DBRS Morningstar Confirms All Ratings on Citigroup Commercial Mortgage Trust 2016-C2

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C2 issued by Citigroup Commercial Mortgage Trust 2016-C2:

-- Class A-1 at AAA (sf)
-- 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 B at AA (sf)
-- Class X-B at A (high) (sf)
-- Class C at A (sf)
-- Class D at BBB (sf)
-- Class X-D at BBB (sf)
-- Class E-1 at BB (high) (sf)
-- Class E-2 at BB (sf)
-- Class E at BB (sf)
-- Class F-1 at BB (low) (sf)
-- Class F-2 at B (high) (sf)
-- Class F at B (high) (sf)
-- Class EF at B (high) (sf)
-- Class G-1 at B (sf)
-- Class G-2 at B (low) (sf)
-- Class EFG at B (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable.

The rating confirmations and Stable trends reflect the generally stable performance of the transaction since DBRS Morningstar’s last rating action, albeit with select loans showing signs of increased stress from issuance, as further detailed below.

As of the June 2022 remittance report, all of the original 44 loans remain in the pool, which has experienced nominal collateral reduction of 4.2% as a result of scheduled amortization. In addition, there has been $2.3 million of realized losses that were contained to the nonrated H2 Class. Five loans, representing 8.7% of the current pool balance, have defeased and two loans, representing 6.4% of the current pool balance, are currently in special servicing. Thirteen loans, representing 22.8% of the current pool balance, are being monitored on the servicer’s watchlist for a variety of reasons, including stressed occupancy rates and low debt service coverage ratios (DSCRs).

The largest loan in special servicing, Welcome Hospitality Portfolio (Prospectus ID#8; 3.9% of the pool), is secured by a Hilton hotel in Scranton, Pennsylvania, and a Hampton Inn in West Springfield, Massachusetts. The loan originally transferred to special servicing in May 2020 for imminent monetary default, a result of cash flow constraints caused primarily by the Coronavirus Disease (COVID-19) pandemic. The borrower received a six-month forbearance in September 2020, which expired in January 2021. According to the servicer, the loan is past due for the March 2022 “bring-current” payment date. The borrower has reportedly requested an extension and is currently negotiating a second forbearance. According to year end (YE) 2021 financial reporting, consolidated occupancy, average daily rate (ADR), and revenue per available room (RevPAR) figures of 71.1%, $111, and $79, respectively, are comparable with issuance metrics, suggesting a general improvement in portfolio performance from the prior year. As of YE2021, cash flow at the Hilton property had rebounded to pre-pandemic levels, with net operating income (NOI) of $3.2 million; however, the Hampton Inn property posted YE2021 NOI of $1.3 million, a -46.1% variance from issuance. The portfolio had a combined property value of $34.1 million at issuance; however, an appraisal conducted in August 2020 reported a combined value of $25.3 million. The value decline was driven by a 44% decrease in the Hampton Inn’s as-is property value.

The largest loan on the servicer’s watchlist, Staybridge Suites Times Square (Prospectus ID#6; 4.9% of the pool), is secured by an extended-stay hotel in Manhattan’s Times Square district. The loan was added to the servicer’s watchlist in May 2020 because of covenant noncompliance related to a decline in the DSCR. The loan was most recently modified in March 2021, at which time furniture, fixtures, and equipment reserve deposits were deferred for three months. As of the June 2022 remittance report, the loan remains current. According to YE2021 financial reporting, the loan’s DSCR was -0.55 times (x) compared with -1.34x at YE2020 and 2.09x at issuance. In addition, the subject property had an average occupancy rate of 35.8% as of YE2021, with ADR and RevPAR figures of $117.67 and $42.17, respectively. In comparison, the competitive set reported occupancy, ADR, and RevPAR figures of 67%, $149.46, and $100.13. Given the collateral’s recent performance declines and the general challenges faced by the extended-stay hotel asset class, DBRS Morningstar’s outlook for this loan has deteriorated from issuance, and, as such, a probability of default penalty was applied in the analysis to reflect the loan’s increased risk profile.

At issuance, DBRS Morningstar assigned an investment-grade shadow rating to the Vertex Pharmaceuticals HQ loan (Prospectus ID#1; 10.3% of the pool). The loan is secured by the borrower’s fee interest in Vertex Pharmaceuticals’ headquarters, a 1,133,723-square-foot, two-building Class A office property in the Fan Pier development within Boston’s Seaport District. The loan continues to perform well, with a YE2021 occupancy rate of 98.9% and a DSCR of 6.4x. In addition, gross revenue and net cash flow have increased approximately 11.2% and 1.5%, respectively, since issuance. With this review, DBRS Morningstar confirms that the performance of this loan remains consistent with investment-grade loan characteristics.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Classes X-A, X-B, 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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loan 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.

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.

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

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