DBRS Morningstar Confirms Ratings on LSTAR Commercial Mortgage Trust 2016-4

DBRS Limited (DBRS Morningstar) confirmed the ratings of the Commercial Mortgage Pass-Through Certificates, Series 2016-4 issued by LSTAR Commercial Mortgage Trust 2016-4 as follows:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-S 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 (high) (sf)
-- Class D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction. As of the September 2022 remittance, 15 of the original 22 loans remained in the trust with an aggregate principal balance of $368.9 million, reflecting a collateral reduction of 27.1% since issuance as a result of loan repayments, scheduled loan amortization and proceeds from one loan liquidation. Since the last rating action, two loans totalling $54.2 million have been repaid in full, and another two loans totalling $30.9 million (8.4% of the pool) have been defeased. There have been minimal losses to date with the $26.8 million unrated Class H reduced by only 1.4% since issuance as of the September 2022 remittance. There are currently five loans, representing 52.6% of the pool, on the servicer’s watchlist, and one loan, representing 1.3% of the pool, in special servicing.

The 310 Superior Street loan (Prospectus ID#22) is secured by an unanchored retail property in Chicago’s River North neighbourhood and was transferred to special servicing in October 2017 after the former largest tenant vacated the space in January 2017, reducing occupancy to 49%. The loan has been delinquent since May 2020 and, as of the September 2022 remittance, had outstanding principal and interest advances of approximately $775,000. In addition, the borrower is in litigation related to a mechanic’s lien filed against the property in April 2020 for approximately $462,000. The property is currently 77.1% occupied by three tenants with lease expirations between 2025 and 2030. The servicer has not reported an updated valuation figure despite the extended delinquency. The issuance appraised value of $7.0 million suggests a loan-to-value ratio of 85.6%. Given the delinquency and lack of resolutions for this loan, this loan poses an increased credit risk to the trust.

DBRS Morningstar is monitoring the largest loan in the pool, Charlotte Plaza (Prospectus ID#1; 13.5% of the pool), for increased binary risk, given the ongoing occupancy issues and the upcoming maturity date in January 2023. The loan is secured by a 632,171 square foot (sf), Class A office building in downtown Charlotte, North Carolina. The loan was initially added to the servicer’s watchlist in late 2017 because the largest tenant, Charlotte School of Law, LLC (CSL), which previously occupied 39.5% of the net rentable area (NRA), was being reviewed by the American Bar Association (ABA). The for-profit school was placed on probation by the ABA in November 2016 and ultimately lost its operating licence. The tenant subsequently vacated the property and ceased rental payments.

As of June 2022, property occupancy had declined to 69.6% from 81.4% in June 2021 due in large part to Grant Thornton (8.8% of NRA) vacating in June 2021 prior to its scheduled lease expiration. While the sponsor was able to backfill approximately 8,300 sf of this space (1.3% of the NRA), the majority of the space remains vacant. Additionally, Lowe’s (31.8% of NRA) has gone dark prior to its July 2024 lease expiration, although it continues to honor the terms of its lease. Two floors (7.9% of NRA) of Lowe’s space is currently being subleased. Leases representing 11.4% of NRA are scheduled to expire by YE2022, including CB Richard Ellis (3.7% of NRA) and Accenture (2.2% of NRA), who have confirmed that they will be vacating upon lease expiration. Given the additional scheduled lease rollover between 2023 (5.2% of NRA) and 2024 (36.0% of NRA) and the relatively low in-place occupancy rate, the challenge of achieving a stabilized occupancy rate in the current economy will likely be compounded, which DBRS Morningstar considered in its analysis.

The 995 Market Street loan (Prospectus ID#4; 12.1% of the pool), is secured by a 91,308-sf office property in downtown San Francisco and remains a loan of concern for DBRS Morningstar. The only remaining tenant, CVS (9.7% of NRA), has gone dark, but continues to honor the terms of its lease, which expires in January 2031. This is a decline from a property occupancy of 85% at YE2021 and is attributable to major tenants WeWork (previously 74.7% of NRA) and Compass Family Services (previously 13.2% of NRA) vacating ahead of their lease expirations.

WeWork’s lease was guaranteed under a $6.5 million corporate guarantee from WeWork Companies. The corporate guarantee was set to decrease by $500,000 per year until it reached $1.5 million in 2025, where it was to remain until the expiration of the lease in August 2027. While the lease was secured by a $3.25 million letter of credit, posted by WeWork, the balance has been depleted according to the September 2022 loan level reserve report. However, $4.4 million remains in leasing reserves. The full details of the lease termination agreement are unknown (including termination fees paid and/or held by the servicer). The loan has not reported any delinquency since issuance, and the loan sponsor contributed $21.4 million to close the $62.0 million purchase of the property that the subject loan financed.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

Classes X-A and X-B 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 this transaction.

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 (October 3, 2022), 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/402907.

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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