Morningstar DBRS Confirms Credit Ratings on All Classes of Bank of America Merrill Lynch Commercial Mortgage Trust 2016-UBS10

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2016-UBS10 issued by Bank of America Merrill Lynch Commercial Mortgage Trust 2016-UBS10 as follows:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (sf)
-- Class C at BBB (high) (sf)
-- Class D at B (low) (sf)
-- Class E at CCC (sf)
-- Class F at C (sf)
-- Class G at C (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (high) (sf)
-- Class X-D at B (sf)
-- Class X-E at C (sf)
-- Class X-F at C (sf)

There are no trends on Classes E, F, G, XE, and XF, which have credit ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) credit ratings. All other trends are Stable.

Morningstar DBRS' expectations for the pool are largely unchanged since the last credit rating action in December 2023. Since then, one loan has transferred to special servicing; there are now three loans, representing 14.4% of the pool, in special servicing. Morningstar DBRS' analysis includes a liquidation scenario for two of the three specially serviced loans, resulting in implied losses of approximately $54.0 million, a slight increase from Morningstar DBRS' projected losses of $47.6 million at the time of the last credit rating action. The current implied losses remain contained to Classes E and below, which already carry distressed ratings.

As of the November 2024 remittance, 41 of the original 52 loans remain in the trust with an aggregate balance of $570.0 million, representing a collateral reduction of 35.0% since issuance. All remaining loans in the pool are scheduled to mature within the next 18 months. While Morningstar DBRS expects the majority of loans will repay, additional defaults could increase Morningstar DBRS' projected losses and potentially result in credit rating downgrades. For loans that are not in special servicing but have exhibited increased default risks, Morningstar DBRS increased the probability of default, and, in certain cases, applied stressed loan-to-value ratios to increase the expected loss (EL) as applicable. The resulting weighted-average (WA) EL for these loans is more than 65% higher than the pool average EL. Excluding Morningstar DBRS' loans of concern, the remaining pool reported a YE2023 weighted-average (WA) debt service coverage ratio of 1.85 times and WA debt yield of 13.6%.

The largest loan in special servicing is Belk Headquarters (Prospectus ID#3, 9.1% of the current pool balance), which is secured by a 473,698-square-foot Class B office property in suburban Charlotte, North Carolina. The subject had previously served as the headquarters for a single tenant, Belk, but the tenant went dark in 2021; soon thereafter, the loan transferred to the special servicer in December 2022 at the request of the borrower and negotiations surrounding a deed in lieu of foreclosure remain ongoing as per the latest servicer commentary from November 2024. While Belk, which has a lease through 2031, continues to honor its contractual obligations and the loan has remained current, Morningstar DBRS expects the property's value has likely declined significantly from its issuance value of $96.9 million, given the challenged office landscape and low investor appetite for this specific property type. A cash flow sweep was triggered as a result of Belk's failure to occupy its space; as per the servicer, approximately $8.6 million has been accumulated in the cash management account till date. Morningstar DBRS' liquidation scenario for this loan considered a conservative haircut to the issuance appraisal given the fully vacant status of the building, suggesting a near full loss of the loan amount could be possible.

The second-largest loan in special servicing is Princeton Pike Corporate Center (Prospectus ID#18, 3.5% of the current pool balance), which is secured by an eight-building suburban office complex in Lawrenceville, New Jersey. The loan is pari passu with the MSBAM 2016-C28 and MSBAM 2016-C29 transactions, which are also rated by Morningstar DBRS. The loan transferred to special servicing in February 2024 for imminent monetary default. However, as of the November 2024 reporting, the loan remains current and discussions surrounding a potential loan modification remain ongoing. Occupancy has fallen significantly, reported at 59.5% as per the February 2024 rent roll, with leases totaling approximately 23.0% of the net rentable area scheduled to rollover in the next 12 months. The occupancy decline follows the departure of several tenants through 2023, and while there is not a YE2023 financial statement that has yet been made available, Morningstar DBRS expects the YE2023 and YE2024 cash flows will also indicate performance decline given this loss in revenue. Given the current payment status, an updated appraisal has not been ordered. Although workout discussions remain ongoing, it is likely that the property's value has declined since issuance given the low in-place occupancy rate and softening submarket metrics. Morningstar DBRS' liquidation scenario was based on a haircut to the issuance appraised value, resulting in a projected loss severity approaching 40%.

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 (August 13, 2024; https://dbrs.morningstar.com/research/437781).

Classes XA, XB, XD, XE, and XF 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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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)

-- Legal Criteria for U.S. Structured Finance (October 28, 2024; https://dbrs.morningstar.com/research/441840)

--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)

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.