DBRS Morningstar Downgrades Five Classes of Morgan Stanley Bank of America Merrill Lynch Trust 2016-C29

DBRS, Inc. (DBRS Morningstar) downgraded 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 X-E to BB (high) (sf) from BBB (low) (sf)
-- Class E to BB (sf) from BB (high) (sf)
-- Class X-F to BB (low) (sf) from BB (sf)
-- Class F to B (high) (sf) from BB (low) (sf)
-- Class G to CCC (sf) from B (low) (sf)

In addition, DBRS Morningstar confirmed the following classes:

-- Class A-2 at AAA (sf)
-- 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)

The rating for Class X-G was discontinued as the certificate references a CCC (sf)-rated class.

DBRS Morningstar changed the trends for Classes X-E, E, X-F, and F to Stable from Negative. Class G has a rating that does not carry a trend. All other trends are Stable.

The rating downgrades are the result of increased risks from issuance for select loans in the pool that are in special servicing. The transaction structure provides relatively limited cushion against losses for the lowest-rated bonds, as the unrated Class H certificate had an issuance balance of just over $20.0 million, with balances of $17.2 million and $8.1 million in Classes F and G, respectively. Although the total liquidation amounts assumed were relatively low, the erosion combined with probability of default (POD) adjustments for some larger loans suggested additional stress from issuance on the five classes that are downgraded with this review. A total of seven loans, totaling 11.5% of the trust balance, are in special servicing as of November 2021. Of these loans, two are in the top 15 and one is the 16th-largest loan in the pool, for a combined 7.1% of the trust balance. Those three loans and two of the smaller specially serviced loans were analyzed with POD adjustments to account for increased risks from issuance. DBRS Morningstar assumed liquidation scenarios for two small loans, with a combined loss amount of approximately $7.5 million.

At issuance, the trust comprised 69 fixed-rate loans secured by 106 commercial and multifamily properties with a trust balance of $809.5 million. Per the November 2021 remittance, 64 loans secured by 100 properties remained in the trust with a total balance of $739.2 million, representing an 8.7% collateral reduction. Nine loans have defeased, representing 11.0% of the trust balance. The trust realized a relatively nominal loss (less than $50,000) in October 2021 following the liquidation of La Quinta Inn – Dallas, TX (Prospectus ID#51). There are interest shortfalls in the amount of $675,976 outstanding contained to the unrated Class H certificate, as of the November 2021 remittance.

As of the November 2021 remittance, there are 10 loans, representing 20.6% of the trust balance, on the servicer’s watchlist. Many of these loans are backed by hotel and retail properties that have shown cash flow and/or occupancy declines amid the Coronavirus Disease (COVID-19) pandemic. The pool has a high concentration of loans secured by retail and hotel assets, which represent 37.1% and 13.2% of the trust balance, respectively. The two largest hotel loans are in special servicing. The special servicer’s November 2021 commentary notes that the Le Meridien Cambridge MIT loan (Prospectus ID#9, 2.7% of the trust balance) is scheduled to pay off in the near term and the other large hotel loan in special servicing, Radisson Hotel Freehold (Prospectus ID #8, 2.6% of the trust balance), is expected to be transferred back to the master servicer as a loan modification has been executed.

The Radisson Hotel Freehold loan is secured by a 121-key full-service hotel in Freehold, New Jersey, and the loan transferred to the special servicer in November 2020 for imminent monetary default at the request of the borrower. A loan modification was executed in September 2021 that featured conversion to interest-only (IO) payments throughout the loan term (unless certain debt service coverage hurdles are achieved) and a discounted payoff (DPO) option at loan maturity. The collateral was reappraised in July 2021 for $18.2 million, down 48.0% from the $35.0 million appraised value at issuance. The DPO will be based on an appraisal completed near loan maturity and will require a DPO minimum of $12.0 million, well below the $19.5 million outstanding loan balance.

The Princeton Pike Corporate Center loan is secured by eight suburban office buildings in Lawrence Township, New Jersey, and the loan transferred to the special servicer in April 2021 for payment default, likely because of the issues with the $17.0 million mezzanine loan also in place. A loan modification was executed for the trust debt in September 2021 that features payment conversion to IO and an ongoing cash trap through loan payoff. The loan was expected to be returned to the master servicer in the near term following the loan modification. The occupancy rate has modestly declined since issuance, and there is considerable upcoming lease rollover 2022. Submarket demand has also softened since issuance as the vacancy rate increased to 18.7% as of Q3 2021 from 16.8% at issuance, according to Reis.

One loan, Penn Square Mall (Prospectus ID#3 – 6.3% of the trust balance), was shadow-rated investment grade at issuance. With this review, DBRS Morningstar notes that the loan continues to exhibit investment-grade characteristics, with stable cash flows and occupancy rates since issuance for the collateral regional mall.

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.

DBRS Morningstar materially deviated from its North American CMBS Insight Model when determining the ratings assigned to Classes B and C, as the quantitative results suggested a lower rating. The material deviation is warranted given the uncertain loan-level event risk related to various loans secured by retail and hospitality properties. Although some of the largest loans in the pool have characteristics that suggest a higher POD, DBRS Morningstar believes the two bonds in question remain generally well insulated given the position in the waterfall and the paydown of approximately $70.0 million since issuance.

Classes X-A, X-B, X-D, X-E, and X-F are 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 – Grove City Premium Outlets (7.6% of the pool)
-- Prospectus ID#8 – Radisson Hotel Freehold (2.6% of the pool)
-- Prospectus ID#16 – Princeton Pike Corporate Center (2.0% of the pool)
-- Prospectus ID#28 – Crossings at Halls Ferry (1.2% 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. 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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