DBRS Morningstar Assigns Ratings to COMM 2016-GCT Mortgage Trust

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2016-GCT issued by COMM 2016-GCT Mortgage Trust (the Issuer) as follows:

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

All trends are Stable.

These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about May 15, 2020. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, on the DBRS Morningstar website at www.dbrsmorningstar.com.

The subject rating actions are the result of the application of the NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology,” as applicable. Qualitative adjustments were made to the final loan-to-value (LTV) sizing benchmarks used for this rating analysis.

The transaction is secured by the borrower’s fee simple interest in The Gas Company Tower, a 1.4 million square foot (sf) Class A office building and parking garage in the Bunker Hill District of downtown Los Angeles. The borrower used the five-year $319.0 million interest-only (IO) loan to refinance previous debt. The trust debt totals $264.0 million, which is split between senior debt totaling $89.0 million and junior subordinate debt totaling $175.0 million. The whole¬-loan balance includes two non-trust senior companion notes totaling $55.0 million that are pari passu with the senior trust debt notes. There is also a $131.0 million mezzanine loan that is coterminous with the trust debt. The sponsor, Brookfield DTLA Holdings LLC (Brookfield DTLA), indirectly owns 100% of the property. Brookfield DTLA is approximately 47% owned and 100% controlled by Brookfield Office Properties Inc. (rated BBB with a Negative trend by DBRS Morningstar), which is 100% owned by Brookfield Property Partners L.P. (rated BBB with a Negative trend by DBRS Morningstar).

The top five tenants represent 68% of the net rentable area (NRA). The Southern California Gas Company (SCGC) is the largest tenant, occupying approximately 34% of the NRA on a lease that extends through 2026. The subject serves as SCGC’s corporate headquarters. The tenant has a remaining termination option for 374,000 sf in 2020 and open ongoing termination options on several smaller spaces. Termination option notice is due in May 2020 and would take effect 18 months later. SCGC has four five-year renewal options remaining on its lease. The subject is also home to the Los Angeles offices of Sidley Austin LLP, which represents 12.0% of net rentable area (NRA), and Latham & Watkins LLP, which represents 7.1% of NRA. In 2015, Deloitte US, which represents 8.2% of NRA, relocated its Los Angeles operations to the subject and became the first tenant to affix its logo to the building’s peak. The fifth-largest tenant is WeWork, occupying 6.7% of NRA on a lease that extends through 2033.

The DBRS Morningstar net cash flow (NCF) derived at issuance was reanalyzed for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The resulting NCF figure was $22.9 million and a cap rate of 7.0% was applied, resulting in a DBRS Morningstar Value of $326.4 million, a variance of -46.6% from the appraised value at issuance of $611.0 million. The DBRS Morningstar Value implies a senior debt LTV of 97.7% and a total debt LTV of 137.9% compared with the LTV of 52.2% on the appraised value at issuance. The NCF figure applied as part of the analysis represents a -13.8% variance from the Issuer’s NCF, primarily driven by TI and LC amounts, rent steps, and management fee. As of YE2018, the servicer reported a NCF figure of $30.2 million, a -24.3% variance from the DBRS Morningstar NCF figure, primarily a factor of base rent, rent steps, and management fee.

DBRS Morningstar applied a cap rate at the middle end of the DBRS Morningstar Cap Rate Ranges for downtown Los Angeles office properties, reflecting the prime location and solid tenant base. In addition, the 7.0% cap rate DBRS Morningstar applied is substantially above the implied cap rate of 4.3% based on the Issuer’s underwritten NCF and appraised value.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis totaling 3% to account for property quality and market fundamentals.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Class X-A is an IO certificate that references 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 ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

DBRS Morningstar notes that the above press release was amended on May 12, 2020, to include adjustments made to the NCF resulting in a reduction of the NCF to $22.9 million from $24.7 million. Thusly, the DBRS Morningstar Value was reduced to $326.4 million from $352.9 million, a variance of -46.6% from the appraised value at issuance of $611.0 million. The changes to the DBRS Morningstar NCF and Value had no ultimate impact on the ratings or trends previously issued on May 1, 2020.

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

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology and North American CMBS Surveillance Methodology, which can be found on www.dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on www.dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that 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.

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

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