DBRS Confirms Ratings on The Bancorp Commercial Mortgage 2016-CRE1 Trust

DBRS Limited (DBRS) confirmed the Commercial Mortgage Pass-Through Certificates, Series 2016-CRE1 (the Certificates) issued by The Bancorp Commercial Mortgage 2016-CRE1 Trust as follows:

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)

All trends are Stable.

The rating confirmations reflect that the performance of the transaction remains in line with DBRS’s expectations since issuance. At issuance, the collateral consisted of 22 floating-rate loans secured by 24 transitional commercial properties. As of the November 2017 remittance, 20 loans remain in the pool, with an aggregate outstanding principal balance of $264.9 million, representing a collateral reduction of 5.5% since issuance because of the unscheduled repayment of two loans: One College Park (3.6% of the original cut-off trust balance) and Terra Creek Apartments (1.9% of the original cut-off trust balance). Four of the remaining loans (22.2% of the current cut-off trust balance) were structured with future funding notes to be used for property renovations and future leasing costs to aid in property stabilization, while two loans (15.1% of the current cut-off trust balance) were structured with mezzanine debt held outside of the trust.

In comparison to DBRS’s expectations at issuance, only one loan has shown a recent decline in performance not in line with its original businesses plan, while other select loans have displayed recent improvements. Based on the most recent financial reporting for the remaining loans, the pool has a weighted-average debt yield of 6.5%, which is not irregular for stabilizing properties. The pool is concentrated by both loan size and property type, as the largest ten loans represent 73.2% of the current cut-off trust balance, while six loans are secured by office properties, representing 36.5% of the current cut-off trust balance. Only one loan, representing 2.8% of the current cut-off trust, is secured by a property located in a tertiary market as the rest of the pool is secured by properties located in dense urban, urban or suburban markets.

There are currently no loans in special servicing and seven loans (52.3% of the current cut-off trust balance) on the servicer’s watchlist. Only one loan on the servicer’s watchlist, the Holiday Inn Express Brooklyn (Prospectus ID#2, 11.5% of the current cut-off trust balance), was flagged because of a performance decline not in line with its original business plan. Four other loans (22.3% of the current cut-off trust balance) were also flagged as a result of performance declines; however, these declines were anticipated within the respective properties’ business plans. The remaining loans on the servicer’s watchlist were flagged because of near-term tenant rollover (two loans; 17.5% of the current cut-off trust balance) and near-term loan maturity (one loan; 2.9% of the cut-off trust balance). Both loans with near-term tenant rollover have recently had positive leasing action, while the borrower of the loan with a near-term loan maturity has expressed interest in executing a one-year extension. The largest loan on the servicer’s watchlist is highlighted below.

The Holiday Inn Express Brooklyn is secured by a 115-room, limited-service hotel located on the west side of Brooklyn, New York. The property was constructed in 2006 and underwent a $2.2 million ($18,696 per room) property improvement plan (PIP) between 2015 and 2016, including a complete overhaul of the guest rooms, lobby and common areas. With most of the business plan complete at issuance, the borrower expected that the renovation would increase demand and improve operations moving forward. Loan proceeds of $30.5 million, along with $4.0 million of mezzanine debt, refinanced $24.3 million of existing debt, returned $8.7 million of equity to the sponsor, allocated $0.3 million for escrows and covered closing costs.

The loan was added to the servicer’s watchlist in August 2017, following a performance decline attributed to declining revenue at the property. Since the subject’s renovation, performance metrics have been below both historical (prior to the renovations completed in May 2016) and competitor’s levels. As of October 2017, the property had trailing twelve-month (T-12) occupancy, ADR and RevPAR figures of 81.4%, $160 and $138, respectively, compared to the competitive set’s figures of 86.5%, $168 and $145, respectively. Although these figures compare favourably to the subject’s September 2016 T-12 occupancy, ADR and RevPAR figures of 77.7%, $170 and $132, respectively, they are still well below the issuer’s anticipated rates of 89.0%, $187 and $167, respectively, and the DBRS issuance assumptions of 85.0%, $171 and $146, respectively.

According to the servicer, performance has recently fallen as a result of increased competition in the area. Although not confirmed, it appears that four or five new hotels came online during 2016, adding around 600 new rooms to markets. While not all of these hotels appear to be directly competitive, the Gowanus Hotel (58 rooms) and Gowanus Inn & Yard (82 rooms), which came online during Q3 2016, appear to be fairly similar in offerings. In addition to the new supply, management indicated at issuance that it had recently lost a key government contract, at a rate of $229 per night, and other business has declined as rooms were taken offline during the renovation project. Further complicating recent financial performance, the Franchisor (The InterContinental Hotel Group), has issued notice that it may terminate the subject’s flag by January 2018 because of low customer satisfaction scores at the property. DBRS will provide an update regarding this development when available, as the borrower will report updated financials and customer satisfaction scores in the new year.

As of Q3 2017, the loan reported an annualized T9 net cash flow (NCF) of $1,155,892, compared to the DBRS Stabilized NCF at issuance of $2,788,273. DBRS has analyzed this loan with a stressed NCF reflective of recent performance and market competition to increase to probability of default levels.

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

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

The principal methodology is CMBS North American Surveillance, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance-related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. Please note that not every related methodology listed under a principal Structured Finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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

The rated entity or its related entities did participate initially in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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