Morningstar DBRS Downgrades Credit Ratings on Seven Classes of DBJPM 2016-C1 Mortgage Trust, Maintains Negative Trends on Three Classes

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on seven classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C1 issued by DBJPM 2016-C1 Mortgage Trust as follows:

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

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A-3A at AAA (sf)
-- Class A-3B at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-M at AAA (sf)
-- Class X-A at AAA (sf)
-- Class F at C (sf)
-- Class G at C (sf)

Morningstar DBRS maintained the Negative trends on Classes B, C, and X-B. There are no trends for Classes D, E, F, G, X-C, and X-D, which have credit ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) credit ratings. All other classes have Stable trends.

The credit rating downgrades reflect Morningstar DBRS' increased loss projections and increased certainty of loss for the two loans in special servicing, collectively representing 8.8% of the pool balance. Morningstar DBRS' analysis included a liquidation scenario for both of these loans, resulting in implied losses in excess of $35.0 million. The projected losses would fully erode Class F, Class G, and the unrated Class H certificate, as well as partially erode the Class E certificate. The Negative trends reflect Morningstar DBRS' concerns for further value decline for the loans in special servicing, in addition to specific concerns regarding a number of loans: 787 Seventh Avenue - Pooled loan (Prospectus ID#1, 11.6% of the pool), Williamsburg Premium Outlets (Prospectus ID#2, 10.1% of the pool), and 7700 Parmer (Prospectus ID#9, 4.6% of the pool). The Negative trends also reflect increased propensity for interest shortfalls, which have doubled since the last credit rating action and continue to accrue with each reporting period. All remaining loans in the pool are scheduled to mature within the next 18 months and while Morningstar DBRS expects most loans are to repay, additional defaults could increase Morningstar DBRS' projected losses and could result in further credit rating downgrades.

Excluding Morningstar DBRS' loans of concern, the remaining pool reported a YE2023 weighted-average (WA) debt service coverage ratio (DSCR) of 2.20 times (x). As of the September 2024 remittance, 31 of the original 33 loans remain in the trust, with an aggregate balance of $690.8 million, representing a collateral reduction of 15.6% since issuance. The pool also benefits from six fully defeased loans, representing 13.4% of the current pool balance. Excluding the defeased loans, the pool is most concentrated by office and retail properties, which each represent approximately 33.0% of the pool balance. Morningstar DBRS increased probability of default, and, in certain cases, applied stressed loan-to-value ratios for loans that have exhibited increased default risk. The resulting WA expected loss for these loans is nearly 30% higher than the pool average.

The largest loan in special servicing, Sheraton North Houston (Prospectus ID#4, 5.0% of the pool), is secured by a 419-key, full-service hotel located near the George Bush Intercontinental Airport in Houston. The loan transferred to the special servicer in November 2020 for payment default and a receiver was appointed in April 2021. According to the provided STR report, the subject reported a trailing 12 months ended May 31, 2024, occupancy rate, average daily rate, and revenue per available room (RevPAR) of 64.7%, $97.94, and $63.33, respectively. While this is indicative of an improvement in property performance from the prior year, the property continues to underperform compared with its competitive set with a RevPAR penetration of 77.5%. The property was reappraised in August 2023 at $43.7 million, which represents a 35.7% decline from the issuance appraised value of $68.0 million. Morningstar DBRS analyzed this loan with a liquidation scenario based on a conservative haircut to the most recent value, suggesting a loss severity approaching 50%.

The second loan in special servicing, Hagerstown Premium Outlets (Prospectus ID#12, 3.8% of the pool), is secured by an open-air retail outlet center in Hagerstown, Maryland, which is owned and operated by Simon Property Group. This loan is pari passu with JPMCC Commercial Mortgage Securities Trust 2016-JP2, which is also rated by Morningstar DBRS. The loan has been in and out of delinquency since the onset of the coronavirus pandemic and was most recently transferred to the special servicer after the borrower defaulted on its September 2023 payment. Property cash flows have been depressed for several years, with the DSCR hovering near or just below breakeven since 2021. As per the March 2024 rent roll, the property was 50.4% occupied, compared with the 90.4% at issuance. There is significant upcoming rollover risk with approximately 32% of the total net rentable area (NRA) scheduled to expire prior to loan maturity in February 2026. The special servicer is now dual tracking foreclosure while discussing a potential loan modification. The property was reappraised in January 2024 at $32.5 million, which represents a 78.3% decline from the issuance appraised value of $150.0 million. With this review, Morningstar DBRS liquidated the loan from the trust with a stressed haircut to the January 2024 value, resulting in a loss severity approaching 80%.

The largest loan in the pool, 787 Seventh Avenue - Pooled, is secured by a 1.7 million square-foot (sf), Class A office building in Midtown Manhattan located on Seventh Avenue between 51st and 52nd Streets. The controlling piece is secured in the COMM 2016-787S Mortgage Trust single-asset, single-borrower transaction, which is also rated by Morningstar DBRS. To read more on Morningstar DBRS' recent credit rating action on that transaction, please see the press release titled "Morningstar DBRS Takes Rating Actions on North American Single-Asset/Single-Borrower Transactions Backed by Office Properties," published on April 15, 2024, on the Morningstar DBRS website. The loan is sponsored by Fifth Street Properties, LLC, a joint venture between the California Public Employees' Retirement System and CommonWealth Partners LLC. According to the December 2023 rent roll, the property was 95.9% occupied with 10.4% of the leases scheduled to expire ahead of loan maturity in February 2026. The former largest tenant, BNP Paribas (16.7% of NRA, lease expiry in December 2041) downsized from its original footprint on 29.4% of NRA in 2022 and under the new lease terms, the tenants' rental rate decreased by 38% to $47.00 per sf. Other large tenants include Sidley Austin LLP (21.7% of the NRA, lease expiry in May 2037); Willkie Farr & Gallagher LLP (17.1% of the NRA, lease expiry in August 2027); and Stifel, Nicolaus & Company, Incorporated (14.0% of the NRA, lease expiry in November 2030). The average rental rate at the subject has decreased by 10% since issuance and consequently, net cash flow (NCF) continues to decline, with the YE2023 NCF reported at $60.4 million, which remains less than the $65.4 million Morningstar DBRS NCF derived in 2020. At issuance, the loan was shadow rated investment grade, given the property's prime location within a desirable submarket, high-quality tenancy, and strong credit metrics. However, given the aforementioned factors, Morningstar DBRS removed the loan's shadow rating as the loan's characteristics are no longer consistent with the investment-grade shadow rating determined at issuance.

At issuance, 225 Liberty Street (Prospectus ID#5, 5.9% of the current pool balance) was shadow-rated investment grade by Morningstar DBRS. With this review, the shadow rating on the loan was maintained given the strong occupancy, credit tenancy, and high asset quality, all of which are characteristics that are consistent with an 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 Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

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.

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 ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these 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 these credit rating actions.

These are solicited credit ratings.

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 (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, 2024), https://dbrs.morningstar.com/research/438283
-- 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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.