DBRS Morningstar Downgrades Five Classes of DBJPM 2016-C1 Mortgage Trust

DBRS Limited (DBRS Morningstar) downgraded the ratings on five classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C1 issued by DBJPM 2016-C1 Mortgage Trust as follows:

-- Class D to BB (low) (sf) from BB (sf)
-- Class E to B (low) (sf) from B (sf)
-- Class X-C to BB (sf) from BB (high) (sf)
-- Class X-D to B (sf) from B (high) (sf)
-- Class G to C (sf) from CCC (sf)

In addition, DBRS Morningstar confirmed the following ratings:

-- 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 B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class F at CCC (sf)
-- Class X-A at AAA (sf)
-- Class X-B at A (sf)

DBRS Morningstar maintains Negative trends on Classes D, E, X-C, and X-D. Classes F and G have ratings that do not carry trends. All remaining classes have Stable trends. In addition, the Interest in Arrears designation was maintained on Class G.

The rating downgrades and Negative trends reflect DBRS Morningstar’s concerns with the largest loan in special servicing, Sheraton North Houston (Prospectus ID#4, 5.1% of the pool balance), as well as the watchlisted Hagerstown Premium Outlets loan (Prospectus ID#12, 3.9% of the pool balance). Both loans are discussed in detail below. As of the April 2022 remittance, 31 of the original 33 loans remain in the pool, with a collateral reduction of 12.8% since issuance. The Shopko Madison loan (Prospectus ID#26) was liquidated from the trust in January 2022 at a loss of $5.4 million, which was contained to the non-rated Class H. Loans secured by office properties represent the greatest property type concentration, accounting for 36.4% of the current pool balance, followed by retail properties at 33.6%. There are two loans in special servicing and nine loans on the servicer’s watchlist, representing 8.5% and 19.7% of the pool balance, respectively. Two loans are fully defeaased, representing 5.0% of the pool balance.

The Sheraton North Houston loan is secured by a 419-key, full-service hotel in Houston, Texas, located within close proximity to the George Bush Intercontinental Airport. The loan has been delinquent since August 2020 and was transferred to special servicing in November 2020. The hotel’s performance consistently lagged issuance expectations, but cash flows remained above breakeven prior to the onset of the Coronavirus Disease (COVID-19) pandemic, with the servicer reporting a year-end (YE) 2019 debt service coverage ratio (DSCR) of 1.32 times (x). The March 2021 appraisal value of $56.0 million reflected a 16.6% decline from the issuance value of $68.0 million, a relatively muted decline given the low in-place cash flows. According to the March 2022 STR report, the property reported a trailing 12 months (T-12) ended March 21, 2022, occupancy rate, average daily rate, and revenue per available room (RevPAR) of 37.7%, $86.67, and $33.41, respectively, which represented a RevPAR penetration rate of 56.9%. Given the low RevPAR penetration rate and the possibility that investor demand could be limited should the servicer attempt a sale in the near-to-moderate term, DBRS Morningstar applied a stressed haircut to the March 2021 appraised value in the liquidation scenario for this review, resulting in a loss severity in excess of 25.0%.

Another loan of concern is Hagerstown Premium Outlets, secured by an open-air retail outlet center in Hagerstown, Maryland, located approximately 70 miles northwest of Washington, D.C. The property is owned and operated by Simon Property Group (SPG). The loan previously transferred to special servicing for payment default in June 2020; however, a loan modification was executed in September 2020 and the borrower brought the loan current in December 2020. Principal payments between October 2020 and December 2020 were deferred and repaid over the first three months of 2021. The loan remains on the servicer’s watchlist because of low performance as the occupancy rate has been precipitously declining in recent years, most notably beginning with the loss of Nike Factory Store in 2019 and Wolf’s Furniture in 2020, both anchors for the outlet mall. The largest tenant at the subject is currently Gap Factory Store (1.9% of the NRA). As of the September 2021 rent roll, the property was 44.3% occupied, compared with the YE2020 occupancy rate of 51.2% and the YE2019 occupancy rate of 71.3%. According to the T-6 ended June 30, 2021, financials, the loan reported a DSCR of 0.87x, compared with the YE2020 DSCR of 1.23x and YE2019 DSCR of 1.70x. The low sustained occupancy rate and below breakeven cash flows suggest the sponsor could determine the subject property no longer fits the profile of its core portfolio and if that determination were to be made, SPG could decide to walk away from the subject loan as it has with other malls backing CMBS loans within its portfolio. Given these factors and the likelihood that the mall’s as-is value has declined sharply from the $150.0 million appraised value at issuance, a liquidation scenario was assumed as part of this review, with an analyzed loss severity in excess of 35.0%.

At issuance, DBRS Morningstar shadow-rated two loans, 787 Seventh Avenue (Prospectus ID#1, 11.2% of the pool balance) and 225 Liberty Street (Prospectus ID#5, 5.7% of the pool balance) as investment grade. With this review, DBRS Morningstar confirmed that the performance of these loans remains consistent with investment-grade loan characteristics.

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, X-B, X-C, and X-D 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 Morningstar 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 4, 2022), 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. 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 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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