Morningstar DBRS Confirms Credit Ratings on All Classes of CSAIL 2016-C7 Commercial Mortgage Trust

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2016-C7 issued by CSAIL 2016-C7 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 B at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class C at A (high) (sf)
-- Class D at BBB (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)

All trends are Stable.

The credit rating confirmations and Stable trends reflect Morningstar DBRS' current outlook and loss expectations for the transaction, which remain relatively unchanged from the prior review in July 2023. Although the majority of loans in the pool continue to exhibit healthy credit metrics, there is a high concentration of loans collateralized by retail and office properties, which represent 39.0% and 20.5% of the current pool balance, respectively. Those include top-10 loans Gurnee Mills (Prospectus ID#2; 10.7% of the pool) and Peachtree Mall (Prospectus ID#7; 3.0% of the pool), which are secured by regional malls that have experienced contractions in cash flow since issuance. The majority of loans secured by office properties continue to perform as expected, with the underlying collateral demonstrating stable to improving operating performance over the last few reporting periods, including the third-largest loan in the pool, 9 West 57th Street (Prospectus ID#3; 7.6% of the pool), which is shadow-rated as investment grade by Morningstar DBRS. In addition, the transaction, as a whole, continues to benefit from increased credit support to the bonds as a result of scheduled amortization, loan repayments, and defeasance, further supporting the credit rating confirmations and Stable trends.

According to the July 2024 remittance, 50 of the original 53 loans remain within the transaction with a trust balance of $655.6 million, reflecting a collateral reduction of 14.6% since issuance. Seven loans, representing 13.6% of the pool balance, are on the servicer's watchlist. Only one loan, representing 1.2% of the pool balance, is in special servicing and 13 loans, representing 18.1% of the pool balance, are fully defeased.

The sole loan in special servicing, 350-360 Fairfield Avenue (Prospectus ID#32; 1.2% of the pool) is secured by a two-building 130,431-square-foot (sf) office complex in Bridgeport, Connecticut, approximately 55 miles from Manhattan. The loan was monitored on the servicer's watchlist for a number of years because of a low debt service coverage ratio (DSCR) prior to transferring to the special servicer in December 2021 for imminent monetary default after the borrower informed the lender that they are no longer willing to contribute additional capital to the property. The loan has been reporting a DSCR below break-even since 2021 and as of the July 2024 remittance, is delinquent with the last payment made in November 2022. According to the servicer, the receiver is in the final stages of a sale, which includes assumable financing.

According to the March 2023 rent roll, the collateral was 68.4% occupied with an average rental rate of $20.83 per square foot (psf). Tenant leases representing approximately 25.0% of the net rentable area (NRA) are set to roll within the next 12 months, or are currently structured on a month-to-month basis. According to Reis, the East submarket of Fairfield County reported a Q1 2023 vacancy rate of 20.5% and asking rental rates of $24.29 psf. The property was most recently appraised in May 2023 at a value of $8.5 million, considerably below the January 2023 and issuance appraised values of $10.3 million and $12.3 million, respectively. Morningstar DBRS liquidated the loan in its analysis based on a haircut to the most recent appraised value, resulting in a loss severity in excess of 30.0%.

The second-largest loan in the pool, Gurnee Mills, is secured by a 1.68 million-sf portion of a larger 1.9 million-sf regional mall in the north-western Chicago suburb of Gurnee, Illinois. Simon Property Group (Simon) owns and manages the property. The loan transferred to special servicing in June 2020 because of imminent monetary default. A forbearance agreement was executed, which allowed Simon to defer debt service payments for 10 months, with repayment scheduled over a two-year period beginning in March 2021. The loan subsequently returned to the master servicer in May 2021 and, as of the June 2024 remittance, remains current. The largest collateral tenants are Bass Pro Shops, Kohl's, and Macy's, while noncollateral tenants include Marcus Cinema, Burlington Coat Factory, and Value City Furniture.

The property was 82.2% occupied as of December 2023, relatively in line with the prior year, but lower than the issuance figure of 91.1%. Challenges at the property began after the departure of Sears Grand (Sears; formerly 12.0% of NRA) in 2018 and Rink Side (formerly 3.3% of NRA) in 2021. In addition, Bed Bath & Beyond (formerly 3.6% of NRA), vacated the property upon lease expiration in January 2023. The former Sears space was partially back-filled by Hobby Lobby (4.0% of the NRA) in 2022. There has been positive leasing momentum at the property with eight restaurant or retail tenants that have opened or are slated to open in the near term. The largest new lease was signed with Round1 Bowling & Arcade (Round1), a multi-entertainment facility that currently occupies 70,518 sf of NRA within the former Sears space. According to the Chicago Tribune, two new tenants, Primark, an international fashion retailer, and California-based Boot Barn, a boot and Western apparel store, are expected to move into the space previously occupied by Bed Bath & Beyond. Boot Barn, which is already a tenant in the mall, is expected to occupy approximately 16,000 sf of the renovated space, while Primark will occupy the other 44,000 sf. Morningstar DBRS has reached out to the servicer to confirm if those leases have been executed and a response is pending.

According to the YE2023 financial reporting, the property generated $17.9 million of net cash flow (NCF), reflecting a DSCR of 1.7 times (x); lower than the prior year's figure and the Morningstar DBRS figure at issuance of $19.7 million and $21.7 million, respectively. However, there is potential for NCF to increase in the near term as new tenants take possession of their space and rent abatements burn off. Given occupancy and NCF at the property remain below issuance expectations, Morningstar DBRS notes that the collateral's as-is value has likely declined, elevating the credit risk to the trust. As such, Morningstar DBRS increased the probability of default (PoD) for this loan and applied a stressed loan-to-value (LTV) ratio in its analysis for this review, resulting in an expected loss approximately 2.3x greater than the pool average.

The Peachtree Mall loan is secured by a 536,202-sf portion of a larger 821,687-sf regional mall in Columbus, Georgia. The loan is sponsored by Brookfield Property Group and is being monitored on the servicer's watchlist for a low DSCR, which was reported at 1.4x as of YE2023¿in line with the YE2022 figure but below the Morningstar DBRS-derived figure of 1.7x at issuance. Despite a healthy occupancy rate of 94.0%, NCF remains subdued with the YE2023 figure of $7.0 million approximately 24.0% lower than the issuance figure, suggesting average rental rates at the property have likely declined. The two largest tenants are Macy's (26.0% of NRA; with a lease through September 2027) and JCPenney (15.0% of the NRA, with a lease through November 2024). The JCPenney lease was structured with three five-year extension options, one of which remains outstanding. Morningstar DBRS has reached out to the servicer to confirm if the tenant intends to exercise the remaining renewal option. Dillard's is also an anchor tenant but does not serve as collateral. Rollover risk is concentrated with leases representing about 30% of NRA scheduled to roll in the next 12 to 18 months. According to a tenant sales report dated December 2023, total in-line tenant sales were reported at $318.0 psf, compared with $340.0 psf at YE2022. Given the increased risk associated with the upcoming tenant rollover, including the upcoming lease expiration for an anchor tenant, declining performance and dated property condition, Morningstar DBRS analyzed this loan with a PoD penalty, resulting in an expected loss that is more than double the weighted-average pool expected loss.

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 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 https://dbrs.morningstar.com/research/427030 (January 23, 2024).

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 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.

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 (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.