DBRS Confirms All Classes of Cherrywood SB Commercial Mortgage Loan Trust 2016-1

DBRS Limited (DBRS) confirmed the ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2016-1 (the Certificates) issued by Cherrywood SB Commercial Mortgage Loan Trust 2016-1 as follows:
-- 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)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction since the last surveillance review, conducted in June 2017, and since issuance in 2016. At issuance, the collateral consisted of 151 individual loans secured by 205 commercial and multifamily properties, with a deal balance of approximately $112.5 million. Because 15 of the loans are sponsored by cross-collateralized borrowing groups, those loans were analyzed as six portfolio loans. As of the May 2018 remittance report, 117 loans remain in the pool with an aggregate principal balance of $86.2 million, representing a collateral reduction of 23.2% since issuance and 12.0% since the June 2017 surveillance review, due to scheduled amortization and loan repayments.

Of the remaining 117 loans, all but eight loans (4.7% of the pool) are fully amortizing, with term lengths ranging between 12 and 28 years. In addition, all of the loans have a floating interest rate structure. Of the loans in the pool, 114 loans (97.7% of the pool) have a fixed interest rate for the first five years of the loan term, two loans (1.1% of the pool) have a fixed interest rate for the first seven years of the loan term and one loan (1.2% of the pool) has a fixed interest rate of the first 15 years of the loan term. After the fixed-rate periods, 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%. For these loans, 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 terms ranging from 15 to 30 years.

The pool is relatively diverse based on loan size, as the top 15 loans represent a relatively small 40.2% of the pool, with an average loan size for the pool of $763,294. The pool is concentrated by property type, as 60 loans, representing 60.4% of the pool, are secured by multifamily properties, and 32 loans (19.0% of the pool) are secured by retail properties. Mitigating the risks associated with the property type concentration, the pool also has a fairly high concentration of properties located in urban and suburban markets (given the small balance nature of the loans), which represent 19.4% and 58.4% of the pool, respectively. 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.

As of the May 2018 remittance, four loans (2.6% of the pool) are 30 to 90+ days delinquent. According to the servicer, each borrower is regularly late on payments with funds typically received prior to month’s end. Two of the loans, representing 1.6% of the pool, are in special servicing, with the strategy for both being to continue collection efforts while pursuing all legal remedies available. The largest loan, 184 Salem Avenue (0.8% of the pool) has been listed for sale twice, but both sales have fallen through. The borrower has since filed for Chapter 11, and subsequently, counsel has begun negotiations regarding interest-only payments while reorganization occurs. DBRS has applied a significant probability of default penalty to all four of these loans and other loans with delinquent pay histories.

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

The rating assigned to Class M-2 materially deviates from the higher rating implied by the quantitative results. DBRS considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by the quantitative results that is a substantial component of a rating methodology. The deviations are warranted given loan level event risk, as the underlying loans do not report ongoing financials.

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 under Related Documents 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 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.