DBRS Morningstar Confirms Ratings on All Classes of CSAIL 2016-C7 Commercial Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2016-C7 issued by CSAIL 2016-C7 Commercial Mortgage Trust as follows:

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

All trends are Stable.

The rating confirmations and Stable trends reflect DBRS Morningstar’s current outlook and loss expectations for the transaction, which remain relatively unchanged from the November 2022 review. At that time, DBRS Morningstar changed the trends on six classes to Stable from Negative, given the decline in the concentration of loans in special servicing and the improved outlook of select loans, primarily those secured by retail, lodging and office properties, which had previously faced disruptions as a result of the Coronavirus Disease (COVID-19) pandemic.

Although the pool’s performance is generally stable, it is noteworthy that there is a high concentration of loans collateralized by retail and office properties, which represent 38.9% and 20.4% of the current pool balance, respectively. Those loans include Gurnee Mills (Prospectus ID#2; 10.5% of the pool) and Peachtree Mall (Prospectus ID#7; 3.0% of the pool), two top-10 loans secured by regional malls that have seen deteriorations in operating performance as evidenced by the historical occupancy rate and/or cash flow trends demonstrated over the last few reporting periods. In recognition of these increased risks, DBRS Morningstar downgraded the ratings on six classes during the January 2022 rating action. Despite a lack of material changes in the loans’ performance since the downgrades, DBRS Morningstar maintains an adverse outlook, given the fluidity of the retail landscape, shifting consumer preferences, and challenging macro-economic conditions, which are likely to weigh more heavily on assets that are located in tertiary markets or smaller metropolitan areas.

In addition to these loans, select others are showing increased risks from issuance, including a number of loans collateralized by office properties. Uncertainty surrounding end-user demand may continue to place upward pressure on vacancy rates in the broader office market, challenging landlords’ efforts to backfill vacant space, and, in certain instances, contributing to value declines, particularly for assets in noncore markets and/or with disadvantages in location, building quality, or amenities offered. Where applicable, DBRS Morningstar increased the probability of default (POD) penalties and, in certain cases, applied stressed loan-to-value ratios (LTVs) for loans that are secured by office properties. However, in addition to loan-level factors mitigating risks in some cases, DBRS Morningstar also notes that the transaction, as a whole, benefits from increased credit support to the bonds as a result of scheduled amortization and loan repayments, as well as significant defeasance.

At issuance, the transaction consisted of 53 fixed-rate loans secured by 199 commercial and multifamily properties with an aggregate trust balance of $767.6 million. As of the July 2023 remittance, 50 loans remain within the transaction with a trust balance of $668.9 million, reflecting collateral reduction of 12.9% since issuance. There are currently 12 fully defeased loans, representing 17.1% of the pool. Only one loan, representing 1.2% of the pool, is in special servicing; however, six loans, representing 9.7% of the pool, are on the servicer’s watchlist.

DBRS Morningstar is projecting the largest loss amount for the pool’s second largest loan, Gurnee Mills, which is secured by a 1.68 million square foot (sf) portion of a larger 1.9 million-sf regional mall in the far northwestern Chicago suburb of Gurnee, Illinois. 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. 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 repayment scheduled over a two-year period beginning in March 2021. The loan subsequently returned to the master servicer in May 2021.

Operating performance has improved from the lows reported during the pandemic, with the property reporting YE2022 occupancy rate, net cash flow (NCF), and debt service coverage ratio (DSCR) metrics of 80.3%, $19.7 million and 1.9 times (x), respectively, which compare favorably with the prior year’s figures of 77.5%, $17.8 million, and 1.7x. However, reported NCF remains subdued with the YE2022 figure more than 20.0% below the issuance figure of $25.1 million. Occupancy at the property has generally trended downward 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. The Sears Grand vacancy has been outstanding for more than four years, and the environment for re-leasing that space continues to be challenging. The property also has exposure to Bed Bath & Beyond, which is liquidating all stores following the bankruptcy filing earlier this year. Strong sponsorship and equity contribution at issuance are noteworthy mitigating factors, but the sponsor’s commitment to the asset may come under pressure, especially if stabilization is not realized in the near to moderate term.

No updated appraisal has been provided since issuance, when the property was valued at $417.0 million; however, given that occupancy and NCF at the property have remained stressed for an extended period of time, DBRS Morningstar notes that the collateral’s as-is value has likely declined significantly, elevating the credit risk to the trust. As such, DBRS Morningstar increased the probability of default for this loan and derived a stressed value based on the property’s in-place cash flow, using the high end of DBRS Morningstar’s cap rate range for retail properties, with the resulting LTV ratio well above 100.0% and the adjusted expected loss approximately 67.0% higher than the pool average.

The only loan in special servicing, 350-360 Fairfield Avenue (Prospectus ID#32; 1.2% of the pool) is secured by a two-building 130,431-sf office complex in Bridgeport, Connecticut, approximately 55 miles from Manhattan. The loan was monitored on the servicer’s watchlist between 2018 and YE2021 for a low DSCR and subsequently transferred to the special servicer in January 2022 for imminent monetary default after the borrower informed the lender that they are no longer willing to contribute additional capital to the property. As of the July 2023 remittance, the loan is delinquent, having last paid in November 2021. The collateral is currently in receivership and the special servicer has confirmed it is in the process of taking title.

Cash flow and occupancy at the property has been depressed since issuance, primarily because of declining average rentals rates and increasing operating expenses. According to the financials for the trailing six months ended June 30, 2022, the property generated NCF of $223,645 ($447,290 when annualized), resulting in a DSCR of 0.8x, relatively in line with the prior year but significantly lower than both the YE2020 and issuance figures of $601,327 and 1.1x, and $749,891 and 1.4x, respectively. According to the March 2023 rent roll, the collateral was 72.5% occupied with an average base rental rate of $20.75 per square foot (psf). Tenant leases representing approximately 15,500 sf (11.9% of NRA) are set to roll within the next 12 months or are currently on month-to-month leases. According to Reis, the East submarket of Fairfield County reported a Q1 2023 vacancy rate of 18.8% and asking rental rates of $36.23 psf. Given the submarket’s soft fundamentals and the sustained elevated vacancy rate at the property, DBRS Morningstar derived a stressed value based on the property’s in-place cash flow, using the high end of DBRS Morningstar’s capitalization rate range for office properties, resulting in a modelled whole-loan LTV ratio of more than 150.0% and an expected loss approximately 86.0% higher than the pool average.

At issuance, DBRS Morningstar shadow-rated the 9 West 57th Street loan (Prospectus ID#3; 7.5% of the pool) as investment grade. This assessment was supported by the loans’ strong credit metrics, strong sponsorship strength, and desirable location in the Plaza District submarket of Manhattan. With this review, DBRS Morningstar confirms that the characteristics of these loans remain consistent with the investment-grade shadow rating.

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 (July 4, 2023) at https://www.dbrsmorningstar.com/research/416784.

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 credit ratings are subject to surveillance, which could result in credit 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 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 credit 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 credit rating process.

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

The credit 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 (March 16, 2023)/North American CMBS Insight Model v 1.1.0.0 (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 (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

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

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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