Morningstar DBRS Downgrades Credit Ratings on 12 Classes of Morgan Stanley Bank of America Merrill Lynch Trust 2016-C28, Changes Trend on One Class to Negative from Stable

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on 12 classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C28 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2016-C28 as follows:

-- Class B to A (sf) from AA (sf)
-- Class X-B to A (high) (sf) from AA (high) (sf)
-- Class C to BB (high) (sf) from A (sf)
-- Class D to CCC (sf) from B (high) (sf)
-- Class X-D to CCC (sf) from BB (low) (sf)
-- Class E-1 to C (sf) from CCC (sf)
-- Class E-2 to C (sf) from CCC (sf)
-- Class E to C (sf) from CCC (sf)
-- Class F-1 to C (sf) from CCC (sf)
-- Class F-2 to C (sf) from CCC (sf)
-- Class F to C (sf) from CCC (sf)
-- Class E-F to C (sf) from CCC (sf)

In addition, Morningstar DBRS confirmed its credit ratings on the following classes:

-- 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 X-A at AAA (sf)
-- Class G-1 at C (sf)
-- Class G-2 at C (sf)
-- Class EFG at C (sf)
-- Class G at C (sf)

Morningstar DBRS changed the trend on Class A-S to Negative from Stable. Classes B, C, and X-B continue to carry a Negative trend while Classes D, E-1, E-2, F-1, F-2, G1, G2, X-D, E, E-F, F, EFG, and G are assigned credit ratings that typically do not carry a trend in commercial mortgage-backed securities transactions. All other trends are Stable.

At the prior credit rating action in April 2024, Morningstar DBRS downgraded Classes D, X-D and E-1 to reflect the increased loss projections for the three loans in special servicing, driven primarily by Princeton Pike Corporate Center (Prospectus ID#5, 6.5% of the pool) and Princeton South Corporate Center (Prospectus ID#6, 5.8% of the pool). At that time, Morningstar DBRS also assigned Negative trends to those classes, citing the potential of further value deterioration for the underlying collateral backing those loans, in addition to a select number of other underperforming office properties.

The credit rating downgrades reflect Morningstar DBRS' increased liquidated loss expectations for the pool, which has three loans in special servicing and several larger loans being monitored on the servicer's watchlist for performance declines. With this review, Morningstar DBRS considered liquidation scenarios for all three specially serviced loans (15.6% of the pool), resulting in aggregate estimated losses of $95.1 million, with implied losses ranging between $25.3 million and $36.0 million for the individual loans based on haircuts to the most recent appraised value, or issuance appraised value, where applicable. The increase in projected losses to the trust would partially erode the Class D certificate, while fully eroding the balance of the subordinate principal bonds below that class, reducing the credit support to the senior principal bonds, most notably Classes B and C, supporting the credit rating downgrades with this review.

Outside of the specially serviced loans, the third largest loan in the pool, the Navy League Building (Prospectus ID#4, 7.4% of the pool) continues to exhibit increased default risk, details of which are outlined below. As the pool continues to wind down with the majority of loans scheduled to mature within the next 12 months, Morningstar DBRS notes that loan, in addition to a select number of other underperforming loans could see reduced commitment from the respective borrowers and/or face difficulty securing replacement financing as performance declines from issuance and softening market conditions have likely eroded property values. In the analysis for this review, Morningstar DBRS stressed those loans with an elevated probability of default (POD) penalty and/or loan-to-value ratio (LTV). The result of that analysis further supports the persisted Negative trend on Class B and C and the trend change to Negative from Stable on the Class A-S certificate.

The credit rating confirmations on the Class A-3, A-4, A-SB, A-S and X-A certificates generally reflect the increased credit support for those classes with the paydown since issuance and the defeasance concentration, as further detailed below. The transaction benefits from a high concentration of loans backed by retail property types, which represent approximately 40.0% of the pool balance and include four top ten loans which combine for almost 30.0% of the pool balance and include the two largest loans in the pool, the largest of which is shadow credit rated investment grade by Morningstar DBRS. All of the largest retail loans are generally performing in line with issuance expectations, with healthy coverage ratios and strong draw positions within the respective markets for the collateral properties. In addition, based on Morningstar DBRS' conservative liquidation scenarios for loans in special servicing, those classes remain well insulated from projected liquidated losses. The overall performing pool of loans, as exhibited by a weighted-average debt service coverage ratio (DSCR) of 1.63 times (x), and the investment-grade shadow rating maintained for the largest loan in the pool, Penn Square Mall (Prospectus ID#1, 11.8% of the pool), further support the credit rating confirmations.

As of the February 2025 remittance, 37 of the original 42 loans remained in the pool with an aggregate principal balance of $762.1 million, representing a collateral reduction of 20.3% since issuance. Seven loans, representing 14.7% of the current trust balance, have been fully defeased. Specially serviced and watchlisted loans represent 15.6% and 15.4% of the pool balance, respectively. Since the prior credit rating action, total interest shortfalls have increased by approximately $2.7 million, with the most senior class with outstanding shortfalls in the Class F-1 certificate being shorted interest since the May 2024 reporting cycle.

The largest loan in special servicing is Princeton Pike Corporate Center. The loan is secured by a an eight-building suburban office complex in Lawrenceville, New Jersey. The loan transferred to special servicing in February 2024 for imminent monetary default and is currently delinquent having last paid in December 2024. The consolidated collateral occupancy rate has fallen significantly, reported at 44.8% as of the December 2024 rent rolls, a decline from the September 2023 figure of 59.5%. The decline in occupancy was a result of the former second and third largest tenants vacating at their respective lease expirations in April and June 2024. In addition, 11 tenants, representing 11.3% of NRA, are scheduled to roll within the next 12 months. According to Reis, office properties within the Trenton submarket reported an average vacancy rate of 15.6% as of Q4 2024. Although an updated appraisal has not been ordered since issuance, Morningstar DBRS expects that the property's as-is value has deteriorated considerably given the historical performance trends, lack of leasing activity, and soft submarket fundamentals. This assessment is further supported by an updated appraisal that was received for the second-largest loan in special servicing, Princeton South Corporate Center, details of which are outlined below. Morningstar DBRS liquidated the loan from the pool based on a 75.0% haircut to the issuance value of $199.0 million, resulting in a Morningstar DBRS value of $49.8 million ($61 per sf) and an implied loss approaching $34.0 million.

The Princeton South Corporate Center loan is secured by two four-story suburban office buildings in Trenton, New Jersey, just six miles west of Princeton Pike Corporate Center. The loan transferred to special servicing in February 2022 after the property was unable to generate sufficient cash flows to cover operating expenses and debt service obligations. The asset became real-estate owned (REO) in January 2024. An updated appraisal from January 2024 valued the property at $27.6 million, more than 60.0% below the issuance appraised value of $72.0 million. Morningstar DBRS liquidated the loan from the pool based on a 35.0% haircut to the most recent appraisal, resulting in a Morningstar DBRS value of $17.9 million ($67 per sf) and an implied loss totaling approximately $36.0 million.

The third specially serviced loan, DoubleTree by Hilton - Cleveland, OH (Prospectus ID#13, 3.3% of the pool), is secured by a 379-key full-service hotel. The loan originally transferred to special servicing in 2019 and the collateral is being actively marketed for sale with interested parties being asked to provide best offers to facilitate the process. Since before the pandemic, the property has underperformed its competitive set and the borrower has failed to submit updated financial reporting. The property was most recently appraised in February 2024 at a value of $16.6 million, below the $40.0 million value at issuance and the $25.4 million loan balance. Given the potential near-term sale of the asset and poor historical performance, Morningstar DBRS assumed a full loss to the loan.

The Navy League Building, which is the largest office loan in the pool, is secured by a 191,000-sf office building in Arlington, Virginia. The loan was added to the servicer's watchlist in January 2021 for a low occupancy rate and DSCR after the second-largest tenant vacated. Although cash flows have increased from YE2023, they remain below the Morningstar DBRS NCF with a DSCR that has remained below break-even since 2020. Two new tenants have recently signed long-term leases (18.0% of NRA), bringing occupancy up to 69.0% as of December 2024, from 57.1% in September 2023; however, tenants representing 20.6% of NRA have leases expiring in the next 12 months. As of the February 2025 reporting, $371,000 remains in a replacement reserve and $4.6 million is held in other reserves. There is also a replacement reserve balance of $371,000. According to Reis, office properties within the Roxxlyn/Courthouse submarket reported an average vacancy rate of 25.6% for the full-year 2024 reporting period. Given the soft office submarket fundamentals and the property's inability to cover operating expenses and debt service obligations with the current levels of rental income, Morningstar DBRS applied a 10.0% capitalization rate to the YE2024 NCF resulting in a loan-to-value (LTV) ratio of 160.0%. In addition, a 30.0% PoD penalty was maintained from the previous credit rating action to account for and the sustained performance declines. The resulting expected loss was more than double the pool average.

At issuance, Penn Square Mall was shadow-rated investment grade. With this review, Morningstar DBRS confirmed that the performance of this loan remains consistent with investment-grade loan characteristics.

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 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 (February 28, 2025): https://dbrs.morningstar.com/research/448963.

Other methodologies referenced in this transaction are listed at the end of this press release.

The credit ratings assigned to the Class A-S certificate materially deviates from the credit rating implied by the predictive model. Morningstar DBRS typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit rating would consider a three-notch or more deviation from the credit rating stress(es) implied by the predictive model to be a significant factor in evaluating the credit rating. The rationale for the negative material deviation is uncertain loan evet event risk. As outlined above, Morningstar DBRS' considered conservative liquidation scenarios and model adjustments for the loans in special servicing and analyzed loans of concern with elevated POD penalties and stressed LTVs, as outlined above, increasing the pool's baseline expected loss. As such, the material deviation is warranted as the Class A-S certificate remains sufficiently insulated from potential losses with a principal balance of approximately $101.0 million remaining in Classes B, C and D after accounting for Morningstar DBRS' liquidation scenarios.

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
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 (December 13, 2024)/North American CMBS Insight Model v 1.2.0.0: https://dbrs.morningstar.com/research/444616

-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024): https://dbrs.morningstar.com/research/439702

-- Legal Criteria for U.S. Structured Finance (December 03, 2024): https://dbrs.morningstar.com/research/444064

-- 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.