DBRS Morningstar Changes Trends on Four Classes to Stable from Negative, Confirms All Classes of Bank of America Merrill Lynch Commercial Mortgage Trust 2016-UBS10

DBRS, Inc. (DBRS Morningstar) confirmed all classes of the Commercial Mortgage Pass-Through Certificates, Series 2016-UBS10 issued by Bank of America Merrill Lynch Commercial Mortgage Trust 2016-UBS10 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 X-A at AAA (sf)
-- Class X-B at AA (high) (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class X-D at BBB (high) (sf)
-- Class D at BBB (sf)
-- Class X-E at BBB (low) (sf)
-- Class E at BB (high) (sf)
-- Class X-F at BB (sf)
-- Class F at BB (low) (sf)
-- Class X-G at B (sf)
-- Class G at B (low) (sf)

DBRS Morningstar changed the trends on Classes E, F, X-E, and X-F to Stable from Negative given the considerable collateral reduction over the past 12 months. Classes G and X-G continue to have Negative trends because of the increased risk of two sizable loans, Belk Headquarters (Prospectus ID#3; 7.9% of the trust balance) and 2100 Ross (Prospectus ID#7; 4.9% of the trust). All other trends are Stable.

The rating confirmations reflect the overall stable performance of the pool, with healthy collateral reduction since issuance. The trust balance reduced to $646.7 million as of the November 2021 remittance from $830.8 million as of the January 2021 remittance with a total collateral reduction of 26.2% since issuance. One loan, The Shoppes at Taylor Mill, liquidated from the trust in August 2021, resulting in a $1.2 million loss to the unrated Class H.

At issuance, the trust comprised 52 loans secured by 84 commercial and multifamily properties with a trust balance of $876.3 million. As of the November 2021 remittance report, 45 loans secured by 69 properties remained in the trust. The trust features a high concentration of loans secured by retail and hotel properties, totaling 32.4% and 19.7% of the trust balance, respectively. Two loans, totaling 1.5% of the trust balance, are fully defeased. Four loans, representing 7.8% of the trust balance, are in special servicing, three of which transferred during the Coronavirus Disease (COVID-19) pandemic. The special servicer stated the largest loan in special servicing, Le Meridien Cambridge MIT (Prospectus ID#13; 3.1% of the trust balance) is scheduled to pay off in the near term. Princeton Pike Corporate Center (Prospectus ID#18; 2.8% of the trust balance) is expected to be transferred back to the master servicer after a loan modification. Ten additional loans, representing 25.4% of the trust balance, are on the servicer’s watchlist primarily because of a low occupancy rate or debt service coverage ratio. Eight of the loans were placed on the servicer’s watchlist during the pandemic, with these loans secured by lodging, retail, and mixed-use properties.

The Belk Headquarters loan is secured by a Class B office property in suburban Charlotte, North Carolina, and previously served as the headquarters for Belk, a regional department store chain that estimated 1,200 employees as of February 2021 working at the property. However, since that time, news reports have stated that the company has shifted to a fully remote policy for its corporate-level employees, and broker listings for the property show the full square footage available for sublease. The Belk lease expires in March 2031. According to the information in the prospectus, a cash sweep will commence if Belk is “failing to be in possession of or operating in its leased space” and the hard lockbox is in place. Should a significant portion of the space remain dark as the loan’s 2026 anticipated repayment date gets closer, refinance options will be limited without a significant cash equity contribution from the sponsor (even with a significant reserve on hand with the cash sweep). Additionally, submarket demand for office properties remains weak and is not likely to recover in the near term as Reis projects the submarket vacancy rate to increase to 22.5% by 2026.

The 2100 Ross loan is secured by a Class A high-rise office building in the Dallas central business district (CBD). The loan is on the watchlist because the largest tenant, CBRE (15.2% of net rentable area), has a lease expiring in March 2022. According to the Dallas Morning News, CBRE has leased a big block of office space in the Telecom Corridor of Richardson, Texas, and plans to relocate employees from 2100 Ross. This consolidation of workers, which is expected to begin in early 2022, represents significant risk to the loan as demand for Dallas CBD office space remains weak. The loan includes a specified tenant trigger event, which includes CBRE. The cash flow sweep is capped at $2.2 million (approximately $17 per square foot on CBRE’s space). The property is likely to perform near breakeven if the sponsor can’t backfill CBRE’s vacant space. While the cash flow sweep is a benefit, DBRS Morningstar does not expect the amount to fully cover a tenant improvement package for a new tenant. Performance could be further exacerbated should Merrill Lynch leave in February 2022 at the end of its lease term. The sponsor may need to contribute additional capital to the collateral to maintain occupancy and attract tenants.

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, X-D, X-E, X-F, and X-G 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 – Hyatt Regency Huntington Beach Resort & Spa (8.5% of the pool)
-- Prospectus ID#7 – 2100 Ross (4.9% of the pool)
-- Prospectus ID#11 – Grove City Premium Outlets (3.4% of the pool)
-- Prospectus ID#18 – Princeton Pike Corporate Center (2.8% 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 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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