Morningstar DBRS Confirms All Credit Ratings of CFCRE Commercial Mortgage Trust 2016-C6

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2016-C6 issued by CFCRE Commercial Mortgage Trust 2016-C6 as follows:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-M at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (sf)
-- Class F at B (low) (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (high) (sf)
-- Class X-E at BB (high) (sf)
-- Class X-F at B (sf)

All trends are Stable.

The credit rating confirmations reflect the minimal changes in the pool’s overall performance since last review. As of the February 2024 remittance, 41 of the original 45 loans remain in the trust, with an aggregate balance of $715.9 million, representing a collateral reduction of 9.1% since issuance. The pool benefits from 10 fully defeased loans, representing 14.4% of the current pool balance. There are four loans with the special servicer, representing 7.1% of the current pool balance, as well as seven loans on the servicer’s watchlist, representing 26.5% of the current pool balance. The watchlist loans include the largest loan in the pool, Hill7 Office (Prospectus ID#1, 9.9% of the current pool balance). Excluding defeasance, the pool is most concentrated with loans collateralized by retail properties, representing 34.7% of the trust, followed by loans backed by office and lodging properties, representing 27.9% and 10.5% of the trust, respectively. In the analysis for this review, Morningstar DBRS generally stressed office loans (in the form of probability of default (POD) and/or loan-to-value ratio (LTV) stresses) given the uncertainties surrounding both tenant and investor demand for the asset type in the current environment. The resulting weighted-average expected loss for office loans was approximately 60.0% above the weighted-average pool expected loss.

The largest loan in special servicing, Waterstone 7 Portfolio (Prospectus ID#8, 3.0% of the current pool balance), is secured by a portfolio of seven retail properties totaling 279,937 square feet (sf) across New Hampshire (six properties) and Massachusetts (one property). The loan transferred to the special servicer in March 2018 because of a nonpermitted equity transfer. The special servicer reports various issues, which have contributed to the loan’s extended stint in special servicing; however, most recently, the special servicer noted that a settlement agreement has been executed that will cure the outstanding events of default.

According to the most recent financial reporting, the loan had a debt service coverage ratio (DSCR) of 1.54 times (x) and the property had an occupancy rate of 95.0% for the trailing six months (T-6) ended June 30, 2023. These figures compare with the YE2022 DSCR of 1.29x and occupancy of 83.7% and the issuance DSCR of 1.28x and occupancy of 93.6%. Based on the August 2023 appraisal report, the property’s value is $23.5 million, a decline from both the November 2022 and March 2022 values of $24.2 million and $26.2 million, respectively, and ultimately a 32.7% decline from the issuance value of $34.9 million. Morningstar DBRS applied a stressed LTV adjustment based on the most recent appraisal, as well as a stressed POD, resulting in an expected loss that is approximately 3x the pool’s expected loss.

The Hill7 Office loan is a $101 million pari passu loan split across the subject transaction and the Morningstar DBRS-rated CGCMT 2016-C3 transaction. The loan is secured by a LEED Gold certified, Class A office building in Seattle’s central business district. Built in 2015, the subject houses headquarter operations for two tenants; HBO Code Labs (39.3% of the net rentable area (NRA), lease expiring in May 2025), and Redfin Corporation (Redfin; 39.6% of the NRA, lease expiring in August 2027). The loan was added to the servicer’s watchlist after the guarantor and one of the loan sponsors, Hudson Pacific Properties, L.P. (HPP), was downgraded by Moody’s in July 2023. The downgrade rationale cited concerns about HPP’s available cash flow and potential need to rely on asset sales to cover their expenses. The loan documents required that, should HPP no longer be rated investment grade, a letter of credit equal to the guaranty provided for future leasing obligations due at the time of closing would be posted. The servicer has confirmed all leasing obligations have been fulfilled and, as such, that a Guarantor Downgrade Sweep Event has not occurred. The other loan sponsor, Canada Pension Plan Investment Board, continues to be rated AAA by Morningstar DBRS, most recently confirmed with a Stable trend in July 2023.

In addition to concerns with one of the loan sponsors, there are increased risks for this loan in the exposure to WeWork Inc. (WeWork; 19.0% of the NRA, lease expiring in January 2030), which is in place as the third-largest tenant. WeWork filed for bankruptcy in November 2023 and the servicer has indicated that negotiations regarding WeWork’s lease amendment are under way, including discussions surrounding reduced rent and a shortened lease term. The servicer has also confirmed that the WeWork space is currently fully subleased to Pinterest (9.0% of the NRA, sublease expiring in June 2024) and Moderna (10.0% of the NRA, sublease expiring in February 2025). In addition, the second-largest tenant, Redfin, appears to also be subleasing a floor to ABC Legal (9.9% of the NRA, sublease expiring in July 2027). Though Redfin does have one more floor being advertised for sublease, the servicer has confirmed that the company is no longer actively looking for another tenant for the space. The servicer also noted that the building is approximately 40% occupied during the middle of the week (Tuesday through Thursday).

According to the rent roll dated September 2023, the property was 99.6% occupied with an average rental rate of $61.60 per sf (psf), which is above the Central Seattle submarket’s asking rental rate of $46.01 psf and occupancy rate of 79.6% as of Q4 2023, according to Reis. The submarket’s occupancy is down significantly from the already low Q4 2022 vacancy rate of 82.2%. Per the most recent financing statements, the DSCR for the T-9 ended September 30, 2023 period, was 3.70x, compared with issuer’s DSCR of 2.68x; cash flow growth since issuance has primarily been due to the addition of WeWork in 2018. Given the near-term lease rollover, weak market fundamentals, and proximity to the 2026 anticipated repayment date, Morningstar DBRS applied a stressed LTV adjustment and elevated POD assumption in the analysis for this loan to stress the expected loss amount well above the base-case figure.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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 at (January 23, 2024) https://dbrs.morningstar.com/research/427030.

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 credit 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 1, 2024), https://dbrs.morningstar.com/research/428798.

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.

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://dbrs.morningstar.com/about/methodologies.

-- North American CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model v 1.2.0.0, https://dbrs.morningstar.com/research/428797

-- 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

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

-- 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.

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