DBRS Morningstar Confirms All Ratings of 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)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction since issuance, despite more recent challenges that have generally been driven by the effects of the Coronavirus Disease (COVID-19) global pandemic. At issuance, the transaction consisted of 22 fixed-rate loans secured by 26 commercial and multifamily properties with a trust balance of $506.3 million. According to the October 2021 remittance report, 17 loans and 21 properties remain within the transaction and there has been a collateral reduction of 15.8% since issuance, lowering the trust balance to $426.3 million. Defeasance has been minimal, with two loans defeased since issuance, representing 3.0% of the pool. There have been minimal losses to date, with the $26.8 million unrated Class H balance at issuance reduced by just under $400,000 as of the October 2021 remittance.

This transaction benefits from a lower concentration of anchored and unanchored retail properties, collectively representing just 6.4% of the current trust balance, as well as a relatively high concentration of loans backed by multifamily properties, at 32.3% of the pool. However, the pool does have a relatively high concentration of hospitality properties, which represent 28.3% of the current trust balance. In general, the collateral hotels were performing well prior to the pandemic and low to moderate leverage metrics at issuance have resulted in a cushion against what is expected to be a temporary reduction in demand over the near to moderate term.

According to the October 2021 remittance report, six loans, representing 41.6% of the current pool balance, are on the servicer’s watchlist. All six of the watchlisted loans fall within the top 15 for the pool. Three loans fall within the top 10 and are all secured by hotel properties that have reported cash flow declines amid the pandemic. All three watchlisted loans backed by hotels have reported current through the pandemic and, to date, none have been modified to allow for payment relief. Two loans backed by multifamily properties are also on the watchlist, with the collateral properties located in Houston and Southfield, Michigan, the latter of which is being monitored for deferred maintenance. The loan backed by the Houston apartment complex is being monitored for a low debt service coverage ratio driven by increased expenses and increased competition since issuance, but the occupancy rate remains healthy and the sponsor has initiated a plan to stabilize the property. One top five loan backed by an office property in San Francisco (995 Market Street, Prospectus ID#4; 10.6% of the pool) is not on the servicer’s watchlist, however, it appears to meet the criteria in that the building is fully vacant. DBRS Morningstar has asked the servicer for confirmation that the loan will be added to the watchlist.

One loan is 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’s River North neighborhood and was transferred to special servicing in October 2017 after the former largest tenant vacated the space in January 2017. The loan was current until May 2020 when it was first flagged as delinquent and, as of the October 2021 remittance, remained delinquent with outstanding principal and interest advances of approximately $510,000. The servicer is not reporting an updated valuation figure despite the extended delinquency, and the issuance appraised value of $7.0 million suggests a loan-to-value of 72.9%. Given the delinquency and lack of concrete information regarding the resolution prospects for this loan, DBRS Morningstar assumed an elevated probability of default (PD) in the analysis for this review, significantly increasing the expected loss.

DBRS Morningstar also notes that the largest loan in the pool, Charlotte Plaza (Prospectus ID#1; 11.7% of the pool), is also being monitored for increased risk, 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 net rentable area (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 subsequently vacated the property and ceased rental payments.

As of June 2021, 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 (Lowe’s), which took roughly 31.8% of NRA on a lease through July 2024. Lowe’s is occupying the full space on an interim basis while the construction of a permanent location is being finalized and ultimately expects to sublease half of its leased space at the subject property. 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 between 2023 and 2024, as well as the relatively low in-place occupancy rate, the challenge of leasing-up space in the current economy will likely be compounded. As such, an elevated PD and resulting increased expected loss were considered in DBRS Morningstar’s analysis.

The 995 Market Street loan, which is secured by a 91,308-sf office property located in downtown San Francisco, was also analyzed with an elevated PD. According to the most recent servicer reports, WeWork (previously occupying 74.7% of the NRA) completed an early lease termination agreement for its lease that had been scheduled to run through 2027. The early lease termination became effective as of August 31, 2021. In addition, the space formerly occupied by Compass Family Services (previously occupying 13.2% of the NRA) was vacated at or prior to its September 2021 lease expiry.

WeWork’s lease was guaranteed under a $6.5 million corporate guarantee from WeWork Companies. The corporate guarantee was set to decrease by $500,000 per year until it reached $1.5 million in 2025, where it was to remain until the expiration of the lease. In addition, the lease was secured by a $3.25 million LOC, posted by WeWork, which was structured to step down to $0 in 2023. The October 2021 Loan Level Reserve Report shows a $3.25 million LOC was on file and was reduced by $1.25 million, for an ending balance of $2.0 million for the reporting period. The report shows an ending balance of $2.7 million in leasing reserves as well. The full details of the lease termination agreement are unknown (including termination fees paid and/or held by the servicer) and DBRS Morningstar has requested further information. The loan has not reported any delinquency since issuance and the loan sponsor contributed $21.4 million to close the $62.0 million purchase of the property that the subject loan financed.

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 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– Charlotte Plaza (11.7% of the pool)
-- Prospectus ID#2– Walker Hotel Greenwich Village (11.4% of the pool)
-- Prospectus ID#4– 995 Market Street (10.6% of the pool)
-- Prospectus ID#6– InterContinental Hotel Monterey (8.3% of the 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 the 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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.

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

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