DBRS Morningstar Upgrades Ratings on 11 Classes of Citigroup Commercial Mortgage Trust 2016-C2

DBRS Limited (DBRS Morningstar) upgraded its ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C2 issued by Citigroup Commercial Mortgage Trust 2016-C2:

-- Class E-1 to BB (high) (sf) from CCC (sf)
-- Class E-2 to BB (sf) from CCC (sf)
-- Class F-1 to BB (low) (sf) from CCC (sf)
-- Class F-2 to B (high) (sf) from CCC (sf)
-- Class G-1 to B (sf) from CCC (sf)
-- Class G-2 to B (low) (sf) from CCC (sf)
-- Class E to BB (sf) from CCC (sf)
-- Class EF to B (high) (sf) from CCC (sf)
-- Class F to B (high) (sf) from CCC (sf)
-- Class EFG to B (low) (sf) from CCC (sf)
-- Class G to B (low) (sf) from CCC (sf)

DBRS Morningstar also removed the Interest in Arrears designation for all of the upgraded classes.

In addition, DBRS Morningstar confirmed the following ratings:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- 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 B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (sf)
-- Class X-A at AAA (sf)
-- Class X-B at A (high) (sf)
-- Class X-D at BBB (sf)

The trends on all classes are Stable.

The rating upgrades reflect the recovery of the interest shortfalls tied to the Crocker Park Phase I and II (Prospectus ID#3; 10.2% of the pool) (Crocker Park) loan, which were initially expected to remain outstanding to the classes in question for an extended period of time. The shorted interest was the result of a decision by the master servicer, Midland Loan Services (Midland), to limit advancing for the Crocker Park loan, which was modified in 2020. Based on the estimates provided by Midland in March 2021, the interest shortfalls would remain outstanding for at least 12 months, beyond DBRS Morningstar’s interest shortfall tolerance of six months for the below investment-grade classes, prompting DBRS Morningstar to downgrade the ratings on 11 classes in May 2021.

However, following DBRS Morningstar’s May 2021 rating actions, the servicer revised its strategy for recovering the shortfalls to a principal known as the Workout Delayed Reimbursement Amount and has been clawing back advances from principal collections, resulting in the shortfalls being recovered for the bonds in question. As such, Classes E through G were upgraded to reflect the recovery of the interest shortfalls and the removal of the Interest in Arrears designation with this review.

As of August 2021, the loan remained current and was performing in line with expectations. The loan modification, which closed in July 2020, allowed for a 12-month forbearance of debt service payments, which would be deferred until loan maturity in August 2026. The loan modification was granted in response to the borrower’s request to use available cash flow to fund the $7.0 million of estimated leasing costs necessary to backfill current and projected future vacancy across the collateral property. As of August 2021, the leasing reserve had a balance of $7.3 million. In addition, as of June 2021, the occupancy rate had improved to 95.0% compared with 90.0% in October 2020 and 87.0% in July 2020. The Q2 2021 debt service coverage ratio (DSCR) was reported at 1.24 times (x), compared with the year-end 2020 DSCR of 1.31x.

As of the August 2021 remittance, all 44 of the original loans remained in the pool, with a total collateral reduction of 3.6% since issuance as a result of loan amortization. There are 10 loans, representing 16.9% of the current trust balance, on the servicer’s watchlist, and three loans, representing 9.1% of the current pool balance, in special servicing. The loans on the servicer’s watchlist are being monitored for a variety of reasons, including low DSCRs and occupancy issues. All three loans in special servicing are secured by either hotel or retail properties, which include Welcome Hospitality Portfolio (Prospectus ID#8; 3.9% of the pool), Jay Scutti Plaza (Prospectus ID#16; 2.7% of the pool), and Marriott-Livonia at Laurel Park (Prospectus ID#17; 2.5% of the pool). Additionally, five loans, representing 8.7% of the pool, have defeased.

At issuance, DBRS Morningstar assigned an investment-grade shadow rating on the Vertex Pharmaceuticals HQ loan (Prospectus ID#1; 10.2% of the pool). With this review, DBRS Morningstar confirmed that the performance of this loan remains consistent with investment-grade loan characteristics.

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/373262.

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 ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer 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.

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

The principal methodology is North American CMBS Surveillance Methodology (March 26, 2021), which can be found on 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 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 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 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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