DBRS Morningstar Downgrades Credit Ratings on Four Classes of Citigroup Commercial Mortgage Trust 2016-C2, Changes Trends on Five Classes to Negative from Stable

DBRS Limited (DBRS Morningstar) downgraded its credit ratings on four classes of the Commercial Mortgage Pass-Through Certificates, Series 2016-C2 issued by Citigroup Commercial Mortgage Trust 2016-C2 as follows:

-- Class G-1 to B (low) (sf) from B (sf)
-- Class G-2 to CCC (sf) from B (low) (sf)
-- Class G to CCC (sf) from B (low) (sf)
-- Class EFG to CCC (sf) from B (low) (sf)

In addition, DBRS Morningstar confirmed the credit ratings on the following classes:

-- 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)

The trends on Classes F-1, F-2, F, EF, and G-1 were changed to Negative from Stable. Classes G-2, G, and EFG have ratings that do not typically carry trends in commercial mortgage backed securities (CMBS) ratings. All remaining classes have Stable trends.

The ratings downgrades and Negative trends are reflective of the decline in value for the sole specially serviced loan, Marriott – Livonia at Laurel Park (Prospectus ID#17; 2.5% of the pool balance), which is secured by a 247-key, full-service hotel in Livonia, Michigan. The loan transferred to special servicing in March 2020 because of the challenges arising from the Coronavirus Disease (COVID-19) pandemic, with the last debt payment having been made in May 2020. The subject has been reporting a debt service coverage ratio (DSCR) below breakeven since that time and, in July 2023, the trust took title of the property via a deed-in-lieu of foreclosure. At last review, the most recent appraisal available was from October 2021, which valued the property at $23.7 million, sufficiently covering the total loan exposure at the time of approximately $18.5 million. However, an updated appraisal from August 2022 valued the property at $13.1 million, a steep decline from the prior value and from issuance, while advances have continued to accrue. In its analysis for this review, DBRS Morningstar liquidated the loan from the trust, resulting in an implied loss of nearly $8.5 million or a loss severity in excess of 60.0%. In addition to the credit erosion indicated from the projected loss, the capital structure of the transaction is noteworthy as the junior tranches carry small balances, providing little cushion to mitigate any additional loss and/or performance volatility for the remaining loans in the pool, thereby supporting the ratings downgrades and Negative trends.

Despite some loan-specific challenges, the rating confirmations and Stable trends reflect the overall performance of the pool, which generally remains in line with expectations since last review, as evidenced by the pool’s weighted-average (WA) DSCR, which was well above 2.0 times (x) based on the most recent year-end financial reporting. Since the last review, the Welcome Hospitality Portfolio loan (Prospectus ID#8), which was previously in special servicing, was liquidated with no loss to the trust.

As of the September 2023 remittance, 43 of the original 44 loans remained in the pool with an aggregate principal balance of $555.0 million, representing a collateral reduction of 9.6% since issuance. The pool is concentrated by property type as loans backed by mixed-use, retail, and hotel properties represented 26.0%, 25.7%, and 15.7% of the pool balance, respectively. Six loans, representing 9.8% of the pool balance, are fully defeased. Seventeen loans, representing 34.6% of the pool balance, are on the servicer’s watchlist being monitored primarily for low DSCRs, tenant rollover risk, and/or trigger events. In the analysis for this review, DBRS Morningstar applied stressed loan-to-value ratios (LTV) or elevated probability of default (POD) assumptions for loans exhibiting declines in performance or increased credit risk since issuance, as applicable. Consequently, the WA expected loss for those loans was double the pool average.

The largest loan on the servicer’s watchlist is Crocker Park Phase One & Two (Prospectus ID#3; 10.6% of the pool balance), which is secured by a mixed-used property, consisting of retail and office space, in Westlake, Ohio. The loan is currently being monitored for a trigger event tied to the bankruptcy filing of Cinemark, the parent company to the fourth-largest tenant, Regal Cinemas (about 4.0% of the net rentable area (NRA)). However, Cinemark emerged from bankruptcy in Q3 2023 and an inquiry on whether the cash flow sweep will be terminated was posted to the servicer. Regal Cinemas had extended its lease from 2020 through to 2029 at a rental rate of $65.05 per square foot (psf), generally in line with its previous rental rate.

During the first year of the pandemic, the loan was modified to allow a 12-month deferral of debt service payments that will be repaid at loan maturity. The borrower was expected to pay all other fees but, according to the servicer, there are nonrecoverable advances amounting to $2.3 million outstanding. Based on the financials for the trailing three-months (T-3) ended March 31, 2023, the loan reported a strong annualized DSCR of 1.40x with an occupancy rate of 98.3%, compared with the YE2022 DSCR of 1.16x and occupancy rate of 98.2%. Other large tenants at the subject include Dick’s Sporting Goods, Fitness & Sports Clubs LLC, and Barnes & Noble, collectively representing approximately 23.0% of NRA.

The Staybridge Suites Times Square loan (Prospectus ID#6; 5.1% of the pool balance), is secured by a 310-key, extended-stay hotel located in the Times Square district of Manhattan. The loan is on the servicer’s watchlist for a low DSCR related to the impact of the pandemic, with the property reporting depressed and even negative net cash over the past several years. However, performance has improved recently with the financials for the T-3 ended March 31, 2023, reporting an annualized DSCR of 1.19x, compared with the YE2022 DSCR of 0.98x. While the property has shown some recent signs of improvement, the loans coverage continues to be below the DBRS Morningstar DSCR of 1.77x derived at issuance. Based on the financials, the YE2022 occupancy rate, average daily rate (ADR), and revenue per available room (RevPAR) were 82.6%, $127, and $105, respectively, compared with the YE2021 RevPAR of $60. While the RevPAR growth is noteworthy, it continues to lag well behind the issuance RevPAR of $235. As such, this loan was analyzed with a significantly elevated POD assumption, resulting in an expected loss that was more than double the pool average.

At issuance, Vertex Pharmaceuticals HQ (Prospectus ID#1; 10.9% of the pool balance) was shadow rated investment grade. With this review, DBRS Morningstar confirms that the loan performance trends remain 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 (July 4, 2023) https://www.dbrsmorningstar.com/research/416784.

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.

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

The principal methodology is the North American CMBS Surveillance Methodology (March 16, 2023), which can be found on 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 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 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.

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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 (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 22, 2023; https://www.dbrsmorningstar.com/research/420982)

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 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].