x. Seven loans, representing 28.2% 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 the deal include New York, Boston and Huntington Beach. Only eight loans, totaling 12.0% of the transaction balance, are considered to be located in tertiary/rural markets.

In total, seven loans, representing 19.9% of the pool, are secured by hotel properties, including three of the largest ten loans. Hotels have the highest cash flow volatility of all major property types as their income, which is derived from daily contracts rather than multi-year leases, and their expenses, which are often mostly fixed, are quite high as a percentage of revenue. These two factors cause revenue to fall swiftly during a downturn and cash flow to fall even faster as a result of high operating leverage. DBRS cash flow volatility for such hotels, which ultimately determines a loan’s POD, assumes between a 31.4% and 92.8% cash flow decline for a BBB stress and a 55.6% and 97.6% cash flow decline for a AAA stress. To further mitigate hotels’ more volatile cash flow, the loans in the pool secured by hotel properties have a WA DBRS Debt Yield and WA DBRS Exit Debt Yield of 11.3% and 13.1%, respectively, which compare quite favorably with the WA DBRS Debt Yield and DBRS Exit Debt Yield of 8.8% and 9.6%, respectively, for the non-hotel properties in the pool.

The DBRS sample included 28 of the 41 loans in the pool. Site inspections were performed on 32 of the 54 properties in the pool (84.9% of the pool by allocated loan balance). The DBRS average sample NCF adjustment for the pool was -7.0% and ranged from -20.4% to +2.1%. Furthermore, the pool is concentrated based on loan size with a concentration profile equivalent to that of a pool of 20 equal-sized loans. The largest five and ten loans total 39.6% and 59.3% of the pool, respectively. A concentration penalty was applied given the pool’s lack of diversity, which increases each loan’s POD. While the transaction is concentrated in the largest ten loans, one of these loans (Vertex Pharmaceuticals HQ), totaling 9.8% of the pool, is shadow rated AA by DBRS.

The ratings assigned to Classes F-2, F and EF differ from the higher ratings implied by the quantitative model. DBRS considers this difference to be a material deviation, and in this case, the ratings reflect the dispersion of loan-level cash flows expected to occur post issuance.

The ratings assigned to the Certificates 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 methodology is North American CMBS Rating Methodology, 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.