DBRS Morningstar Confirms Ratings on All Classes of BAMLL Commercial Mortgage Securities Trust 2016-ISQR

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

-- Class A at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class X-B at A (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations from when ratings were initially assigned. The transaction consists of a $370.0 million trust loan secured by the fee interest in the Class A, 1.16 million square foot (sf) International Square office property in downtown Washington, D.C. The trust loan consists of a $166.7 million senior A-1 note and a $203.3 million junior note with an additional $80.0 million pari passu senior A-2 note split across three commercial mortgage-backed security (CMBS) conduit transactions. The loan is sponsored by a joint venture between Tishman Speyer Properties (Tishman) and the Abu Dhabi Investment Authority, which purchased the subject in 2006. The loan is interest only (IO) throughout the 10-year loan term.

The property includes three separate office buildings connected by a 12-story atrium developed between 1978 and 1982 along I Street NW between 18th Street NW and 19th Street NW. The subject has direct access to Farragut West Metro Station and is four blocks northwest of the White House in the Golden Triangle area of Washington, D.C.’s central business district. In addition to the 1.1 million sf of office space, the collateral includes 67,000 sf of ground-floor retail space, 12,000 sf of storage space, and a 637-space subterranean parking garage.

According to the December 2020 rent roll, property occupancy declined to 74.7% from 79.3% at December 2019. The loan has been monitored on the servicer’s watchlist since October 2020 for low occupancy, which has steadily declined from 94.2% at issuance. Since issuance, notable tenants including the World Bank, Morgan Stanley, and HQ Global Workspaces LLC have either given back space or vacated the property. Tenant rollover risk in the next year is minimal with tenants representing 5.0% of net rentable area (NRA) scheduled to roll in 2021.

The current largest tenants are the Federal Reserve System (the Fed; 33.6% of the NRA with various lease expiries ranging from March 2022 to May 2028) and Blank Rome LLP (14.5% of the NRA with a lease expiry in July 2029), which account for approximately 50.3% of the property’s rental revenue combined. In December 2019, the Fed’s Board of Governors announced a $450.0 million renovation and consolidation plan to move its operations in currently leased spaces throughout Washington, D.C. to its government-owned headquarters on Constitution Avenue NW. However, per recent servicer commentary, the Fed has reconsidered these plans and has opted to renew 319,888 sf out of the 390,233 sf it currently occupies at the subject. These renewals will extend through 2029 and 2033 and the Fed will vacate the remaining 55,675 sf (4.8% of NRA) at lease expiries in January 2026 and April 2028.

According to Reis, Inc., the Downtown Washington, D.C. submarket remains stable for Class A office properties as of YE2020 with an average vacancy rate of 12.1% and an asking rental rate of $59.48 psf gross. In its Q3 2020 report, CBRE Group, Inc. stated that stabilized Class A office properties were trading at capitalization rates ranging from 5.25% to 5.75%. While the subject’s current occupancy rate is below market, tenants are generally paying rental rates in line with or above market and the current total debt load of $388 psf is reasonable. According to Q3 2020 financials, the loan reported a year-to-date debt service coverage ratio (DSCR) of 1.65 times (x), a moderate decline from the YE2019 and YE2018 figures of 1.89x and 1.85x, respectively.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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.

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 26, 2021), 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.

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

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