DBRS Finalizes Provisional Ratings on Citigroup Commercial Mortgage Trust 2016-C3

DBRS, Inc. (DBRS) has today finalized provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C3 (the Certificates) issued by Citigroup Commercial Mortgage Trust 2016-C3:

-- 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 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 B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (sf)
-- Class F at B (high) (sf)

All trends are Stable.

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

The Classes X-A, X-B, X-D, X-E, X-F and X-G 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’ positions within the transaction payment waterfall when determining the appropriate ratings.

The collateral consists of 44 fixed-rate loans secured by 72 commercial properties, comprising a total transaction balance of $756,492,190. The transaction has a sequential-pay pass-through structure. Two loans, representing 8.6% of the pool, were shadow-rated investment grade by DBRS. Proceeds for the shadow-rated loans are floored at their respective ratings within the pool. When 8.6% of the pool has no proceeds assigned below the rating floor, the resulting pool subordination is diluted or reduced below that rated floor. The conduit pool was analyzed to determine the 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, none of the loans 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 18 loans, representing 44.5% of the pool, having refinance DSCRs below 1.00x.

Two of the largest eight loans, Potomac Mills and Quantum Park, exhibit credit characteristics consistent with investment-grade shadow ratings. The loans represent 8.6% of the pool. Potomac Mills has credit characteristics consistent with an A (low) shadow rating, while Quantum Park has credit characteristics consistent with a BBB (high) shadow rating. Additionally, five of the largest 15 loans that comprise 28.3% of the pool were modeled with strong sponsorship: Briarwood Mall, 101 Hudson Street, Potomac Mills, Hill7 and Mills Fleet Farm. The pool exhibits a relatively strong DBRS Weighted-Average (WA) Term DSCR of 1.95x based on the whole loan balances, which indicates moderate term default risk. Twenty-three loans, representing 73.6% of the pool, have a DBRS Term DSCR in excess of 1.50x. Even when excluding the two shadow-rated loans, the deal continues to exhibit a healthy DBRS Term DSCR of 1.83x. None of the loans in the pool are secured by student or military housing properties, which often exhibit higher cash flow volatility than traditional multifamily properties.

The transaction has a notable related borrower concentration with a combined 17 loans, representing 34.7% of the pool, sponsored by either Simon Property Group, Inc. (Simon); Starwood Capital Group; Columbia Sussex Corporation; HK Realty; Gregory S. Houge, Bruce H. Rothman, Laurent A. Opman and Serge Azria; Bruce P. Woodward, James Alexander McCabe and Steven Dietrich; or Fred D. Grimes, Mark P. Esbensen and William Wen-Wai Lo. Two loans sponsored by Simon, accounting for 13.2% of the pool and 38.1% of the related borrower loan balance, were modeled with strong sponsorship. In total, ten loans, representing 20.9% of the pool, are secured by hotels, including four of the largest 15 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 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 probability of default (POD), assumes between a 23.6% and 30.0% cash flow decline for a BBB stress and a 66.8% and 84.9% 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 10.3% and 10.6%, respectively, which compare favorably with the WA DBRS Debt Yield and DBRS Exit Debt Yield of 8.8% and 10.1%, respectively, for the non-hotel properties in the pool.

The DBRS sample included 26 of the 44 loans in the pool. Site inspections were performed on 45 of the 72 properties in the portfolio (77.5% of the pool by allocated loan balance). The DBRS average sample NCF adjustment for the pool was -10.0% and ranged from -21.7% to -0.2%. Furthermore, the pool is concentrated based on loan size, with a concentration profile equivalent to that of 23 equal-sized loans. The largest five and ten loans total 35.9% and 56.3% 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, two of these loans (Potomac Mills and Quantum Park), totaling 8.6% of the pool, are shadow-rated at A (low) and BBB (high), respectively, by DBRS.

The rating assigned to Class F differs from the higher rating 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.

To provide more information on this transaction and supporting data, DBRS has made the transaction available on DBRS CMBS IReports. Please log into www.ireports.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS CMBS IReports platform.

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 a 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.