DBRS Morningstar Upgrades Six Classes of BAMLL Commercial Mortgage Securities Trust 2016-SS1, Removes UR-Dev. Status

DBRS Limited (DBRS Morningstar) upgraded the ratings on the following classes of the Commercial Mortgage Pass-Through Certificates issued by BAMLL Commercial Mortgage Securities Trust 2016-SS1 as follows:

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

DBRS Morningstar also confirmed the ratings on the following classes:

-- Class A at AAA (sf)
-- Class X-A at AAA (sf)

All trends are Stable. The ratings have been removed from Under Review with Developing Implications, where they were placed on November 14, 2019.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, on the DBRS Morningstar website at www.dbrsmorningstar.com.

Prior to the finalization of the NA SASB Methodology, the DBRS Morningstar ratings for the subject transaction and all other DBRS Morningstar-rated transactions subject to the methodology in question were previously placed Under Review with Developing Implications, as the proposed methodology changes were material.

The subject rating actions are the result of the application of the NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology,” as applicable. Qualitative adjustments were made to the final loan-to-value (LTV) sizing benchmarks used for this rating analysis.

The rating upgrades were driven by the updated NA SASB Methodology applied during this review. This transaction closed in February 2016 and is secured by the fee and leasehold interests in One Channel Center. The property is located in the Seaport submarket of Boston and consists of a 501,650-square-foot Class A office building and the adjacent Channel Center Garage containing 965 parking spaces. The $166.0 million fixed-rate loan is fully interest only (IO) through the 10-year term.

The property was constructed in 2014 and has remained fully occupied by State Street Corporation (State Street), an investment-grade tenant rated AA with a Stable trend by DBRS Morningstar. State Street’s lease runs through December 2029, which is more than three years past loan maturity with no early termination options available. State Street is currently paying a triple net rental rate of $27.50, with the next rent step occurring in January 2025. The Channel Center Garage was operating under a three-year lease with VPNE Parking Solutions Inc. (VPNE), which was extended twice, with the most recent taking the expiration date to 2021. As this is the tenant’s second extension, DBRS Morningstar has requested updated leasing terms. VPNE previously paid an annual base rent of $2.2 million and 50.0% of annual gross revenue above $2.7 million, and the garage had a minimum occupancy of at least 25.9% at all times since State Street was required to lease 250 spaces. At issuance, DBRS Morningstar noted that the development boom in the area in recent years has reduced the number of available surface lots. This factor, combined with the relatively limited parking structure development in the area, suggests significant upside for income from the parking structure as the area continues to grow and parking demands increase.

The loan reported a YE2019 place debt service coverage ratio (DSCR) of 1.92 times (x) compared with the DSCR derived at issuance of 2.05x. The net cash flow (NCF) decline from the DBRS Morningstar issuance figure is attributed to DBRS Morningstar’s long-term credit tenant treatment of State Street, with the contractual rent included on a straight-line basis in the DBRS Morningstar NCF analysis. According to Reis, Class A office properties in the Seaport submarket reported a vacancy rate of 6.9% and an availability rate of 9.5% as of January 2019, compared with the January 2018 vacancy rate of 5.8% and an average vacancy of 6.9%, suggesting significant potential rent upside for the loan.

In the analysis for these rating actions, the DBRS Morningstar NCF figure of $14.4 million derived at issuance was accepted and a cap rate of 7.0% was applied, resulting in a DBRS Morningstar Value of $206.2 million, a variance from the appraised value of $322.0 million. The DBRS Morningstar Value implies an LTV of 80.5%, as compared with the LTV on the issuance appraised value of 51.6%.

The NCF figure applied as part of the analysis represents a 10.4% positive variance from the Issuer’s NCF. As of YE2019, the servicer reported a NCF figure of $13.7 million, a 5.4% variance from the DBRS Morningstar NCF, primarily driven by the straight-line credit DBRS Morningstar applied at issuance.

The cap rate applied is at the middle of the range of DBRS Morningstar Cap Rate Ranges for office properties, reflective of the long-term, investment-grade tenant as well as the property’s vintage, condition, and location. The property has exhibited strong historical performance with no vacancy since issuance as a result of its long-term, single-tenant lease. In addition, the 7.0% cap rate applied is substantially above the implied cap rate of 4.1% based on the Issuer’s underwritten NCF and appraised value.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis totalling 5.25% to account for cash flow volatility, property quality, and market fundamentals.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Classes X-A and X-B are IO certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

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

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology and North American CMBS Surveillance Methodology, which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. 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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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 [email protected].

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

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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