Morningstar DBRS Confirms Credit Ratings on All Classes of Morgan Stanley Bank of America Merrill Lynch Trust 2016-C32, Changes Trends to Negative on Two Classes

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2016-C32 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2016-C32 as follows:

-- Class A-3 at AAA (sf)
-- Class A-4 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 AA (sf)
-- Class X-D at A (low) (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)

Morningstar DBRS changed the trends on Classes E and F to Negative from Stable. All remaining trends are Stable.

The credit rating confirmations reflect the stable performance of the transaction, which remains in line with Morningstar DBRS' expectations. Overall, the pool continues to exhibit healthy credit metrics, as evidenced by the weighted-average debt service coverage ratio (DSCR) of 2.32 times (x), based on the most recent financial reporting available. In addition, the transaction 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 assigned with this review. In addition, two top-five loans, Hilton Hawaiian Village Waikiki Beach Resort (Prospectus ID#1; 7.6% of the pool) and Potomac Mills (Prospectus ID#5; 6.3% of the pool) are shadow-rated as investment grade by Morningstar DBRS. The Negative trends assigned to the Class E and F certificates reflect loan specific concerns tied to the second and third largest loans in the pool, Wolfchase Galleria (Prospectus ID#3; 6.3% of the pool) and 191 Peachtree (Prospectus ID#2; 6.7% of the pool), details of which are outlined below.

According to the July 2024 remittance, 52 of the original 56 loans remain within the transaction with a trust balance of $825.2 million, reflecting a collateral reduction of 9.0% since issuance. In addition, five loans, representing approximately 4.5% of the pool, have fully defeased. There are no loans in special servicing; however, four loans, representing 8.3% of the pool, are on the servicer's watchlist. The transaction is concentrated by property type, with loans representing 40.8%, 17.0%, and 10.2% of the pool collateralized by retail, office, and lodging properties, respectively.

The largest loan on the servicer's watchlist, Wolfchase Galleria, is secured by an approximately 392,000-square-foot (sf) portion of a 1.3 million-sf, super-regional mall in Memphis. The loan sponsor is an affiliate of Simon Property Group, which contributed approximately $62.0 million of equity at closing. The trust debt of $51.7 million is a pari passu portion of a $155.2 million whole loan. The property is anchored by noncollateral Macy's, Dillard's, and JC Penney. The noncollateral Sears closed in 2018 and the space remains dark. The loan transferred to special servicing in June 2020 for imminent monetary default because of the bankruptcies and store closures of several tenants. A forbearance agreement was executed in January 2021 and the loan subsequently transferred back to the master servicer a few months later. Operating performance at the property was stressed prior to the coronavirus pandemic, with net cash flows (NCFs) consistently reported well below the Morningstar DBRS figure at issuance. According to the YE2023 financial reporting, the property generated $9.8 million of NCF (a DSCR of 1.5x), below the YE2022 and Morningstar DBRS figures of $10.3 million (a DSCR of 1.07x) and $14.1 million (a DSCR of 1.46x), respectively.

Per the March 2024 rent roll, the collateral's occupancy rate was 75.2%, a marginal decline from the April 2023 figure 80.4%, but well below the issuance rate of 89.3%. The mall had exposure to Bed Bath & Beyond, which filed for bankruptcy in 2023 and has since closed its doors at the subject property. The largest collateral tenant, Malco Theatres (7.9% of collateral net rentable area (NRA)) has a lease expiration in December 2027, approximately one-year post-loan maturity in November 2026. The third-largest collateral tenant, The Finish Line (5.6% of collateral NRA) recently extended its lease for seven years through to February 2029; however, tenant rollover risk remains elevated as leases representing approximately 21.0% of the collateral's NRA have expired or are scheduled to expire within the next 12 months. Given the sustained decline in performance, Morningstar DBRS analyzed the loan with an elevated probability of default (POD) penalty and stressed loan-to-value ratio (LTV), resulting in an expected loss that was approximately three times the pool average.

The 191 Peachtree loan is secured by a 1.2 million sf office property in Atlanta's central business district. The largest tenant, Deloitte & Touche USA LLP (Deloitte; 19.3% of NRA) had a lease expiration date in May 2024. Although Deloitte remains at the property, the tenant has reduced its footprint by 199,145 sf (16.3% of NRA), signing a short-term 18 month lease for 35,932 sf. Deloitte is reportedly moving to the Promenade Tower and will be reducing its overall footprint in Atlanta's business district by approximately 50.0%. With this downsizing, the property's physical occupancy will likely decline from 84.2% at YE2023 to slightly less than 70.0%. The loan is structured with a cash flow sweep that was designed to trigger two years prior to Deloitte's lease expiration until the balance reaches approximately $11.8 million (or $50.0 per sf on Deloitte's intended vacant space). According to the July 2024 reporting, reserve balances total $11.5 million, the majority of which is held in a tenant reserve account.

While Deloitte's recent downsizing is noteworthy, the loan benefits from structural mitigants, namely, the moderate going-in LTV ratio of 64.9% (based on the whole-loan balance of $175.5 million and the issuance appraised value of $270.5 million) and the cash sweep provisions. Moreover, the loan's maturity date in November 2026 will provide some time to backfill vacant space and work toward stabilization. Historically, operating performance at the property has been strong with the YE2023 DSCR reported at 2.92x, compared with the YE2022 and Morningstar DBRS DSCR of 2.95x and 2.33x, respectively. According to Reis, office properties in the Downtown submarket reported a Q2 2024 vacancy rate of 18.4%, compared with the Q2 2023 vacancy rate of 13.8%. Given the property's increased vacancy rate, coupled with soft submarket conditions, the collateral's as-is value has likely declined from issuance. Morningstar DBRS analyzed the loan with an elevated POD penalty and stressed LTV, resulting in an expected loss that was more than triple the pool average.

At issuance, Morningstar DBRS shadow-rated the Hilton Hawaiian Village loan and the Potomac Mills loan as investment grade. This assessment was supported by the loans' strong credit metrics, strong sponsorship strength, and historically stable performance. With this review, Morningstar DBRS confirms that the characteristics of these loans remain consistent with the investment-grade shadow rating.

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

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 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 actions.

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 actions.

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.

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.

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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 (April15, 2024),

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.