DBRS Morningstar Confirms Ratings on All Classes of Morgan Stanley Bank of America Merrill Lynch Trust 2016-C29

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C29 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2016-C29:

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

All trends are Stable with the exception of Class G which has a rating that does not typically carry a trend in commercial mortgage-backed securities (CMBS) ratings.

The rating confirmations reflect the stable performance of the transaction, which has remained in line with DBRS Morningstar’s expectations, given the relatively healthy net cash flows in addition to defeasance collateral in the transaction. The office concentration is relatively low at approximately 15% of the pool balance, a property type that has been generally challenged given the low investor appetite and increased vacancy rates in many submarkets because of the shift in workplace dynamics. Only one of the four office loans in this pool, 696 Centre (Prospectus ID#13, 2.1% of the pool), has demonstrated increased substantial risk from issuance and is discussed in detail below.

As of the July 2023 remittance, 62 of the original 69 loans remain in the pool, with an aggregate principal balance of $697.9 million, reflecting a collateral reduction of 13.8% since issuance. Since the last rating action in November 2022, two additional loans were defeased, bringing the total defeased collateral to 16 loans or 19.3% of the pool. Eleven loans (20.6% of the pool) are on the servicer’s watchlist; however, only seven of those loans (14.9% of the pool) are being monitored for performance-related concerns.

There are two loans (2.7% of the pool) in special servicing, Wabash Landing Retail (Prospectus ID#22, 1.5% of the pool) and Crossings at Halls Ferry (Prospectus ID#28, 1.2% of the pool), both of which are real estate owned. These properties have reported declines in value based on the most recent appraisals and are expected to be disposed from the trust before YE2023. For this review, DBRS Morningstar analyzed these loans with a liquidation scenario, resulting in a loss severity in excess of 20.0% for the Wabash Landing Retail loan and 50.0% for the Crossings at Halls Ferry loan. The aggregate implied loss is expected to approach $7.0 million, eroding the nonrated Class H by almost 35.0%, thereby supporting the CCC (sf) rating on Class G.

In terms of the pool composition, the trust primarily consists of loans secured by retail properties, representing almost 39.0% of the pool balance. The office concentration is quite small, representing about 15.0% of the pool balance. Considering the challenges that are impacting the office sector as previously mentioned, office loans and loans exhibiting increased risk from issuance were analyzed with stressed scenarios, resulting in a weighted-average expected loss that was approximately double the pool average.

The Grove City Premium Outlets (Prospectus ID#1, 8.0% of the pool) is the largest loan in the pool and is currently on the servicer’s watchlist because of declines in occupancy. The loan is secured by an outlet mall in Grove City, Pennsylvania, located approximately 54 miles north of Pittsburgh. The loan is sponsored and managed by Simon Property Group. As of the May 2023 rent roll, the subject was 73.9% occupied, which remains relatively unchanged in the last several years but is well below the issuance figure of 97.5%. The largest tenants include Lee Wrangler (5.0% of the net rentable area (NRA), lease expiry in February 2024), Old Navy (3.8% of the NRA, lease expiry in January 2026), and Nike Factory Store (3.1% of the NRA, lease expired in June 2023). Although the lease has expired for the Nike Factory Store, the tenant still remains open and listed on the mall online directory. Over the next 12 months, there is a tenant rollover risk of 18.2% of the NRA; however, according to the most recent servicer’s commentary, the borrower expects many of these tenants to extend its lease.

According to the most recent financials, the loan reported a YE2022 debt service coverage ratio (DSCR) of 2.05 times (x), compared with the YE2021, YE2020, and DBRS Morningstar figures of 2.20x, 2.13x, and 2.44x, respectively. Based on the February 2023 tenant sales report, the trailing 12-month sales figures for the property was reported slightly below issuance expectations. Although performance is below DBRS Morningstar expectations, the loan is performing well above breakeven with sales nearing issuance and pre-Coronavirus Disease (COVID-19) pandemic levels. However, as the loan approaches its maturity date in December 2025, the lack of meaningful uptick in performance since issuance could pose some concern as the borrower seeks takeout financing.

The 696 Centre loan is secured by a Class B, suburban office property in Farmington Hills, Michigan, located approximately 20 miles outside of Detroit. The loan is watchlisted because of the departure of the former largest tenant, Google (41.4% of the NRA), which vacated at its November 2022 lease expiration. This was considered a major tenant trigger event, and the borrower is working on setting up the cash management account. The property had previously lost another major tenant, , Botsford (24.9% of the NRA), which appears to have exercised its one-time termination option in November 2021, which is subject to a termination fee of approximately $715,000. Based online leasing reports, both of the former Google and Botsford spaces remain available for lease with an asking rental rate of $16.50 per square foot (psf). Per a Reis report, the Farmington Hills submarket reported Q2 2023 vacancy rate of 21.8% and an effective rent of $15.16 psf.

The YE2022 financials reported an occupancy rate of 75.0%, which is likely not reflective of the departure of Google and the occupancy may be as low as 33.0%. The YE2022 DSCR was reported at 1.21x, a major decline from the YE2021 figure of 2.83x, and DBRS Morningstar expects this figure to drop well below breakeven when accounting for Google’s departure. As such, considering cash management is being established, the effectiveness of the lockbox will be minimal. As of the July 2023 reserve report, the loan has approximately $100,000 across all of its reserve accounts. Given the lack of reserves, significant drop in occupancy, and soft submarket, the value of this property has likely declined from issuance. As such, DBRS Morningstar analyzed this loan with a stressed loan-to-value ratio and a probability of default penalty, resulting in an expected loss that is more than double the pool average.

The Penn Square Mall (Prospectus ID#3, 6.7% of the pool) loan was shadow-rated investment grade at issuance. With this review, DBRS Morningstar notes that the loan continues to exhibit investment-grade loan characteristics as demonstrated by the stable cash flow and occupancy rate.

ENVIRONMENTAL, SOCIAL, 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 DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/416784 (July 4, 2023).

Classes X-A, X-B, X-D, X-E, and X-F 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 DBRS Morningstar.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

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

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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@dbrsmorningstar.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.

DBRS Morningstar 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 DBRS Morningstar 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.

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The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model v 1.1.0.0 (https://www.dbrsmorningstar.com/research/410913)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.