Morningstar DBRS Downgrades Three Classes of Morgan Stanley Bank of America Merrill Lynch Trust 2016-C28

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on three classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C28 issued by MSBAM Commercial Mortgage Securities Trust 2016-C28 as follows:

-- Class D to B (high) (sf) from BB (high) (sf)
-- Class X-D to BB (low) (sf) from BBB (low) (sf)
-- Class E1 to CCC (sf) from B (low) (sf)

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

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (sf)
-- Class X-B at AA (high) (sf)
-- Class C at A (sf)
-- Class E-2 at CCC (sf)
-- Class E at CCC (sf)
-- Class F-1 at CCC (sf)
-- Class F-2 at CCC (sf)
-- Class F at CCC (sf)
-- Class E-F at CCC (sf)
-- Class G-1 at C (sf)
-- Class G-2 at C (sf)
-- Class G at C (sf)
-- Class EFG at C (sf)

In addition, Morningstar DBRS changed the trends on Classes B, C, D, X-B, and X-D to Negative from Stable. All other classes carry Stable trends, with the exception of Classes E-1, E-2, E, F-1, F-2, F, E-F, G-1, G-2, G, and EFG, which have ratings that typically do not carry a trend in Commercial Mortgage-Backed Securities (CMBS) transactions.

The credit rating downgrades and Negative trends reflect the increased liquidated loss projections for the three loans in special servicing, which collectively represent 15.6% of the pool balance. Of particular concern is the largest loan in special servicing, Princeton Pike Corporate Center (Prospectus ID#5, 6.4% of the pool), which recently transferred to the special servicer in February 2024 for imminent monetary default. In addition, Morningstar DBRS has concerns with the largest office property in the pool, the Navy League Building (Prospectus ID#4, 7.4% of the pool), which continues to struggle with a below break-even debt service coverage ratio (DSCR) and a low occupancy rate for the collateral property.

As of the March 2024 remittance, 37 of the original 42 loans remain in the pool, representing a collateral reduction of 19.2%. In addition, 14.8% of the current pool balance has been fully defeased. The pool consists primarily of loans backed by retail and office properties, representing 40.6% and 28.9% of the pool balance, respectively. In addition to the three loans previously mentioned in special servicing, there are nine loans, representing 19.4% of the pool balance, on the servicer’s watchlist.

Princeton Pike Corporate Center is secured by an eight-building suburban office complex in the Trenton suburb of Lawrenceville, New Jersey. The loan transferred to special servicing in February 2024 for imminent monetary default after the borrower indicated the inability to cover debt service and operating expenses. As of the March 2024 reporting, the loan was reported current. The collateral occupancy rate has fallen significantly, reported at only 59.5% as of the September 2023 rent rolls, a further decline from the already low September 2022 figure of 75.5%. The occupancy decline over those 12 months was due to seven tenants, representing 8.9% of total net rentable area (NRA), having vacated or downsized their space since September 2022. The occupancy rate could decline even further as in the next 12 months, nine tenants representing 20.7% of NRA, are scheduled to roll. According to Reis, office properties within the Trenton market reported average rental and vacancy rates of $32.3 per square foot (psf) and 17.0%, respectively, for the full-year 2023 period. The subject’s vacancy rate of just over 40% and average rental rate of $30.10 psf lag the market, but Morningstar DBRS expects the availability rate within the submarket could be much higher than the reported vacancy rate given the shift in demand for office space, particularly within suburban markets.

The annualized September 2023 net cash flow (NCF) was $7.1 million (reflecting a DSCR of 1.16x), compared with the YE2022 figure of $9.2 million (a DSCR of 1.50x) and the Morningstar DBRS NCF of $10.8 million. The drop in cash flow was attributed to a drop in occupancy, although Morningstar DBRS notes that multiple tenants vacated their space throughout 2023, suggesting the full year 2023 and the 2024 cash flows could show even further declines. and as such may not be accurately reflected in the financial reporting. Given the significant performance declines for the underlying collateral, as well as the loan’s status as specially serviced, Morningstar DBRS analyzed this loan with a liquidation scenario, with a resulting loss severity in excess of 30.0%.

The second-largest loan in special servicing is Princeton South Corporate Center (Prospectus ID#6, 5.8% of the pool), which is secured by two four-story suburban office buildings in Trenton, New Jersey. The property is approximately six miles west of Princeton Pike Corporate Center. The loan transferred to special servicing in February 2022 for insufficient cash flows to cover operating expenses and debt service. A receiver was ultimately appointed in June 2022, and a foreclosure sale was held in November 2023. The title was transferred to the trust, and by January 2024 the asset was declared real-estate owned (REO). An updated appraisal valued the property at $34.9 million as of February 2023, a slight increase from the YE2022 value of $29.0 million, but well below the issuance appraised value of $72.0 million. A liquidation scenario based on the more conservative 2022 value was considered for this review, resulting in a loss severity of approximately 60.0%.

The last loan in special servicing, DoubleTree by Hilton – Cleveland, OH (Prospectus ID#13, 3.3% of the pool) is secured by a 379-key full-service hotel in Cleveland, built in 1974 and renovated in 2008. The loan transferred to special servicing in October 2019 for imminent monetary default and is currently due for the June 2021 loan payment. A receiver was appointed in January 2020, and according to recent servicer commentary, the workout strategy includes a plan to engage a hotel brokerage firm to market the property for sale in the near term. Based on the most recent appraisal dated October 2022, the property was valued at $26.3 million, a sharp decline from the issuance value of $40.0 million. For this review, DBRS Morningstar analyzed the loan with a liquidation scenario, resulting in a loss severity of approximately 80.0%.

The Navy League Building, which is the largest office loan in the pool, is secured by a 191,000-sf office building in Arlington, Virginia, built in 2005. The loan was added to the servicer’s watchlist in January 2021 for a low occupancy and DSCR after the second-largest tenant vacated the property. Since then, the borrower has provided updates to the servicer that note ongoing discussions to backfill three vacant spaces totaling 47,000 sf; however, as of April 2023, none of the leases had been executed. Since the low DSCR triggered cash management in 2019, $5.2 million has been swept in lockbox receipts as of March 2024. There is also a replacement reserve balance of $332,187. Although cash flows have increased from YE2022, they remain below the Morningstar DBRS NCF with a DSCR that has remained below break-even since 2020. The property was 56.5% occupied according to the YE2023 reporting, in line with the September 2022 figure but well below the 99.6% occupancy at issuance. Given the difficulty the property is facing with regard to leasing and the inability to cover operating expenses and debt service with the current levels of rental income, Morningstar DBRS applied both a stressed loan-to-value ratio and increased probability of default for this review to increase the expected loss, which was nearly twice the pool average in that scenario.

At issuance, Penn Square Mall (Prospectus ID#1, 11.7% of the pool) was shadow-rated investment grade. With this review, DBRS Morningstar confirmed that the performance of this loan remains consistent with investment-grade loan characteristics.

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, and X-D 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 credit ratings assigned to Classes B and C materially deviate from the credit ratings implied by the predictive model. Morningstar DBRS typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider a three-notch or more deviation from the credit rating stresses implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviations is uncertain loan-level event risk, largely tied to the loans in special servicing and the office loans exhibiting increased risks from issuance. Although Morningstar DBRS’ projected losses for those loans with this review suggest liquidated losses would be contained to the lower portion of the capital stack, there remains the possibility that losses could ultimately increase at resolution, supporting the Negative trends placed on Classes B, C, D, X-B, and X-D.

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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The Morningstar DBRS 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. Morningstar DBRS’ outlooks and credit ratings are monitored.

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)

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].