Morningstar DBRS Changes Trends on Four Classes of Citigroup Commercial Mortgage Trust 2016-C2 to Stable from Negative, Confirms Credit Ratings on All Classes

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2016-C2 issued by Citigroup Commercial Mortgage Trust 2016-C2 as follows:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (sf)
-- Class X-B at A (high) (sf)
-- Class C at A (sf)
-- Class D at BBB (sf)
-- Class X-D at BBB (sf)
-- Class E-1 at BB (high) (sf)
-- Class E-2 at BB (sf)
-- Class E at BB (sf)
-- Class F-1 at BB (low) (sf)
-- Class F-2 at B (high) (sf)
-- Class F at B (high) (sf)
-- Class EF at B (high) (sf)
-- Class G-1 at B (low) (sf)
-- Class G-2 at CCC (sf)
-- Class EFG CCC (sf)
-- Class G at CCC (sf)

Morningstar DBRS changed the trends on Classes F-1, F-2, E-F, and F to Stable from Negative. The trends on all remaining classes are Stable, with the exception of Class G-1, which remains Negative, and Classes G-2, EFG, and G, which are assigned credit ratings that do not typically carry a trend in commercial mortgage-backed securities (CMBS) transactions.

The credit rating confirmations reflect Morningstar DBRS' loss expectations for the transaction, which remain relatively unchanged from the prior review in October 2023. At that time, four classes were downgraded, and the trends on Classes F-1, F-2, F, EF, and G-1 were changed to Negative from Stable as a reflection of Morningstar DBRS' concerns surrounding the specially serviced loan, Marriott - Livonia at Laurel Park. With this review, it was determined that the outlook for that loan has not materially deteriorated over the last year, supporting the change in trends to Stable. However, Morningstar DBRS has concerns about the accruing interest shortfalls currently affecting Classes G-2, H-1, and H-2. Shortfalls have increased to $1.2 million as of September 2024, up from approximately $623,000 in the prior year. The classes above Class H-2 are now more susceptible to additional shortfalls, a consideration for maintaining the Negative trend on Class G-1 with this review.

The transaction is generally well distributed by property type, with loans representing 26.0%, 25.8%, and 15.6% of the pool collateralized by mixed-use, retail, and lodging properties, respectively. The majority of loans in the pool continue to exhibit stable to improving credit metrics, as evidenced by the weighted-average (WA) debt service coverage ratio (DSCR) of 2.5 times (x), based on the most recent financial reporting available, which further supports the trend changes made with this review. In addition, the transaction continues to benefit from increased credit support as a result of scheduled amortization, loan repayments, and defeasance. The largest loan in the pool, which is secured by a two-building office and laboratory property, is shadow-rated investment grade, as further described below.

As of the September 2024 remittance, 43 of the original 44 loans remain in the pool, with a trust balance of $543.2 million, representing collateral reduction of 10.8% since issuance. To date, the trust has incurred $2.3 million of losses, which have been contained to the nonrated Class H2 certificate. Sixteen loans, representing 34.9% of the pool balance, are on the servicer's watchlist; however, only five of those loans, representing 9.5% of the pool balance, are being monitored for performance-related reasons. Only one loan, representing 2.5% of the pool balance, is in special servicing, and nine loans, representing 13.7% of the pool balance, are fully defeased.

The sole loan in special servicing, Marriott - Livonia at Laurel Park (Prospectus ID#17), is secured by a 224-key, full-service hotel in Livonia, Michigan. The loan transferred to special servicing in March 2020 for imminent monetary default and, as of the September 2024 reporting, was last paid in May 2020. The loan has been reporting a below breakeven DSCR since that time and, in July 2023, the trust took title of the property via a deed-in-lieu of foreclosure. The most recent appraisal on file, dated August 2022, valued the property at $13.1 million, considerably below the October 2021 and issuance appraised values of $23.7 million and $27.1 million, respectively. Morningstar DBRS' analysis included a liquidation scenario based on a haircut to the most recent appraised value, resulting in a projected loss severity in excess of 60.0%.

The largest loan on the servicer's watchlist, Crocker Park Phase One & Two (Prospectus ID#3; 10.6% of the pool balance), is secured by a mixed-used property, consisting of retail and office space, in Westlake, Ohio. The loan was previously modified to allow for a 12-month deferral of debt service payments to be repaid at loan maturity. The borrower was expected to pay all other fees; however, according to the servicer, there are outstanding nonrecoverable advances totalling $6.0 million that have been accruing since May 2021. In addition, a cash trap was triggered when the largest tenant, Dick's Sporting Goods (Dick's), which occupies 2.2% of the net rentable area, did not renew its lease a year in advance of its January 2025 expiration date. Based on the financials for the trailing three month ended March 31, 2024, the property was 98.2% occupied and generated annualized net cash flow of $12.9 million (a DSCR of 1.45x), above the YE2023 and issuance figures of $11.2 million (a DSCR of 1.25x) and $12.0 million (a DSCR of 1.34x), respectively.

At issuance, the Vertex Pharmaceuticals HQ loan (Prospectus ID#1; 10.9% of the pool balance) was shadow-rated investment grade. With this review, Morningstar DBRS confirms that the performance of that loan remains consistent with investment-grade loan characteristics, given the strong credit metrics, experienced sponsorship, and the underlying collateral's historically stable performance.

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 Factors in Credit Ratings at https://dbrs.morningstar.com/research/437781 (August 13, 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 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.

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
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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 (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- 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.