DBRS Morningstar Downgrades Three Classes, Changes Trends on Six Classes to Negative From Stable of DBJPM 2016-C1 Mortgage Trust

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

-- Class E to CCC (sf) from B (low) (sf)
-- Class X-D to B (low) (sf) from B (sf)
-- Class F 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 X-A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class X-B at A (sf)
-- Class C at A (low) (sf)
-- Class D at BB (low) (sf)
-- Class X-C at BB (sf)
-- Class G at C (sf)

DBRS Morningstar changed the trends on Classes B, C, D, X-B, X-C, and X-D to Negative from Stable. Classes E, F, and G have ratings that do not typically carry trends in commercial mortgaged-backed securities (CMBS) ratings. All other classes have Stable trends.

At the last rating action, DBRS Morningstar had changed the trends on Class D, E, X-C, and X-D to Stable from Negative given the conservative liquidation scenarios that were applied in the analysis of the sole loan in special servicing, Sheraton Hotel Houston (Prospectus ID#4, 5.1% of the pool balance), and a loan on the servicer’s watchlist, Hagerstown Premium Outlets (Prospectus ID#12, 3.9% of the pool balance). The loss projections were insulated in the first loss piece, Class H, and Class G. The March 2021 appraisal was available at the time, which reported a value of $56.0 million, but a February 2023 appraisal has since become available and reported a value of $44.9 million. In addition, performance of the Hagerstown Premium Outlets loan continues to be well below expectations and recently defaulted. Consequently, the loss projections for these loans have increased for this review. The loans are further discussed below. There is also a considerable concentration of loans in the pool backed by office properties, representing more than 30.0% of the pool balance. In general, the office sector has been challenged given the increased vacancies in many submarkets as well as the shift in workplace dynamics. A notable loan is the Hall Office Park A1/G1/G3 loan (Prospectus ID#13, 3.6% of the pool balance), which is secured by three office properties in Frisco, Texas, and one of the buildings went dark. For this review, this loan was analyzed with a stressed loan-to-value ratio (LTV) and a probability of default penalty, resulting in an expected loss that was more than triple the pool average. Given these concerns and increased loss expectations, the rating downgrades and Negative trends are supported. The rating confirmations and Stable trends reflect the steady performance of the remaining loans in the pool, which is exhibited by a weighted-average debt service coverage ratio (DSCR) of above 2.0 times (x).

As of the August 2023 remittance, 31 of the original 33 loans remain in the pool with an aggregate principal amount of $701.4 million, representing a collateral reduction of 14.3% since issuance. Six loans, representing 13.5% of the pool, are fully defeased. As previously mentioned, only one loan, representing 5.0% of the pool balance, is in special servicing. There are four loans on the servicer’s watchlist, representing 10.7% of the pool. Two of these four loans are being monitored for occupancy declines, and all are being monitored for low DSCRs. Loans that have exhibited increased credit risk, where applicable, were analyzed with stressed scenarios to increase the expected loss.

The Sheraton North Houston loan is secured by 419-key, full-service hotel in Houston, located within close proximity to the George Bush Intercontinental Airport. The loan has been delinquent since September 2020 and has been in special servicing since November 2020. The property performance has lagged from issuance expectations even prior to the onset of the Coronavirus Disease (COVID-19) pandemic. A receiver was appointed in April 2021 to stabilize the property and aid in a sale scheduled for 2024.

According to the June 2023 STR, Inc. report, the property reported a trailing 12 months (T-12) ended June 30, 2023, occupancy rate, average daily rate, and revenue per available room (RevPAR) of 59.6%, $91.92, and $54.81, respectively. RevPAR has improved from the T-12 ended March 31, 2022, figure of $33.41 but is still below the issuance figure of $104.21. Cash flow performance remains depressed with an annualized trailing three months ended March 31, 2023, net cash flow (NCF) of $0.6 million, compared with the YE2019 NCF of $3.4 million and the DBRS Morningstar NCF of $5.2 million. As previously mentioned, the February 2023 appraisal reported a value of $44.9 million declined from the March 2021 value of $56.0 million and issuance of $68.0 million. Given the continued decline in value and performance, DBRS Morningstar applied a haircut to the February 2023 appraised value in the liquidation scenario for this review, resulting in a loss severity in excess of 45.0%.

The Hagerstown Premium Outlets loan is secured by an open-air retail outlet center in Hagerstown, Maryland, approximately 70 miles northwest of Washington, D.C. The property is owned and operated by Simon Property Group. The loan previously transferred to special servicing because of a payment default in June 2020, but the borrower brought the loan current in December 2020 upon executing a loan. However, the loan recently defaulted with the last payment received in July 2023. The loan has been on the servicer’s watchlist for low performance as occupancy has been precipitously declining in the last several years, with the March 2023 rent roll reporting an occupancy rate of 40.2%. In addition, tenants representing 12.3% of the net rentable area (NRA) have leases that expired or will be expiring in the next 12 months, including the two largest tenants, Gap Factory (1.9% of the NRA, lease expiry in July 2024) and The North Face (1.8% of the NRA, lease expiry in October 2023). The loan has been reporting DSCRs below break-even since 2021, with the YE2022 DSCR at 0.82x. Given the persistent low occupancies and depressed NCFs, the as-is value has likely declined sharply from the issuance value of $150.0 million. The loan was analyzed with a liquidated scenario based on a stressed value, resulting in a loss severity in excess of 50.0%.

At issuance, DBRS Morningstar shadow-rated two loans, 787 Seventh Avenue (Prospectus ID#1, 11.4% of the pool balance) and 225 Liberty Street (Prospectus ID#5, 5.8% 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.

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, 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 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 credit rating assigned to Class D materially deviates from the credit rating 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 rating would consider a three-notch or more deviation from the credit rating stress(es) implied by the predictive model to be a significant factor in evaluating the credit rating. The rationale for the material deviation is uncertain loan-level event risk, considering the conservative approach applied in the analysis for the Sheraton North Houston, Hagerstown Premium Outlets, and Hall Office Park A1/G1/G3 loans. The tranches that are more susceptible to loss were downgraded, and the Negative trends on several classes, including Class D, are reflective of the downward pressure; however, DBRS Morningstar also recognizes the overall stable performance of the remaining loans in the transaction, as illustrated by the weighted-average DSCR of the pool.

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 credit 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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar Long-Term Obligation Rating Scale definition indicates that credit 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 credit ratings are monitored.

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/North American CMBS Insight Model Version 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 (August 23, 2023) https://www.dbrsmorningstar.com/research/419592

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].