DBRS Morningstar Downgrades One Class of DBJPM 2016-C1 Mortgage Trust

DBRS Limited (DBRS Morningstar) downgraded the following rating on the Commercial Mortgage Pass-Through Certificates, Series 2016-C1 issued by DBJPM 2016-C1 Mortgage Trust:

-- Class F to CCC (sf) from B (low) (sf)

DBRS Morningstar also confirmed the ratings on the following classes:

-- Class A-3A at AAA (sf)
-- Class A-3B at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-M 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 X-C at BB (high) (sf)
-- Class D at BB (sf)
-- Class X-D at B (high) (sf)
-- Class E at B (sf)
-- Class X-E at B (low) (sf)
-- Class G at CCC (sf)

The trends on Classes D, E, X-C, X-D, and X-E are Negative. DBRS Morningstar changed the trends on Classes C and X-B to Stable from Negative. Classes F and G have ratings that do not carry trends. All other trends are Stable. DBRS Morningstar also maintained the Interest in Arrears designation on Classes E, F, and G.

The downgrade and Negative trends resulted primarily from the anticipated losses to the trust for certain loans in special servicing as of the June 2021 remittance, which collectively represented 11.8% of the pool balance. DBRS Morningstar expects the losses to be concentrated with the largest of these loans, Sheraton North Houston (Prospectus ID#4, 5.1% of the pool), as further discussed below. Although the outlook for the Sheraton North Houston loan and others in special servicing has deteriorated since the January 2021 DBRS Morningstar review of this transaction, when four classes were downgraded and eight classes had Negative trends, there have been some positive developments since that time. In January 2021, Hagerstown Premium Outlets loan (Prospectus ID#12, 3.9% of the pool) was in special servicing; however, as anticipated, the loan transferred back to the master servicer in May 2021. Additionally, 600 Broadway (Prospectus ID#6, 2.3% of the pool) was approved for a third loan modification that included a curtailment payment in excess of $20.0 million that was applied as of the June 2021 remittance.

The pool has a significant concentration in retail and hospitality properties, representing 36.1% and 17.2% of the pool balance, respectively, with many of those loans currently on the servicer’s watchlist. These property types have been the most severely affected by the effects of the Coronavirus Disease (COVID-19) pandemic and, as such, these concentrations suggest increased risks for the trust, particularly for the non-investment-grade classes, since issuance.

As of the June 2021 remittance, 32 of the original 33 loans remained in the pool, with a collateral reduction since issuance of 10.9% because of scheduled amortization and the curtailment payment for the 600 Broadway loan. There are 10 loans, representing 26.3% of the pool, on the servicer’s watchlist. These loans are being monitored for various reasons including low debt service coverage ratios, occupancy-related issues, pandemic-related forbearance requests, and two non-credit-related transfers.

Four loans, representing 11.8% of the pool, are with the special servicer. The largest, the Sheraton North Houston loan, is secured by a 419-key full-service hotel in Houston. The hotel has failed to generate cash flow in line with the Issuer’s expectations following the loss of a large contract with United Airlines after the airline moved its pilot training facility to Denver in 2017. The hotel was able to recover some of the lost room revenue with a contract for a smaller airline for a small portion of the rooms previously under contract with United Airlines, but the difficult environment for Houston hotels amid oversupply issues and falling demand for some that has coincided with the sustained declines in the energy sector made a full recovery significantly more difficult. The effects of the coronavirus pandemic compounded these factors, and the loan was transferred to special servicing in November 2020.

The borrower has advised the servicer that cash flow shortfalls will no longer be funded and the special servicer has initiated proceedings to install a receiver. A March 2021 appraisal was provided that valued the collateral at $56.0 million on an as-is basis relative to its issuance value of $68.0 million. Although the value decline is relatively moderate and suggests value outside of the loan balance, DBRS Morningstar notes that 2020 appraisals for several other troubled Houston hotels reported declines in values of up to 65% when compared with their issuance appraisal values. Given these trends and the cash flow declines for the hotel that preceded the pandemic, DBRS Morningstar assumed a conservative haircut to the March 2021 appraisal in its loss scenario for this loan.

The 600 Broadway loan transferred back to special servicing in March 2021, with the special servicer evaluating the borrower’s proposal for a third loan modification at the time the loan was transferred. The tenants were permitted to go dark as part of a 2019 loan modification, and the property has been vacant for several years following the store closures. In early 2021, the borrower reached an agreement with the tenant to terminate the leases with a lease termination fee in excess of $60.0 million. The termination was ultimately approved by the special servicer and termination funds will be used to fund principal curtailments and to fund a debt service reserve of $2.5 million. In addition, all but $3.5 million of the prepayment premium will be waived on the condition that the borrower pay off the entirety of the subject loan within 120 days of the loan modification closing.

As previously mentioned, a curtailment payment in excess of $20.0 million was applied to the trust with the June 2021 remittance. The borrower has secured two new tenants, Konrad Group (39.2% of total net rentable area; lease expiry January 2033) and Target Corp. (35.7% of net rentable area; lease expiry January 2038), with each tenant paying $113 per square foot (psf) and $112 psf, respectively. These rents compare with the base rents for the Abercrombie & Fitch tenants of $158 psf as of issuance. Target Corp. is expected to take occupancy in the summer of 2021 and will be in a free rent period until April 2022. Konrad Group is currently paying rent at the subject. As of July 2020 the collateral was valued at $49.9 million on an as-is basis compared with its issuance value of $220.0 million; however, the leasing activity has likely increased the as-is value significantly, a factor that combines with the scheduled principal curtailments and debt service reserve collections to significantly reduce the risk to the trust for this loan.

At issuance, DBRS Morningstar assigned an investment-grade shadow rating on two loans, 787 Seventh Avenue (Prospectus ID #1, 11.0% of the pool) and 225 Liberty Street (Prospectus ID #5, 5.6% of the pool). DBRS Morningstar confirmed that the performances of these loans remain consistent with investment-grade loan characteristics.

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.

DBRS Morningstar materially deviated from its North American CMBS Insight Model when determining the ratings assigned to Classes B and C, as the quantitative results suggested a lower rating on these classes. The material deviation is warranted given the uncertain loan-level event risk.

Classes X-A, X-B, X-C, X-D, and X-E 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.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance related data.

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 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.

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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