DBRS Morningstar Confirms All Classes of Citigroup Commercial Mortgage Trust 2016-C3, Removes Four Classes From Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2016-C3 issued by Citigroup Commercial Mortgage Trust 2016-C3 as follows:

-- 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 A-AB 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 (sf)
-- Class X-D at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class X-E at BB (high) (sf)
-- Class E at BB (sf)
-- Class X-F at BB (low) (sf)
-- Class F at B (high) (sf)

Classes E, F, X-E, and X-F were removed from Under Review with Negative Implications where they were placed on August 6, 2020. All trends are Stable; however, the underlying collateral continues to face performance challenges, many of which have been driven by the Coronavirus Disease (COVID-19) pandemic. In addition to the loans representing 1.8% of the pool that are in special servicing as of the December 2020 remittance, DBRS Morningstar also notes that the pool has a moderate concentration of hospitality and retail properties, representing 20.1% and 23.2% of the pool balance, respectively. The initial impact of the coronavirus pandemic has affected these property types most severely and, as such, those concentrations suggest slightly increased risks for the pool, particularly at the lower rating categories, since issuance.

The transaction is concentrated by property type as 11 loans, representing 36.8% of the current trust balance, are secured by office assets, whereas 10 loans, representing 23.2% of the current trust balance, are secured by retail assets. Lodging collateral makes up the third-largest concentration, representing 10 loans and 20.1% of the current trust balance. According to the December 2020 remittance, two loans, representing 1.8% of the current trust balance, were in special servicing. The two loans—Homewood Suites Overland Park (Prospectus ID#26; 0.9% of the current trust balance) and Marriott Saddle Brook (Prospectus ID#28; 0.9% of the current trust balance)—are both secured by lodging properties.

The Homewood Suites Overland Park is secured by a 92-key extended-stay hotel property in Overland Park, Kansas, and was transferred to the special servicer in July 2020, given the ongoing effects of the coronavirus pandemic. The loan is now 121-plus days delinquent. The loan was already under some stress prior to 2020 as net cash flow (NCF) was 18% below the issuer’s NCF. As of December 2020, the servicer reported working on a loan modification with the borrower. The subject recently received an updated appraisal that reported a September 2020 value of $9.5 million (a -24.0% variance from the issuance value of $12.5 million), implying a current loan-to-value ratio (LTV) of 72.7%. Given that short-term demand remains suppressed, DBRS Morningstar analyzed the loan with an elevated probability of default.

The Marriott Saddle Brook is secured a 241-key full-service hotel property in Saddle Brook, New Jersey, and was transferred to the special servicer in November 2020, also because of the effects of the coronavirus pandemic. As of December 2020, the servicer reported the workout strategy to be foreclosure and the loan remains delinquent. At issuance, the collateral for the loan had an appraisal value of $43.0 million, equating to an LTV of 70.0%. Given these increased risks from issuance, the loan’s delinquency status, and concerns with borrower’s commitment to the property, DBRS Morningstar liquidated the loan in the analysis for this review. In this scenario, the loan incurred an implied loss severity of 45.7%.

All 44 original loans remain in the pool, with a collateral reduction of 3.4% since issuance as a result of loan amortization. One loan, representing 1.5% of the current trust balance, has been defeased. Additionally, 11 loans, representing 30.9% of the current trust balance, are on the servicer’s watchlist. These loans are being monitored for a variety of reasons, including low debt service coverage ratio, occupancy, and deferred maintenance issues.

At issuance, DBRS Morningstar assigned an investment-grade shadow rating to two loans: Potomac Mills (Prospectus ID#6, 4.8% of the current trust balance) and Quantum Park (Prospectus ID#8, 4.1% of the current trust balance). DBRS Morningstar confirmed that the performance of these loans remains consistent with the investment-grade loan characteristics.

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, X-B, X-D, X-E, and X-F 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.

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 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 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.

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

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