DBRS Finalizes Ratings on Morgan Stanley Bank of America Merrill Lynch Trust 2016-C32

DBRS, Inc. (DBRS) has today finalized the provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C32 (the Certificates) issued by Morgan Stanley Bank of America Merrill Lynch Trust 2016-C32:

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

All trends are Stable.

Classes X-D, D, E and F have been 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’ positions within the transaction payment waterfall when determining the appropriate ratings.

The collateral consists of 56 fixed-rate loans secured by 76 commercial and multifamily properties, comprising a total transaction balance of $906,952,869. The transaction has a sequential-pay pass-through structure. The trust assets contributed from two loans, representing 12.7% of the pool, are shadow-rated investment grade by DBRS. Proceeds for each shadow-rated loan are floored at their respective rating within the pool. When 12.7% of the pool has no proceeds assigned below the rated floor, the resulting pool subordination is diluted or reduced below that rated floor. 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 4.9% 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. Twenty-seven loans, representing 54.8% of the pool, have a DBRS Refinance (Refi) DSCR below 1.00x; however, these credit metrics are based on whole-loan balances. Two of the pool’s loans with DBRS Refi DSCRs below 0.90x, Hilton Hawaiian Village and Potomac Mills, which total 12.7% of the transaction balance, are shadow-rated and have large pieces of subordinate mortgage debt outside the trust. Based on A-note balances only, the deal’s weighted-average (WA) DBRS Refi DSCR improves to 1.09x from 1.02x and the concentration of loans with DBRS Refi DSCRs below 1.00x reduces to 42.1%.

As previously mentioned, two of the largest eight loans, Hilton Hawaiian Village and Potomac Mills, have trust participations that exhibit credit characteristics consistent with investment-grade shadow ratings. Hilton Hawaiian Village has credit characteristics consistent with a BB (high) shadow rating while Potomac Mills has credit characteristics consistent with an A (low) shadow rating. In addition, 16 loans, representing 40.4% of the pool, have a DBRS Term DSCR in excess of 1.50x. This includes six of the largest ten loans. Even when excluding the two shadow-rated loans, both of which have large pieces of subordinate mortgage debt held outside the trust, the deal continues to exhibit a favorable DBRS Term DSCR of 1.67x. Based on A-note balances only, the DBRS Term DSCR is even more robust at 1.93x. Only two loans, representing 9.6% of the pool, are secured by hotels, the largest of which is Hilton Hawaiian Village, which totals 7.0% of the pool and is shadow-rated BBB (high) by DBRS. Hotels have the highest cash flow volatility of all major property types.

The pool has an elevated concentration of loans either fully or primarily leased to a single tenant. Thirteen loans, comprising 23.5% of the transaction balance, are secured by such properties, which includes four of the largest 15 loans: 100 Hamilton, FedEx Ground Portfolio, American Greetings HQ and Walgreens Pool 7. Loans secured by properties occupied by single tenants have been found to suffer higher loss severities in an event of default; however, almost a quarter of the single-tenant concentration stems from a low-leveraged loan with an excellent urban location in Palo Alto, California, that is tenanted by one of the highest-valued private companies in the country. Two more of these loans, which represent 32.6% of the concentration, are backed by brand new structures built to suit the tenants, which are both heavily invested in their respective properties. The pool’s single-tenant loans exhibit WA DBRS Going-In and Exit Debt Yields of 10.0% and 11.0%, respectively, which are well above the deal as a whole. Additionally, single-tenant properties are modeled by DBRS with a higher loss profile compared with multi-tenant properties. The transaction has a high concentration of loans that are secured by assets either fully or primarily used as retail at 45.9%. The retail sector has generally underperformed since the Great Recession because of a general decline in consumer spending power, store closures, chain bankruptcies and the rapidly growing popularity of ecommerce. According to the U.S. Census Bureau, ecommerce sales represented 7.0% of total retail sales in 2015 compared with 3.9% in 2009. As the ecommerce share of sales is expected to continue to grow significantly in the coming years, the retail real estate sector may continue to be relatively weak. DBRS considers the majority of the retail concentration to be secured by either anchored or regional mall properties, which are more desirable and have shown lower rates of default historically. Over a quarter of the retail concentration consists of Wolfchase Galleria and Potomac Mills, which are dominant regional malls in established suburban markets. Both properties are owned and operated by Simon Property Group, which DBRS considers to be one of the strongest in its industry. Additionally, Potomac Mills is shadow-rated A (low) by DBRS.

The DBRS sample included 29 of the 56 loans in the pool. Site inspections were performed on 33 of the 76 properties in the portfolio (74.8% of the pool by allocated loan balance). The DBRS average sample NCF adjustment for the pool was -6.6% and ranged from -18.8 to +5.0%. The average DBRS sampled NCF haircut compares favorably with more recent transactions by DBRS, where the average DBRS sampled haircut is typically in excess of -7.5% and commonly around -10.0%.

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.

For more information on this transaction and supporting data, 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.

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 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.