DBRS Morningstar Confirms All Ratings on Citigroup Commercial Mortgage Trust 2016-C3

DBRS Limited (DBRS Morningstar) confirmed the following ratings of the Commercial Mortgage Pass-Through Certificates, Series 2016-C3 issued by Citigroup Commercial Mortgage Trust 2016-C3:

-- 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)

All trends are Stable.

The rating confirmations and Stable trends reflect the overall consistent performance of the transaction. As of the November 2021 remittance, 42 of the original 44 loans remained in the pool, with an aggregate principal balance of $682.1 million, representing a collateral reduction of 9.8% since issuance as a result of loan amortization and repayment. Additionally, one loan, representing 1.6% of the current pool balance, is fully defeased. By property type, the pool is most heavily concentrated in office, retail, and lodging properties, representing 33.1%, 24.7%, and 21.1% of the pool, respectively.

Per the November 2021 reporting, there are three loans, representing 5.7% of the pool, in special servicing. The workout strategy for the two smaller loans, representing 1.9% of the pool, is listed as foreclosure, and DBRS Morningstar anticipates nominal loss to the trust for each. For the remaining loan, Lightstone Hotel Portfolio (Prospectus ID#11, 3.8% of the pool), DBRS Morningstar requested the servicer for the current status and will provide an update to confirm if repayment was made upon its October 2021 maturity date; however, the loan is current based on the November 2021 reporting, with a year-to-date debt service coverage ratio (DSCR) of 1.17 times (x) ended June 2021. There are also 11 loans, representing 38.2% of the pool, on the servicer’s watchlist for a variety of reasons, including low DSCRs, declines in occupancy, and deferred maintenance issues.

The largest loan in the pool, Briarwood Mall (Prospectus ID#1, 9.5% of the pool) is on the servicer’s watchlist. The $65.0 million pari passu loan is secured by the borrower's fee-simple interest in a 369,916-square-foot (sf) portion of a super-regional mall in Ann Arbor, Michigan. The subject is anchored by noncollateral tenants Macy’s, JCPenney, and Von Maur, with a vacant box formerly occupied by Sears. The 10-year $165.0 million whole loan is interest only (IO) throughout and is sponsored by a joint venture between Simon Property Group (50.0% beneficial interest) and General Motors Pension Trust (50.0% beneficial interest).

The loan was added to the servicer’s watchlist in September 2021 for occupancy related concerns stemming from the recent departures of H&M (3.6% of net rentable area (NRA), Gap (3.6% of NRA), Banana Republic (1.9% of NRA), and MC Sports (6.1% of NRA), causing the overall mall occupancy to fall to 70.9% as of March 2021, down from 74.0% at YE2020, 87.3% at YE2019, and 97.0% at issuance. While the property’s website shows that something is in the works for the former Sears space, the most recent servicer commentary only indicates that the borrower is working to retenant vacant spaces. Pottery Barn (3.2% of NRA) recently extended its lease to January 2022 from 2021; however, the short-term renewal is concerning.

Based on the most recent reporting, net cash flow has declined by nearly 33% since issuance, falling to roughly $12.4 million as of Q2 2021 from $18.4 million, but still the DSCR is relatively healthy at 2.26x. Although coverage remains strong, concerns still remain at the property given the uptick in vacancy, the slow leasing momentum, and low tenant retention. Additionally, two of the anchors, Macy’s and JCPenney, have struggled in the past couple of years. The largest in-line tenants at the property include Forever 21 (4.3% of NRA, expiring January 2023), Victoria's Secret (3.8% of NRA, expiring January 2026), and the aforementioned Pottery Barn.

The second-largest loan on the watchlist is 101 Hudson (Prospectus ID#3, 8.2% of the pool), secured by a 1.3 million-sf, Class A office property on the waterfront in Jersey City, New Jersey. The loan was added to the servicer’s watchlist in June 2020 for a decrease in occupancy, primarily stemming from the departure of National Union Fire Insurance (20.2% of NRA). Occupancy has remained somewhat consistent since then at 74.0% in June 2021, compared with 73.0% at YE2020 and 70.0% at YE2019. Despite the volatility in occupancy, coverage of the loan remains healthy at a 3.35x DSCR as of Q2 2021.

At issuance, DBRS Morningstar assigned an investment-grade shadow rating to Potomac Mills (Prospectus ID#6, 5.1% of the pool). DBRS Morningstar has confirmed that the performance of this loan remains consistent with the 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.

Classes X-A, X-B, X-D, X-E, and X-F 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 – Briarwood Mall (9.5% of the pool)
-- Prospectus ID#3 – 101 Hudson (8.2% 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 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/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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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