Morningstar DBRS Downgrades Credit Ratings on Three Classes of LSTAR Commercial Mortgage Trust 2016-4

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on three classes of Commercial Mortgage Pass-Through Certificates, Series 2016-4 issued by LSTAR Commercial Mortgage Trust 2016-4 as follows:

-- Class D to B (sf) from BBB (sf)
-- Class E to C (sf) from BBB (low) (sf)
-- Class F to C (sf) from CCC (sf)

In addition, Morningstar DBRS confirmed its credit ratings on the remaining classes as follows:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (high) (sf)
-- Class B at AA (sf)
-- Class C at A (high) (sf)
-- Class G at C (sf)

All trends are Stable with the exception of Classes E, F, and G, which are assigned credit ratings that do not typically carry a trend in commercial mortgage-backed securities (CMBS) transactions.

Morningstar DBRS downgraded Classes F and G during the prior credit rating action in July 2023, as a result of the projected loss expectations tied to the largest specially serviced loan in the pool, Charlotte Plaza (Prospectus ID#1, 14.0% of the pool) and the largest loan on the servicer's watchlist, 995 Market Street (Prospectus #4, 12.2% of the pool). Morningstar DBRS' liquidation analysis for the Charlotte Plaza loan considered a stressed haircut to the collateral's appraised value at issuance; however, a March 2024 appraisal was made available that indicated the property's value has deteriorated more significantly than originally expected. In addition, the 995 Market Street loan transferred to the special servicer in July 2023 and became real estate owned (REO) in April 2024. Additional details of those loans are highlighted below. For this review, Morningstar DBRS assumed a liquidation scenario for all three loans in special servicing, resulting in a cumulative projected loss amount of $69.6 million. Those losses would erode the entirety of the Class H (nonrated), Class G, and Class F balance, in addition to approximately 18.0% of the Class E balance, supporting the credit rating downgrades with this review.

The credit rating confirmations and Stable trends reflect the overall stable performance of the remaining 11 non-specially serviced loans in the pool, the majority of which are collateralized by lodging and retail properties. Those loans continue to exhibit healthy credit metrics as evidenced by the weighted-average (WA) debt service coverage ratio (DSCR) of 1.76 times (x), based on the most recent financial reporting available. As of the June 2024 remittance, 14 of the original 22 loans remain in the pool, with a trust balance of $356.3 million, representing collateral reduction of 29.6% since issuance. To date, the trust has incurred a total loss of approximately $400,000, which has been contained to the nonrated Class H certificate. Two loans, representing 11.5% of the pool balance, are on the servicer's watchlist and three loans, representing 27.6% of the pool balance are in special servicing. In addition, two loans, representing 8.3% of the pool balance, are fully defeased.

The Charlotte Plaza loan is secured by a 632,171 square foot (sf) office building in downtown Charlotte, North Carolina. The loan was transferred to special servicing in January 2023 for maturity default with the last debt service payment received in May 2024. The trust debt of $50.0 million is a pari passu portion of a $120.0 million whole loan. The subject property has experienced significant declines in occupancy since the departure of the former largest tenants, Charlotte School of Law, LLC and Grant Thornton, which collectively represented approximately 50.0% of the net rentable area (NRA). The property was 64.6% occupied as per the June 2023 rent roll; however, Lowe's Home Improvement (Lowe's; 31.8% of NRA) is dark and is currently subleasing a portion of its space at the property. Although Lowe's continues to honour the terms of the lease, which expires in July 2024, the existing subtenants are expected to vacate the property at lease expiration. When accounting for the eventual departure of Lowe's, occupancy could decline to as low as 30.0%.

According to Q1 2024 Reis data, office properties in the Uptown submarket reported average vacancy and effective rental rates of 21.0% and $29.39 per square foot (psf), respectively - relatively in line with the prior year. Lowe's currently pays a rental rate of approximately $38.0 psf, suggesting any new leases signed at the property will likely be executed at lower rental rates. Although the loan is reporting a healthy DSCR of 1.74x for the trailing six-month period ended June 30, 2023, coverage is expected to fall below breakeven when accounting for the expiration of Lowe's lease. A March 2024 appraisal valued the property at $66.4 million, a 63.5% decline from the issuance appraised value of $181.5 million and well below the current whole loan amount of $120.0 million. Although a loan modification was reported as the workout, several news articles note that CBRE listed the property for sale earlier this year. Morningstar DBRS liquidated the loan in its analysis based on a haircut to the most recent appraised value, resulting in an implied loss of nearly $30.0 million and a loss severity approaching 60.0%.

The 995 Market Street loan is secured by a 91,000 sf, Class B office property in downtown San Francisco. The loan transferred to special servicing in July 2023 for payment default and is currently REO. The property has been mostly vacant since 2021 when the original three tenants at the property, WeWork (71.8% of NRA), Compass Family Services (13.2% of NRA), and CVS (9.7% of NRA), vacated ahead of their lease expirations (although CVS continues to honour its lease, which expires in January 2031). WeWork's lease initially was structured with a corporate guarantee and a letter of credit posted by WeWork Companies; however, due to WeWork's bankruptcy filing in November 2023, those financial guarantees no longer carry any value.

The previous owner, New York-based Bridgeton Holdings (Bridgeton), purchased the property in 2018 for approximately $62.0 million ($679 psf); however, it defaulted on the $45.0 million mortgage loan in August 2023. A number of online news sources indicate that an entity affiliated with the loan's special servicer, LNR Partners, bought the property in April 2024 with a winning auction bid of $6.6 million, and subsequently took over the loan. This figure is lower than the March 2024 appraised value of $8.2 million, as well as the issuance appraised value of $64.4 million. For this review, Morningstar DBRS liquidated the loan from the trust based on a stressed value, resulting in an implied loss of $38.6 million and a loss severity approaching 90.0%.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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) at https://dbrs.morningstar.com/research/427030.

Classes X-A and X-B 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).

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 info-DBRS@morningstar.com.

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.

DBRS Limited
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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 (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 (June 28, 2024; https://dbrs.morningstar.com/research/435294)

Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024; https://dbrs.morningstar.com/research/435293)

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

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 info-DBRS@morningstar.com.