DBRS Morningstar Confirms Bank of America Merrill Lynch Commercial Mortgage Trust 2016-UBS10, Removes Four Classes from Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) confirmed all classes of the Commercial Mortgage Pass-Through Certificates, Series 2016-UBS10 issued by Bank of America Merrill Lynch Commercial Mortgage Trust 2016-UBS10 as follows:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SB 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 (high) (sf)
-- Class D at BBB (sf)
-- Class X-E at BBB (low) (sf)
-- Class E at BB (high) (sf)
-- Class X-F at BB (sf)
-- Class F at BB (low) (sf)
-- Class X-G at B (sf)
-- Class G at B (low) (sf)

DBRS Morningstar also discontinued the rating on Class A-1 as the class was repaid with the November 2020 remittance. In addition, the ratings for Classes F, G, X-F, and X-G were removed from Under Review with Negative Implications, where they were placed on August 6, 2020. The trends for these classes are Negative. DBRS Morningstar changed the trends on Classes E and X-E to Negative from Stable. All other trends are Stable.

The Negative trends reflect DBRS Morningstar’s concerns with select loans in the pool, most notably the second-largest loan, Belk Headquarters (Prospectus ID#3, 7.0% of the pool), which is secured by an office property in Charlotte, North Carolina. The property is occupied by a single tenant, Belk, a department store retailer whose headquarters are housed at the subject property. The company has been widely reported to be in significant distress that began prior to the Coronavirus Disease (COVID-19) pandemic and has since been exacerbated amid the effects social distancing measures and an increased shift to online shopping. Although the lease runs through 2031, a bankruptcy filing by the company would put the likelihood of the lease being honoured through the term in significant doubt. DBRS Morningstar analyzed the loan with a significant increase to the probability of default, with the resulting loan-level expected loss contributing to an elevated expected loss for the pool overall given the loan size, supporting the Negative trends for the lowest-rated certificates.

As of the January 2021 remittance, 50 of the original 52 loans remain in the trust, representing a collateral reduction of 9.0%. Two loans are fully defeased, representing 1.3% of the pool balance. In general, the loans in the pool have performed as expected thus far. Based on the YE2019 financials, the pool reported a weighted-average (WA) debt service coverage ratio (DSCR) of 1.84 times (x) compared with the YE2018 WA DSCR of 1.86x and the DBRS Morningstar DSCR at issuance of 1.45x.

As of the January 2021 remittance, there were loans representing 11.8% of the pool in special servicing and 11.0% of the pool on the servicer’s watchlist. DBRS Morningstar also notes a moderate concentration of retail and hospitality properties, representing 27.4% and 17.2% of the pool balance, respectively. These property types have been the most severely affected by the initial effects of the coronavirus pandemic and, where merited, loans backed by those property types were analyzed with stressed scenarios to increase the expected loss in the analysis.

The largest loan in the pool, Hyatt Regency Huntington Beach Resort & Spa (Prospectus ID#1, 7.5% of the pool balance) transferred to special servicing in July 2020 because of imminent monetary default as a result of the pandemic. The loan was modified to allow for a three-month forbearance of debt service payments, with an interest-only (IO) period following the forbearance period. The servicer also agreed to allow a deferral of monthly reserve payments and the usage of reserves to cover operating costs and/or debt service payments. The repayment of the deferred amounts is to be made over a period of 30 months starting in April 2021. As the loan went over 60 days delinquent before the modification was finalized, a new appraisal dated October 2020 was obtained by the special servicer, which showed an as-is value of $316.3 million, with a stabilized value of $403.0 million, compared with the issuance value of $367.9 million. Although the as-is value has dropped since issuance, the loan modification and historically strong performance of the collateral are mitigating factors that suggest the increased risks from issuance are relatively moderate.

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, X-F, and X-G 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 the following loans in the transaction:

-- Prospectus ID#1 – Hyatt Regency Huntington Beach Resort (7.5% of the pool)
-- Prospectus ID#3 – Belk Headquarters (7.0% of pool)
-- Prospectus ID#13 – Le Meridien Cambridge MIT (2.5% of pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer 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 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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