DBRS Morningstar Confirms Ratings on LSTAR Commercial Mortgage Trust 2016-4

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2016-4 issued by LSTAR Commercial Mortgage Trust 2016-4 as follows:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (high) (sf)
-- Class B at AA (sf)
-- Class C at A (high) (sf)
-- Class D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

DBRS Morningstar discontinued its rating on Class A-1 because it was repaid in full.

Classes F and G were removed from Under Review with Negative Implications, where they were placed on August 6, 2020. All trends are Stable.

The rating confirmations reflect the generally stable performance of the transaction since issuance; however, DBRS Morningstar continues to monitor performance challenges for the underlying collateral, much of which has been driven by the impact of the Coronavirus Disease (COVID-19) global pandemic. This transaction does benefit from a lower concentration of anchored and unanchored retail properties, collectively representing 6.5% of the current trust balance. The pool has a high concentration of hospitality properties, however, representing 28.3% of the pool. These property types have been the most severely affected by the initial effects of the coronavirus pandemic and, as such, the high concentration is of note. It is noteworthy that none of the five hotel loans in the pool are on the servicer’s watchlist for a coronavirus relief request and none are in special servicing. In general, the collateral hotels were performing well prior to the pandemic and the loans benefit from generally low LTVs as based on the issuance valuations. Also offsetting some of the increased risks to the pool resulting from the coronavirus is the concentration of loans secured by multifamily properties, representing 32.3% of the current pool balance, which have continued to show overall stable performance throughout the global pandemic.

As of the November 2020 remittance, 17 of the original 22 loans remain in the pool, representing a collateral reduction of 15.2% since issuance. One loan, representing 3.0% of the current pool balance, is fully defeased. Additionally, there are four loans, representing 33.7% of the current trust balance. These loans are being monitored for a low debt service coverage ratio (DSCR) and/or occupancy issues primarily driven from disruptions related to the coronavirus pandemic. There is only one loan in special servicing, 310 Superior Street (Prospectus ID#22), representing 1.2% of the pool. This loan is secured by an unanchored retail property in Chicago and was transferred to special servicing in October 2017 after the former largest tenant closed in January 2017. The loan remained current through the stint in special servicing, until May 2020 when it was first flagged as delinquent. The November 2020 reporting showed the loan was 121-plus days delinquent and a new value is pending. The loan was analyzed with a probability of default (PoD) penalty to increase the expected loss in the analysis for this review.

The largest loan in the pool, Charlotte Plaza (Prospectus ID#1, 11.7% of the pool), was analyzed also with an elevated PoD given the ongoing occupancy issues for the underlying property, a 632,171-sf, Class A office building in downtown Charlotte, North Carolina. The loan was initially added to the servicer’s watchlist in late 2017 because the largest tenant, Charlotte School of Law, LLC (CSL), which previously occupied 39.5% of the NRA, was being reviewed by the American Bar Association (ABA). The for-profit school was placed on probation by the ABA in November 2016 and ultimately lost its operating license.

The tenant vacated the property and ceased rental payments with that development and according to the September 2020 rent roll, the property was 81.4% occupied. The sponsor was able to back-fill most of the CSL space in August 2019 with Lowe’s Home Improvement, which took roughly 31.8% of NRA on a lease through July 2024. This space is serving as an interim office space while the tenant waits for a permanent location to be completed. Other major tenants at the property include Grant Thornton (8.8% of the NRA through December 2023) and Tryon Medical Partners (4.0% of NRA through February 2029). Given the concentration of lease rollover around the January 2023 loan maturity date, as well as the relatively low in-place occupancy rate that will compound the challenge of leasing up space in the current economy, the elevated PoD and resulting increased expected loss were justified.

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 interest-only (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.

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

The principal methodology is North American CMBS Surveillance Methodology (March 6, 2020), 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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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

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