DBRS Morningstar Downgrades Three Classes of CD 2016-CD1 Mortgage Trust, Changes Trends on Four Classes to Negative from Stable

DBRS Limited (DBRS Morningstar) downgraded the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2016-CD1 issued by CD 2016-CD1 Mortgage Trust as follows:

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

The following classes were confirmed:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-M at AAA (sf)
-- Class A-SB 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 X-C at BBB (sf)
-- Class D at BBB (low) (sf)

DBRS Morningstar also discontinued the rating on Class X-E, given the downgrade to the reference Class F certificate noted above. In addition, DBRS Morningstar changed the trends on Classes C, D, X-B, and X-C to Negative from Stable. The trends on Class E and X-D remain Negative. Class F has a commercial mortgage-backed security (CMBS) rating that does not carry a trend. All other trends are Stable.

The downgrades and Negative trends reflect DBRS Morningstar’s increased concerns with the largest watchlist loan, Westfield San Francisco Centre (Prospectus ID#3; representing 10.3% of the pool), which was analyzed with a stressed loan-to-value ratio (LTV) and elevated probability of default, and the specially serviced loans, most notably 401 South State Street (Prospectus ID#15; representing 2.4% of the pool), which was analyzed with an elevated expected loss.

Westfield San Francisco Centre is secured by 553,366 square feet (sf) of retail space and 241,155 sf of office space, representing a combined 794,521-sf portion of a regional mall in San Francisco. The loan went on the servicer’s watchlist in December 2021 for declining occupancy and financial performance. Total collateral occupancy was 87.0% as of December 2022, which is in line with the past two years but down from 95.6% at issuance. Occupancy for the office space has declined to 52.8% as of YE2022 from 100.0% at issuance, primarily driven by former tenants Crunchyroll (previously 29.7% of office net rentable area (NRA)) and TrustArc (previously 11.7% of office NRA) vacating at lease expiration. While these tenants represented 41.4% of office NRA, they represented a combined total of only 12.6% of the collateral NRA. The retail occupancy is 95.5% as of YE2022, compared with 93.7% at issuance. The mall’s two anchor tenants, Bloomingdale’s and Nordstrom, are not collateral for the subject loan.

Nordstrom, which currently has two stores in downtown San Francisco, recently announced it will be closing both locations, including at the subject property, amid challenges stemming from the pandemic including increases in crime and significantly reduced foot traffic resulting from remote and hybrid work models. This is likely to hinder property performance, as it may trigger cotenancy clauses and make it more challenging to attract in-line tenants. While the loan has never reported any defaults, DBRS Morningstar also notes that sponsor Unibail-Rodamco-Westfield has previously announced plans to shed its U.S. portfolio. The property reported a net cash flow of $18.8 million for the trailing nine month period ended September 30, 2022, representing a debt service coverage ratio (DSCR) of 0.98 times (x), down from 1.05x at YE2021 and 1.68x at YE2020. The DBRS Morningstar Term DSCR at issuance was 2.54x. As part of this review, DBRS Morningstar removed the investment-grade shadow rating previously assigned to this loan. DBRS Morningstar’s analysis also includes an elevated probability of default and stressed LTV, resulting in an increased expected loss.

The largest specially serviced loan, 401 South State Street, is secured by a 487,022-sf, Class B office property in Chicago. The loan transferred to special servicing in June 2022 for payment default stemming from Coronavirus Disease (COVID-19) pandemic-related hardships following the departure of former single tenant Robert Morris University Illinois (previously 75.0% of NRA) and remains delinquent. The tenant vacated in April 2020 and stopped making rent payments. In October 2021, a rent claim recovered $3.9 million against the former tenant and represented the final rent payment. According to the servicer commentary, a foreclosure sale occurred in March 2023. At issuance, the as-is dark value of the property was $46.5 million; however, given the weakening Chicago office market, especially given recent shifts in space utilization, DBRS Morningstar believes the value has further declined. The loan is part of a $47.8 million whole loan at issuance with a nontrust pari passu companion note held in CGCMT 2016-P4, which is not rated by DBRS Morningstar. DBRS Morningstar’s analysis includes a liquidation scenario, based on a DBRS Morningstar value that represents a significant stress to the issuance dark value, resulting in an implied loss severity exceeding 80.0%.

The increase to expected losses for these pivotal loans is mitigated by the overall stable performance of most of the remaining loans since issuance. At issuance, the pool consisted of 32 fixed-rate loans secured by 58 commercial properties with a total trust balance of $703.2 million. As of the April 2023 remittance, 30 loans remain in the trust, with an aggregate principal balance of $595.1 million, reflecting a collateral reduction of 15.4% since issuance following loan repayments, scheduled loan amortization, and loan liquidations. In addition, six loans, representing 6.2% of the pool, are secured by collateral that has fully defeased. There are seven loans, representing 32.7% of the pool, on the servicer’s watchlist and three loans, representing 5.1% of the pool, in special servicing.

The transaction is concentrated by property type with approximately 44.3% of the nondefeased loans in the trust secured by office properties, including the two largest loans. Although nonspecially serviced office properties reported generally healthy credit metrics, there is continued uncertainty related to end-user demand and investor appetite for this property type. Retail and mixed-use properties constitute 19.4% and 11.7% of the current pool balance, respectively. DBRS Morningstar applied probability of default penalties and stressed LTVs in certain instances.

At issuance, DBRS Morningstar shadow-rated the 10 Hudson Yards (Prospectus ID#1; 11.2% of the trust balance) and Vertex Pharmaceuticals HQ (Prospectus ID#9; 5.6% of the trust balance) because of investment-grade tenancy, strong sponsorship, and high-quality finishes. With this review, DBRS Morningstar confirmed that the performance of the loans remains consistent with investment-grade loan characteristics.

ENVIRONMENTAL, SOCIAL, AND 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 (May 17, 2022).

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.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

The credit ratings assigned to Classes B, C, and D materially deviate from the ratings implied by the predictive model. DBRS Morningstar typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider a three-notch or more deviation from the credit rating stresses implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviations is the uncertain loan-level event risk for the largest watchlist loan.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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.

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.

DBRS Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology/North American CMBS Insight Model v 1.1.0.0 (March 16, 2023; https://www.dbrsmorningstar.com/research/410913)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022; https://www.dbrsmorningstar.com/research/402153)

Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)

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