DBRS Morningstar Downgrades Six Classes of CSAIL 2016-C7 Commercial Mortgage Trust

DBRS Limited (DBRS Morningstar) downgraded six classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C7 issued by CSAIL 2016-C7 Commercial Mortgage Trust as follows:

-- Class C to A (high) (sf) from AA (low) (sf)
-- Class D to BBB (sf) from BBB (high) (sf)
-- Class X-E to BB (sf) from BB (high) (sf)
-- Class E to BB (low) (sf) from BB (sf)
-- Class X-F to B (sf) from B (high) (sf)
-- Class F to B (low) (sf) from B (sf)

In addition, DBRS Morningstar confirmed its ratings on the remaining classes in the transaction, as listed below:

-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class B at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)

The trends for Classes C, D, X-E, E, X-F, and F are Negative. In addition, DBRS Morningstar removed the Interest in Arrears designation for Class F. All other trends remain Stable.

The rating downgrades and Negative trends reflect DBRS Morningstar’s adverse outlook and loss expectations for two regional mall loans, Gurnee Mills (Prospectus ID#2, 10.2% of the pool) and Peachtree Mall (Prospectus ID#7, 3.1% of the pool). Both loans are being monitored on the servicer’s watchlist for declines in operational performance and cash flow.

At issuance, the transaction consisted of 53 fixed-rate loans secured by 199 commercial and multifamily properties, with a trust balance of $767.6 million. According to the December 2021 remittance report, three loans have paid in full, leaving 50 loans within the transaction. There has been a collateral reduction of 10.3% since issuance, lowering the trust balance to $688.9 million. Defeasance has been minimal, with two small loans, representing 3.0% of the pool, defeased since issuance. According to the December 2021 remittance, there have been no losses to the trust.

The transaction is concentrated by property type with loans backed by retail, office, and multifamily properties, representing 41.6%, 25.6%, and 19.0% of the current trust balance, respectively. According to the December 2021 remittance, two loans, representing 2.0% of the current trust balance, are in special servicing and 11 loans, representing 26.4% of the current trust balance, are on the servicer’s watchlist. These loans are on the watchlist for a variety of reasons, including low debt service coverage ratios (DSCRs), low occupancy, and tenant rollover concerns. The primary rating drivers for this transaction are retail and lodging properties, which continue to suffer from sustained downward pressure on operational performance, stemming from ongoing disruptions related to the Coronavirus Disease (COVID-19) pandemic. Where applicable, DBRS Morningstar analyzed the specially serviced and watchlisted loans with probability of default (POD) penalties to increase the expected loss for this review.

The largest loan on the servicer’s watchlist, Gurnee Mills, is secured by a regional mall in Gurnee, Illinois, totalling 1.9 million square feet (sf), of which 1.68 million sf is part of the collateral. Simon Property Group (Simon) owns and manages the property. The loan transferred to special servicing in June 2020 at the borrower’s request because of imminent monetary default, stemming from performance and operational challenges related to the coronavirus pandemic. A forbearance agreement was executed, which allowed Simon to defer debt service payments for a total of 10 months between May 2020 and February 2021, with subsequent repayment over a two-year period beginning in March 2021. The loan returned to the master servicer in May 2021 after Simon successfully remitted three consecutive payments, as per the forbearance agreement. The loan is currently cash managed, and according to the December 2021 remittance report the excess cash reserve balance is $2.8 million.

The financials for the trailing six-month period ended June 30, 2021, indicate a DSCR of 1.73 times (x), with a physical occupancy rate of 75.4%, down from the YE2020 occupancy rate of 87%. Occupancy has been suppressed since the loss of Sears Grand (formerly 12.0% of net rentable area (NRA)) in 2018 and Rink Side (formerly 3.3% of NRA) in 2021. DBRS Morningstar has been closely monitoring this loan for several years because of the occupancy and cash flow declines that were in place before the onset of the pandemic, suggesting increased risks from issuance. The Sears Grand vacancy has been outstanding for more than three years, and the environment for re-leasing that space continues to be challenging given the shifts in the retail landscape and the ongoing effects of the coronavirus pandemic. The strong sponsorship and equity contribution at issuance are noteworthy mitigating factors, but the sponsor’s commitment to the loan could be further stressed over the near to moderate term.

The second-largest loan on the servicer’s watchlist, Peachtree Mall, is secured by a 536,202-sf portion of an 821,687-sf Class B regional mall in Columbus, Georgia. The loan was added to the servicer’s watchlist in October 2021 for a decline in the DSCR, which fell to 1.34x as of September 2021 from 1.54x in 2019. The decline can be attributed to a drop in base rents, which have been falling year over year as evidenced by a 7.9% decline in 2020 and a 18.1% decline in 2021. The property also suffers from near-term lease rollover risks with 11% of its leases expiring within the next 12 months and 23% of leases expiring over the next two years. In addition, the property’s tenant base largely comprises small to mid-scale specialty tenants. Although the property has historically operated at a stable occupancy rate, recent performance has shown signs of softness. Consequently, the true market value of the property has likely declined since 2016, when the property was appraised at $140 million. It is currently unknown if the sponsor, Brookfield Property Partners, considers the property to be a core part of its portfolio. DBRS Morningstar believes the risk for this loan has significantly increased from issuance and, as such, is monitoring the loan on the DBRS Morningstar Hotlist. To reflect the increased risk profile of this loan, both a POD adjustment and a loan-to-value adjustment were employed in this analysis, whereby a 50% haircut was applied to the issuance appraisal value.

The largest specially serviced loan, Holiday Inn & Suites Plantation (Prospectus ID#17, 1.6% of the pool), is secured by a 156-key limited-service lodging property in Plantation, Florida. The loan fell delinquent on payments between April and May 2020. The loan remains delinquent; however, property operations have shown an improvement according to the June 2021 year-to-date financials, which reveal a DSCR of 1.33x along with occupancy, average daily rate, and revenue per available room figures of 83.4%, $94.75, and $79.40, respectively. The special servicer noted that it is currently dual tracking settlement discussions and enforcement of the lender's rights while considering a sale of the collateral via an assumption. The property was reappraised in August 2021 with a resulting value of $19.1 million, 27.3% higher than its previous appraisal value of $15.0 million in November 2020 and 4.9% higher than the issuance appraisal value of $18.2 million. Based on the updated appraisal value of $19.1 million, the loan remains above water with implied market equity of $7.9 million based on the outstanding loan balance of $11.2 million as of December 2021. DBRS Morningstar believes the overall risk for this loan remains moderate and will continue to monitor the loan for updates and developments.

DBRS Morningstar maintains an investment-grade shadow rating on the 9 West 57th Street loan (Prospectus ID#3, 7.3% of the pool), supported by the loans’ strong credit metrics, strong sponsorship strength, and historically stable collateral performance. With this review, DBRS Morningstar confirms that the characteristics of this loan remain consistent with the investment-grade shadow rating.

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

-- Prospectus ID#2 – Gurnee Mills (10.2% of the pool)
-- Prospectus ID#7 – Peachtree Mall (3.1% 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 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.

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].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577