DBRS Morningstar Confirms All Ratings on Morgan Stanley Bank of America Merrill Lynch Trust 2016-C32

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2016-C32 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2016-C32 as follows:

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

All trends are Stable, with the exception of Class F, which remains Negative. In addition, Class A-2 was discontinued as the class fully repaid with the November 2021 remittance.

A Negative trend on Class F is primarily a reflection of DBRS Morningstar’s concerns regarding the performance of a large mall loan that was previously in special servicing, as further discussed below.

The rating confirmations reflect the overall stable performance of the transaction since issuance, despite more recent challenges that have generally been driven by the effects of the Coronavirus Disease (COVID-19) pandemic. At issuance, the transaction consisted of 56 fixed-rate loans secured by 76 commercial and multifamily properties, with a trust balance of $907.0 million. According to the November 2021 remittance report, two loans have paid in full, leaving 54 loans within the transaction. There has been a collateral reduction of 5.9% since issuance, lowering the trust balance to $853.4 million. Defeasance has been minimal, with three small loans defeased since issuance, representing 2.2% of the pool. There have been no losses to date, with the $36.3 million unrated Class G balance at issuance unchanged as of the November 2021 remittance.

The transaction is concentrated with loans backed by retail property types, with 21 retail loans, representing 41.4% of the current trust balance. The remaining concentrations by property type are relatively low, including lodging, which represents about 10% of the pool balance. The third-largest loan in the pool is the Wolfchase Galleria loan (Prospectus ID #3; 6.10% of the current pool balance), which is backed by a regional mall in Memphis, Tennessee, and has shown performance declines from issuance.

According to the November 2021 remittance report, no loans are in special servicing. There are eight loans, representing 22.9% of the current trust balance, on the servicer’s watchlist. These loans are on the watchlist for a variety of reasons, including low debt service coverage ratios (DSCRs), occupancy, and tenant rollover concerns. The primary drivers, however, are retail and hospitality properties, which continue to suffer from sustained downward pressure on DSCR stemming from ongoing disruptions related to the pandemic. Where applicable, DBRS Morningstar analyzed the watchlisted loans with probability of default penalties to increase the expected loss for this review.

The largest loan on the servicer’s watchlist is Hilton Hawaiian Village (Prospectus ID#1; 7.4% of the pool), which is secured by a luxury beachfront property in Waikiki, Hawaii. Performance at YE2020 was subdued as expected given the impacts of the coronavirus pandemic, with a DSCR of 0.26 times (x), far below the 2019 figure of 2.70x. During the sponsor’s (Park Hotels and Resorts Inc.) Q3 2021 earnings call, however, it was noted that the property showed an impressive rebound in operations with occupancy averaging more than 75% during Q3 2021. It was also noted that the sponsor plans to expand the property with an additional tower to be constructed in 2024 and 2025. Given the historically strong performance and the sponsor’s clear commitment to the asset, DBRS Morningstar expects the loan will continue to perform.

The Wolfchase Galleria loan was transferred to special servicing in June 2020 for imminent monetary default because of bankruptcies and store closures of tenants. The mall is owned and operated by affiliates of Simon Property Group (Simon), and based on the Q3 2021 reporting for the real estate investment trust, the subject remains a core asset for the company. A forbearance agreement was executed in January 2021, and the loan was returned to the master servicer in April 2021. Financial performance has improved with the DSCR at 1.36x as of June 2021, compared with 1.05x at YE2020. However, cash flow remains approximately 8.0% below the DBRS Morningstar net cash flow figure derived at issuance. In addition, the Q2 2021 occupancy rate of 75.0% is a further decline from the 2019 and 2020 occupancy rates that hovered near 80.0% and is well below the issuance occupancy rate of 90.0%.

Tenant rollover risks at the property are also a concern, with two leases accounting for 14% of the net rentable area (NRA) due to expire within the next six months. In addition, the largest collateral tenant, Malco Theatres (7.9% of the NRA), signed a short-term renewal for 12 months last year and has a lease that now expires in December 2022, suggesting that long-term commitment to the space could be tenuous. There has been some recent leasing activity at the mall, with clothing retailer rue21 having opened a store in October 2021. DBRS Morningstar considers Simon to be a strong sponsor, having contributed more than $60.0 million to close the subject loan. Simon is well equipped and incentivized to address the performance challenges, but market difficulties remain. The cash flow and occupancy declines from issuance, as well as the presence of a dark Sears anchor that has been empty since 2018, suggest increased risks from issuance that support DBRS Morningstar’s adjustments to increase the expected loss for the loan in the analysis for this review.

At issuance, DBRS Morningstar shadow-rated two loans, Hilton Hawaiian Village and Potomac Mills (Prospectus ID#5; 6.1% of the pool), investment grade, supported by the loans’ strong credit metrics, strong sponsorship strength, and historically stable collateral performance. With this review, DBRS Morningstar confirms that the characteristics of these loans remain consistent with the investment-grade shadow rating.

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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#1 – Hilton Hawaiin Village (7.4% of the pool)
-- Prospectus ID#3 – Wolfchase Galleria (6.1% of the pool)

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.

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/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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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