Morningstar DBRS Confirms All Credit Ratings of CSAIL 2016-C5 Commercial Mortgage Trust, Changes Trends on Six Classes to Negative from Stable

DBRS Limited (Morningstar DBRS) confirmed all credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2016-C5 issued by CSAIL 2016-C5 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 X-A at AAA (sf)
-- Class X-B at AA (high) (sf)
-- Class B at AA (sf)
-- Class C at AA (low) (sf)
-- Class X-D at BBB (sf)
-- Class D at BBB (low) (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)

Morningstar DBRS changed the trends on Classes X-D, D, X-E, E, X-F, and F to Negative from Stable. All other trends remain Stable.

The credit rating confirmations and Stable trends reflect the overall stable performance of the transaction, which remains in line with Morningstar DBRS’ expectations since the last rating action. However, there are some challenges for the pool with two loans in special servicing and the highest concentration of non-defeased loans secured by office properties, with exposure to challenged markets and near-term tenant rollover. Morningstar DBRS notes mitigating factors in the moderate loss severities expected for the specially serviced loans and the overall stable performance as of the most recent reporting for most of the office loans in the pool. The transaction also benefits from the seven years of amortization since issuance, as well as significant defeasance and loan repayments, as further described below. However, given the loan-specific challenges and heightened credit risk for some of the office loans, most notably 401 Market (Prospectus ID#5, 8.6% of the pool), and increased loss expectations, the Negative trends for the three lowest-rated classes most exposed to loss were warranted.

The 401 Market loan is collateralized by a 484,643 square foot (sf), Class A office building in the Center City submarket of Philadelphia. Since issuance, the property has been fully leased to two tenants, Wells Fargo (66.8% of the net rentable area (NRA)) and American Bible Society (28.1% of the NRA). The loan was added to the servicer’s watchlist in November 2023 after Wells Fargo indicated it will not be renewing its lease upon expiration in September 2024, having already vacated one floor (8.0% of the NRA). The Wells Fargo lease is part of a larger, multi-property, master lease agreement, which allows the tenant to terminate up to 234,336 sf across the larger portfolio without payment of a termination fee; however, the tenant or the guarantor will be required to pay a termination fee equal to the net present value of the remaining lease payments for the outstanding lease term on the remainder of the space. As of the February 2024 reporting, the borrower had access to reserves totaling $4.7 million to help re-tenant the space.

While the tenant’s departure will result in a below breakeven coverage without any leasing momentum, Wells Fargo (34.7% of the gross rent) currently pays a rental rate of only $6.22 psf, well below the submarket effective rental rate of $24.95 psf and the asking rental rate of $33.53 psf according to Reis, indicating that future leasing could lead to potential upside. The tenant, however, has occupied the majority of its space since 2004 and the space is in need of capital expenditure. In addition, the Center City submarket has experienced just 1.6% rent growth over the past four years, with vacancy doubling from 7.3% as of Q1 2020 to 14.6% as of Q4 2023, with significant negative absorption during that time period. Given the anticipated vacancy and soft market conditions, its value is expected to decline significantly prior to loan maturity in October 2025, indicating elevated refinance risk. As such, Morningstar DBRS analyzed the loan with elevated probability of default and stressed loan-to-value (LTV) assumptions, resulting in an expected loss almost three times the pool average.

As of the February 2024 reporting, 48 of the original 59 loans remain in the pool, with an aggregate principal balance of $615.3 million, reflecting a collateral reduction of 34.3% since issuance as a result of loan repayments, scheduled amortization, and the liquidation of three loans. Since the last rating action in April 2023, one additional loan has fully defeased, bringing the total defeased collateral to 20 loans, representing 26.9% of the pool. The pool is most concentrated by office properties, representing 16.7% of the pool (or 22.9% of the pool excluding defeasance), followed by multifamily and industrial at 15.8% and 15.6%, respectively. Eight loans (20.1% of the pool) are on the servicer’s watchlist, predominantly being monitored for significant near-term tenant rollover or low debt service coverage ratios (DSCR), and two loans (5.1% of the pool) remain in special servicing. For this review, Morningstar DBRS analyzed both loans in special servicing with liquidation scenarios at a total loss of nearly $12.0 million, partially writing down the principal balance of the non-rated Class NR.

The largest specially serviced loan, Sheraton Lincoln Harbour Center (Prospectus ID#12, 3.2% of the pool), is secured by a 343-room full-service hotel in Weehawken, New Jersey. The loan transferred to special servicing in January 2021 and remains delinquent. At last review, Morningstar DBRS noted that the sponsor was no longer supporting operations at the hotel and the special servicer was pursuing foreclosure, while dual tracking a potential sale of the asset. The receiver listed the property for sale in 2022 and early 2023 but no acceptable bids were received and the property was taken off the market. Property operations have improved significantly since the receiver took possession with an above breakeven DSCR as of the Q3 2023 annualized financials. As of September 2023, the property reported a year-to-date occupancy rate of 87.8%, with average daily revenue (ADR) of $178 and revenue per available room (RevPAR) of $156, with demand segmentation led by corporate travel and the airline business. Despite the improvement in performance, with RevPAR approaching pre-pandemic and issuance levels, an appraisal dated July 2023 valued the property at $80.5 million, a marginal improvement over the August 2022 value of $79.5 million, but a 37.1% decline from the issuance value of $128.0 million, reflecting an LTV ratio above 110% based on the total loan exposure. In its analysis for this review, Morningstar DBRS liquidated the loan from the trust based on a haircut to the most recent appraised value, resulting in an implied loss approaching $8.0 million, or a loss severity of approximately 40%.

The second specially serviced loan, Frisco Plaza (Prospectus ID#23, 1.9% of the pool), is secured by a 61,453 sf retail property in Frisco, Texas. The loan transferred to special servicing in April 2019 for imminent default after the former largest tenant, LA Fitness (previously 73.2% of NRA) defaulted on the terms of its lease by failing to pay rent. Although the borrower was subsequently able to bring the loan current, LA Fitness vacated at lease expiration in March 2021, bringing occupancy down to 16.5%, and the asset became real estate owned as of February 2022. Occupancy remains low at 22.5% as of Q3 2023, resulting in a negative cash flow. According to the most recent servicer commentary, the receiver plans to take the asset to market in 2024. An August 2023 appraisal valued the property at $13.0 million, an improvement over the February 2022 value of $10.8 million, but still around a 30.0% decline from its issuance appraised value of $18.5 million, reflecting an LTV ratio in excess of 100% based on total exposure. In its analysis for this review, Morningstar DBRS liquidated the loan from the trust based on a haircut to the most recent appraised value, resulting in an implied loss approaching $4.0 million, or a loss severity of approximately 35%.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024; https://dbrs.morningstar.com/research/427030).

Classes X-A, X-B, X-D, 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 Morningstar DBRS.

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

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

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

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.

Morningstar DBRS 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.

The conditions that lead to the assignment of a Negative or Positive trends are generally resolved within a 12-month period, Morningstar DBRS outlooks and credit ratings are monitored.

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

North American CMBS Multi-Borrower Rating Methodology (November 3, 2023)/North American CMBS Insight Model v 1.2.0.0 (https://dbrs.morningstar.com/research/422859)

Rating North American CMBS Interest-Only Certificates (December 13, 2023; https://dbrs.morningstar.com/research/425261)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023; https://dbrs.morningstar.com/research/420982)

North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://dbrs.morningstar.com/research/419592)

Legal Criteria for U.S. Structured Finance (December 7, 2023;
https://dbrs.morningstar.com/research/425081)

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279 (July 17, 2023).

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