Morningstar DBRS Downgrades Ten Classes of CD 2016-CD1 Mortgage Trust, Changes Trends to Negative on Three Additional Classes

DBRS Limited (Morningstar DBRS) downgraded the credit ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-CD1 issued by CD 2016-CD1 Mortgage Trust:

-- Class A-M to AA (low) (sf) from AAA (sf)
-- Class X-A to AA (sf) from AAA (sf)
-- Class B to A (low) (sf) from AA (sf)
-- Class X-B to BBB (low) (sf) from A (high) (sf)
-- Class C to BB (high) (sf) from A (sf)
-- Class X-C to CCC (sf) from BBB (sf)
-- Class X-D to C (sf) from B (high) (sf)
-- Class D to CCC (sf) from BBB (low) (sf)
-- Class E to C (sf) from B (sf)
-- Class F to C (sf) from CCC (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-SB at AAA (sf)

The trends on Classes A-M, B, C, X-A, and X-B are Negative. All other classes carry Stable trends with the exception of Classes D, E, F, X-C, and X-D, which are assigned credit ratings that do not typically carry a trend in commercial mortgage-backed securities (CMBS).

In May 2023, Morningstar DBRS downgraded three classes and placed Negative trends on four classes because of increased concerns with several loans, including the Westfield San Francisco Centre loan (Prospectus ID#3, 10.4% of the pool), which was on the servicer's watchlist at the time for low performance, and the specially serviced loan, 401 South State Street (Prospectus ID#15, 2.4% of the pool), which is backed by an office property in downtown Chicago. Since the May 2023 credit rating action, the Westfield San Francisco Centre loan has transferred to special servicing and is reporting a significant value decline from issuance. In addition, Prudential Plaza (Prospectus ID#4, 8.1% of the pool), which is also backed by an office property in downtown Chicago, transferred to special servicing, bringing the total special servicing concentration to 20.9% of the pool balance across three loans as of the April 2024 reporting.

In the analysis for this review, Morningstar DBRS liquidated two of the three specially serviced loans, resulting in an aggregate loss of $41.4 million, which would fully erode the balance of Class G (nonrated), Class F, and the majority of Class E. As such, the increased loss expectation and credit erosion supports the credit rating downgrades and Negative trends with this review. Additional details regarding the specially serviced loans are highlighted below. It is also worth noting that interest shortfalls have been accruing, with a cumulative balance of $1.7 million shorted across Classes D through G as of the April 2024 remittance. Class D has been accruing interest since the January 2024 remittance and is at the maximum Morningstar DBRS shortfall tolerance of four months for the BBB (sf) rating categories, further supporting the downgrade to CCC (sf) with this review. Lastly, the classes above Class D are now more susceptible to additional shortfalls, a consideration for the credit rating downgrades and Negative trends with this rating action.

The credit rating confirmations and Stable trends are reflective of the overall stable performance of the majority of loans in the pool, as exhibited by the healthy weighted-average (WA) debt service coverage ratio (DSCR) of 2.22 times (x), based on the most recent year-end financials. As of the April 2024 remittance, 29 of the original 32 loans remain in the pool, representing a collateral reduction of 17.9% since issuance. Defeasance collateral represents 7.1% of the pool balance. Three loans are in special servicing and eight loans are on the servicer's watchlist, representing 20.9% and 27.3% of the pool balance, respectively.

Westfield San Francisco Centre is secured by approximately 553,000 square feet (sf) of retail space and 241,000 sf of office space within a regional mall in San Francisco. The loan transferred to special servicing in June 2023 for imminent monetary default and the loan was last paid through September 2023. Foreclosure was filed in September 2023 and a receiver was appointed in October 2023. The mall was rebranded as Emporium Centre San Francisco, with Jones Lang LaSalle acting as the property manager to stabilize the subject. Occupancy has been depressed with the June 2023 figure at 46.0%, which may be lower considering several news sources have reported that additional tenants have vacated the subject thus far in 2024. The non-collateral Nordstrom anchor shuttered its doors in August 2023, leaving the non-collateral Bloomingdale's as the remaining anchor. As a result of the depressed occupancy, net cash flow (NCF) continues to be low with the trailing nine months (T-9) ended September 30, 2023, financials reporting a DSCR of 0.93x.

The June 2023 asset summary report provided by the special servicer notes that a $75 million guarantee from the loan sponsor, Unibail-Rodamco-Westfield (URW), is in place; however, it is unclear if the guarantee is being pursued. Additional information has been requested and, as of the date of this press release, the servicer's response is pending. Based on the December 2023 appraisal, the property was valued at $290.0 million, a drastic decline from the issuance value of $1.2 billion. In the analysis for this review, the loan was liquidated from the trust based on a haircut to the most recent value, resulting in a trust loss approaching $30.0 million and a loss severity in excess of 45.0%.

401 South State Street is secured by a Class B office property in the Central Loop submarket of Chicago. The loan transferred to special servicing in June 2020 and is currently real estate owned. The sole tenant at the subject, Robert Morris University Illinois (previously 75.0% of the net rentable area (NRA)), vacated the property in April 2020. The loan is part of a $47.8 million whole loan, with a non-trust pari passu companion note held in CGCMT 2016-P4 (not rated by Morningstar DBRS). The reporting for the companion transaction showed a July 2022 value for the collateral property of $20.0 million, a significant decline from the issuance value of $76.5 million. Considering the dated appraisal, low investor appetite for this property type, and soft office submarket, this loan was analyzed with a stressed haircut to the most recent value, resulting in an almost full loss to the trust.

Prudential Plaza is secured by two Class A office buildings in the East Loop submarket of Chicago. The loan transferred to special servicing in June 2023 for imminent monetary default, but the loan remains current as of the April 2024 remittance. Occupancy at the subject has been declining, with the June 2023 figure at 78.0%, compared to the YE2022 figure of 81.0%. The tenant roster is granular, with the largest three tenants representing approximately 13.0% of NRA and no single tenant representing more than 5.0% of NRA. The YE2023 DSCR was 1.20x, compared to the YE2022 DSCR of 1.75x. The decline in NCF was driven by a decrease in revenue and increase in expenses, specifically real estate taxes.

The loan was modified to interest-only payments starting in January 2024 and the maturity was extended from 2025 to 2027, with an option to extend through to 2029. It does not appear that the borrower was required to provide a principal curtailment as part of the loan modification but, according to a CoStar article published on January 3, 2024, the sponsor agreed to fund a leasing reserve and invest approximately $50.0 million to upgrade the property and stabilize the subject. Morningstar DBRS has requested confirmation of these plans and the availability of reserves to fund them, and the servicer's response is pending as of the date of this press release. The sponsor, Wanxiang America Real Estate, purchased the property in 2018 for $680.0 million, a slight discount from the issuance value of $700.0 million. According to Reis, Class A properties in the East Loop submarket reported a YE2023 vacancy rate of 11.4%, with asking rents of $37.31 per square foot (psf), compared to the YE2022 vacancy rate of 15.2% and asking rents of $36.91 psf. Given the generally challenged office sector (especially in Chicago's CBD), declining occupancy, and NCFs, the value of the property has likely fallen from the 2018 figure. As such, the loan was analyzed with a stressed loan-to-value (LTV) ratio and probability of default penalty, resulting in an expected loss that was nearly triple the pool average.

At issuance, Morningstar DBRS shadow rated 10 Hudson Yards (Prospectus ID#1; 11.3% of the trust balance) and Vertex Pharmaceuticals HQ (Prospectus ID#9; 5.2% of the trust balance) investment grade, because of investment-grade tenancy, strong sponsorship, and high-quality finishes. The 10 Hudson Yards loan, which is secured by a Class A office property in the Penn Station submarket of New York, is pari passu to a loan secured in Hudson Yards 2016-10HY Mortgage Trust, which is also rated by Morningstar DBRS. Morningstar DBRS recently reviewed that transaction, with the credit rating actions detailed in a press release dated April 15, 2024. For more information, please see the press release titled "Morningstar DBRS Takes Rating Actions on North American Single-Asset/Single Borrower Transactions Back by Office Properties" on the Morningstar DBRS website. During the April 15, 2024, review, Morningstar DBRS derived an updated Morningstar DBRS Value for the property and Morningstar DBRS LTV. The updated approach continued to support the investment-grade shadow rating on the loan.

Vertex Pharmaceuticals HQ is secured by an office and lab property in Boston and serves as the global headquarters for Vertex Pharmaceuticals (Vertex) as it occupies the majority of the space. According to recent news articles, the tenant is reevaluating its space and may consider leaving the subject at the end of its lease in December 2028. However, a mitigating factor is the lease extends two years beyond the loan's anticipated repayment date (ARD) in August 2026 and if the borrower does not repay at ARD, the loan will hyper amortize at a higher interest rate and will remain in cash management where all excess cash will be used to reduce the principal balance until the final maturity date in November 2028. Based on the YE2023 financials, the loan reported a DSCR of 6.57x. With this review, Morningstar DBRS confirmed that the performance of the loans 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 at (January 23, 2024; https://dbrs.morningstar.com/research/427030)

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 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), which can be found on dbrs.morningstar.com under Methodologies & Criteria.

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 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 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.

-- 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 (April 15, 2024; https://dbrs.morningstar.com/research/431205)

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].