DBRS Morningstar Confirms All Ratings of Morgan Stanley Bank of America Merrill Lynch Trust 2016-C28

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C28 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2016-C28:

-- 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 (low) (sf)
-- Class D at BB (high) (sf)
-- Class E-1 at B (low) (sf)
-- Class E-2 at CCC (sf)
-- Class E at CCC (sf)
-- Class F-1 at CCC (sf)
-- Class F-2 at CCC (sf)
-- Class F at CCC (sf)
-- Class EF at CCC (sf)
-- Class G-1 at C (sf)
-- Class G-2 at C (sf)
-- Class G at C (sf)
-- Class EFG at C (sf)

Classes E-2, E, F-1, F-2, F, EF, G-1, G-2, G, and EFG have ratings that generally do not carry a trend in commercial mortgage-backed securities (CMBS) ratings. All other classes have Stable trends. The rating confirmations reflect the overall stable performance of the transaction since DBRS Morningstar’s last review. The CCC (sf) and C (sf) ratings for the above-mentioned classes are reflective of DBRS Morningstar’s continued concerns and loss expectations for the loans in special servicing, as discussed below.

As of the April 2023 remittance, 37 of the original 42 loans remain in the pool, with an aggregate principal balance of $782.0 million, reflecting a collateral reduction of 18.2% since issuance as a result of loan repayments and scheduled amortization. The transaction is concentrated by property type, with 41.0% of the pool secured by retail properties and 28.9% of the pool secured by office properties. Four loans have defeased, representing 10.5% of the pool. There are two loans in special servicing and eight loans on the servicer’s watchlist, representing 9.2% and 16.4% of the pool balance, respectively. The watchlisted loans are primarily being monitored for low debt service coverage ratios (DSCRs) and/or occupancy figures.

The largest specially serviced loan, Princeton South Corporate Center (Prospectus ID#6; representing 5.9% of the pool), is secured by two Class A office buildings totaling approximately 267,000 square feet (sf) in Trenton, New Jersey. The loan transferred to special servicing in February 2022 for imminent monetary default resulting from insufficient cash flow and the loan defaulted on its March 2022 payment. Occupancy dropped substantially as tenants vacated and certain existing tenants did not pay rent because of ongoing disputes with the borrower. According to the December 2022 rent roll, the property was 60.1% occupied with an average rental rate of $31.92 per square foot (psf), down from 76.4% as reported by the trailing nine month ended (T9) financials. A receiver was appointed in June 2022 and is actively pursuing new and renewal leases while addressing rental payment delinquencies. The noted workout strategy is foreclosure and, according to the March 2022 appraisal, the property was valued at $29.0 million, a significant decrease from the issuance value of $72.0 million and well below the loan balance of $45.8 million. The most recent financial reporting available was from Q3 2021 when the loan reported an annualized net cash flow (NCF) of $3.0 million and a DSCR of 1.12 times (x). The servicer provided unaudited YE2022 financial statements, which noted a net operating income of below $1.0 million.

According to Reis, office properties in the Trenton submarket reported a YE2022 vacancy rate of 17.7% and an asking rental rate of $26.17 psf, compared with the YE2021 vacancy rate of 18.8% and asking rental rate of $25.52 psf. Given the sharp value decline, DBRS Morningstar liquidated the loan in its analysis, resulting in a loss severity in excess of 55.0%.

The DoubleTree by Hilton – Cleveland, OH loan (Prospectus ID#13, 3.3% of the pool) is secured by a 379-key, full-service hotel in Cleveland, Ohio. The loan transferred to special servicing in October 2019 for imminent monetary default and was last paid through June 2021. A receiver was appointed in January 2020 and the borrower had agreed to a voluntary foreclosure that was scheduled for May 2020 but was delayed after Cuyahoga County placed a moratorium on sheriff sales amid the Coronavirus Disease (COVID-19) pandemic. The moratorium was lifted in October 2020 and the receiver is working on stabilizing the subject. Based on the October 2022 appraisal, the property was valued at $26.3 million, a sharp decline from the issuance value of $40.0 million and just above the outstanding loan balance of $25.7 million. For this review, DBRS Morningstar liquidated the loan, resulting in a loss severity in excess of 60.0%.

The largest watchlisted loan, Navy League Building (Prospectus ID#4; representing 7.4% of the pool), is secured by an office building with ground floor retail in Arlington, Virginia. The loan was added to the servicer’s watchlist in January 2021 for declining occupancy and DSCR since the departure of the former second-largest tenant, Bean Kinney & Korman P.C. Occupancy has further declined since with the September 2022 occupancy rate reported at 55.8%, compared with YE2021 at 63.3% and YE2020 at 74.0%. The servicer noted that the borrower is in discussion with three potential tenants to back-fill approximately 47,000 sf but no leases have been executed to date. According to the T9 September 30, 2022, financials, the loan reported an annualized NCF of $2.7 million (DSCR of 0.70x), down from $3.5 million (DSCR of 0.92x) at YE2021. For this review, DBRS Morningstar analyzed the loan with an elevated probability of default given the low performance, resulting in an expected loss that was about 60.0% above the weighted-average pool expected loss.

At issuance, Penn Square Mall (Prospectus ID#1, 11.5% of the pool) was shadow-rated investment grade. With this review, DBRS Morningstar confirmed that the performance of this loan remains consistent with investment-grade loan characteristics.

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 (May 17, 2022).

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.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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.

DBRS Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model v 1.1.0.0 (https://www.dbrsmorningstar.com/research/410913)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022; https://www.dbrsmorningstar.com/research/402153)

Legal Criteria for U.S. Structured Finance (December 7, 2022;
https://www.dbrsmorningstar.com/research/407008)