DBRS Morningstar Confirms Ratings on All Classes of Morgan Stanley Bank of America Merrill Lynch Trust 2016-C32

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2016-C32 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2016-C32 as follows:

-- Class A-3 at AAA (sf)
-- Class A-4 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 AA (sf)
-- Class X-D at A (low) (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall healthy financial performance of the pool, as exhibited by the weighted-average debt service coverage ratio (DSCR), which was well above 2.0 times (x), as of the most recent reporting. The pool is concentrated by property type with loans backed by retail and office properties representing 41.3% and 16.9% of the current pool balance, respectively. One of those loans, Wolfchase Galleria (Prospectus ID#3; 6.2% of the pool), which is secured by a regional mall in Memphis, Tennessee, has seen deteriorations in operating performance as evidenced by the sustained decline in net cash flow (NCF) since issuance, details of which are further discussed below. In addition, the office sector continues to face challenges given limited investor appetite and uncertainty surrounding end-user demand, which is placing upward pressure on vacancy rates, 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) and, in certain cases, applied stressed loan-to-value ratios (LTVs) for loans that are secured by office properties and/or loans that are showing increased risk from issuance.

As of the July 2023 remittance, 52 of the original 56 loans remain in the pool with a trust balance of $836.1 million, reflecting collateral reduction of 7.2% since issuance. Four loans are fully defeased, representing 3.9% of the pool. There are no specially serviced loans; however, nine loans are on the servicer’s watchlist, representing 17.5% of the pool. These loans are being monitored for declines in NCF, tenant rollover risk, and/or deferred maintenance items.

The largest loan on the servicer’s watchlist, Wolfchase Galleria, is secured by an approximately 392,000-square-foot (sf) portion of a 1.3 million-sf super-regional mall in Memphis. The loan sponsor is an affiliate of Simon Property Group who contributed approximately $62.0 million of equity at closing. The property is anchored by noncollateral tenants Macy's, Dillard's, and JC Penney. The noncollateral tenant Sears closed in 2018, with the space remaining dark. The loan transferred to special servicing in June 2020 for imminent monetary default because of the bankruptcies and store closures of several tenants. A forbearance agreement was executed in January 2021 and the loan subsequently transferred back to the master servicer a few months later. Operating performance at the property was stressed prior to the pandemic, with NCFs consistently reported well below the DBRS Morningstar figure at issuance. As of YE2022, NCF was reported at $10.3 million (reflective of a DSCR of 1.07x), a slight improvement from the YE2021 figure of $10.1 million (reflective of a DSCR of 1.13x) but well below the DBRS Morningstar NCF of $14.1 million (reflective of a DSCR of 1.46x).

According to the April 2023 rent roll, the collateral’s occupancy rate was 80.4%, a marginal increase from the prior year’s occupancy rate of 77.5%, but well below the issuance rate of 89.3%. The property has exposure to Bed Bath & Beyond, which filed for bankruptcy earlier this year and is in the process of closing all 360 of its stores in addition to 120 Buy Buy Baby locations. The largest collateral tenant, Malco Theatres (7.9% of collateral net rentable area (NRA); 2.4% of total NRA), recently extended its lease for five years through to December 2027, but tenant rollover risk remains elevated as leases representing approximately 17.5% of the collateral’s NRA have expired or are scheduled to expire within the next 12 months. 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 prior to loan maturity in November 2026.

Given the sustained decline in performance, the subject’s as-is value has likely declined from the issuance value, elevating the credit risk to the trust. In its analysis, DBRS Morningstar increased the POD penalty and LTV ratio for this loan, resulting in an expected loss that is approximately double the pool average.

The 191 Peachtree loan (Prospectus ID#2; 6.6% of the pool) is secured by a 1.2 million-sf office property in Atlanta’s central business district. According to recent news articles, the largest tenant, Deloitte & Touche (Deloitte; 21.3% of NRA), will not be renewing its lease, which currently expires in May 2024. Deloitte is reportedly moving to the Promenade Tower and will be reducing its footprint in Atlanta’s business district by approximately 50.0%. With this departure, occupancy is expected to drop to approximately 65.0% from the current occupancy rate of 86.0%. The loan is structured with a cash flow sweep that triggers two years before Deloitte’s lease expiration until the balance reaches approximately $11.8 million (or $50.0 per sf on Deloitte’s intended vacant space). DBRS Morningstar has reached out to the servicer to request an update on the cash flow sweep. Overall, performance has been strong with the YE2022 DSCR reported at 2.91x, compared with the YE2021 DSCR of 2.87x. According to Reis, office properties in the Downtown submarket reported a Q2 2023 vacancy rate of 13.8%, compared with the Q2 2022 vacancy rate of 20.5%. Although there are mitigating factors with the improvement in the submarket fundamentals and cash management provisions, the refinance risk is elevated considering Deloitte’s lease expires two years prior to loan maturity in November 2026. For this review, DBRS Morningstar applied a stressed LTV in its analysis, resulting in an expected loss that is more than double the pool average.

At issuance, DBRS Morningstar shadow-rated the Hilton Hawaiian Village loan (Prospectus ID#1; 9.0% of the pool) and the Potomac Mills loan (Prospectus ID#4; 6.2% of the pool) as investment grade. This assessment was 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 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 at https://www.dbrsmorningstar.com/research/416784 (July 4, 2023).

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 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 credit 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 credit 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
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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 analyzes 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].