DBRS Morningstar Upgrades Five Ratings on Cherrywood SB Commercial Mortgage Loan Trust 2016-1

DBRS Limited (DBRS Morningstar) upgraded its ratings on five classes of the Commercial Mortgage Pass-Through Certificates, Series 2016-1 (the Certificates) issued by Cherrywood SB Commercial Mortgage Loan Trust 2016-1 (the Trust) as follows:

-- Class M-2 to AAA (sf) from AA (high) (sf)
-- Class M-3 to AA (sf) from BBB (high) (sf)
-- Class M-4 to A (sf) from BBB (high) (sf)
-- Class B-1 to BBB (sf) from BB (sf)
-- Class B-2 to BB (sf) from B (sf)

All trends are Stable.

The rating upgrades reflect the significantly improved credit support for the transaction as the transaction continues to factor down and credit issues remain minimal. According to the January 2022 remittance, 42 of the 205 original loans remain in the trust with an aggregate principal balance of $26.0 million, representing a collateral reduction of 76.9% since issuance as a result of loan repayments, scheduled amortization, and loan liquidations. As the transaction continues to wind down, the trust has become more concentrated, with the largest 15 loans representing 64.4% of the trust balance, compared with the previous year’s concentration of 53.8% of the trust balance. All loans remaining in the pool are amortizing, with an average loan size of approximately $619,000.

Since issuance, 13 loans have been liquidated from the trust, with only three incurring a realized loss at payoff and a cumulative loss of $0.5 million; only one of those loans had a loss severity in excess of 20%. The trust benefits from a high concentration of multifamily loans, representing 32.3% of the trust balance, and also a lack of exposure to hotel property types, which are generally more volatile and have been particularly stressed amid the Coronavirus Disease (COVID-19) pandemic. There are noteworthy risks for the pool in that the loan sponsors are generally less sophisticated operators of commercial real estate with limited real estate portfolios and experience. These risks are partially mitigated by borrower or guarantor recourse, regardless of credit history. DBRS Morningstar assigned a Bad (Litigious), Weak, or Average sponsor strength to all loans in the pool to reflect the relative inexperience of the loan sponsors.

As of the January 2022 remittance, there were eight loans, representing 29.0% of the trust balance, with the special servicer. Three of those loans, representing 13.2% of the trust balance, were either in the foreclosure process or had plans to sell as part of the workout strategy, while four of the loans, representing 13.4% of the trust balance, were on active repayment plans to bring the loans current. DBRS Morningstar applied a probability of default penalty to the loans in the analysis for this review given their delinquency, significantly increasing the expected loss for each. DBRS Morningstar notes that ongoing property financials are not provided as part of the surveillance reviews.

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.

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

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.

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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