DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2016-C3 issued by Citigroup Commercial Mortgage Trust 2016-C3, as follows.
Class A-3 at AAA (sf)
Class A-4 at AAA (sf)
Class A-AB 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 (sf)
Class X-D at BBB (sf)
Class D at BBB (low) (sf)
Class X-E at BB (high) (sf)
Class E at BB (sf)
Class X-F at BB (low) (sf)
Class F at B (high) (sf)
All trends are Stable.
The rating confirmations reflect the overall healthy financial performance of the pool, as exhibited by the weighted-average (WA) debt service coverage ratio (DSCR), which, for loans that reported YE2022 financials, was reported at 2.32 times (x). In addition, the transaction has seen an increase in defeasance and principal paydown since DBRS Morningstar's last review, with over 14.0% of the pool defeased and a principal reduction of over 16.8% since issuance.
The pool is concentrated by property type with loans backed by office and retail properties representing 28.8% and 25.9% of the current pool balance, respectively. One of those loans, Briarwood Mall (Prospectus ID#1, 10.3% of the pool), which is secured by a regional mall in Ann Arbor, Michigan, has seen deteriorations in operating performance as evidenced by the sustained decline in net cash flow (NCF) and occupancy since issuance, the details of which are further discussed below. In addition, the office sector continues to face challenges given low investor appetite for the property type and high vacancy rates in many submarkets, as a result of the shift in workplace dynamics. Although the office sector has seen significant challenges in the current economic environment, the majority of office properties secured in this transaction continue to perform as expected, with a WA DSCR above 2.50x, based on the most recent financial reporting. Where applicable, DBRS Morningstar increased the probability of default (POD) and, in certain cases, applied stressed loan-to-value ratios (LTVs) for loans that are secured by office properties and/or loans that are showing increased risk from issuance.
As of the August 2023 remittance, 39 of the original 44 loans remain in the pool with a trust balance of $629.4 million, reflecting a collateral reduction of 16.8% since issuance. Ten loans, representing 14.2% of the pool, are fully defeased. There are no specially serviced loans; however, 10 loans, representing 34.3% of the pool, are on the servicer's watchlist. These loans are mainly being monitored for occupancy declines, low cash flow, and cash management initiations.
The largest loan on the servicer's watchlist, Briarwood Mall, is secured by a 370,000-square-foot (sf) portion of a super-regional mall in Ann Arbor, Michigan. The subject is anchored by noncollateral tenants Macy's, JCPenney, and Von Maur, with a vacant box formerly occupied by Sears. The loan is sponsored by a joint venture between Simon Property Group (Simon) (50.0% beneficial interest) and General Motors Pension Trust (50.0% beneficial interest). Based on Simon's Q2 2023 Supplementary Report, the property remains classified as one of Simon's core assets. The loan has been monitored on the servicer's watchlist since September 2021 for occupancy-related concerns stemming from several tenant departures, including H&M (3.6% of net rentable area (NRA), Gap (3.6% of NRA), Banana Republic (1.9% of NRA), and MC Sports (6.1% of NRA). Both occupancy and DSCR have declined every year since issuance, most recently being reported at 66.0% and 1.87x, respectively, as of YE2022; however, according to servicer watchlist commentary, occupancy has declined to 45.0%. Through Q1 2023, the loan reported an annualized NCF of $8.3 million, resulting in a DSCR of 1.53x, well-below the DBRS Morningstar DSCR derived at issuance of 2.82x.
Although the loan is still hovering above 1.50x, concerns remain, given the uptick in vacancy, lack of leasing activity, and dark anchor box. Additionally, both JCPenney and Von Maur have lease expirations in October 2023 and tenants representing 28.4% of NRA have leases that are scheduled to expire in the next 12 months. The borrower is reportedly working on a redevelopment plan for the vacant Sears space. Local news articles report that a mixed-use development could replace the old Sears box and would include a new grocery store, additional retail space, and multifamily units. DBRS Morningstar has inquired about the status of the development and a response is outstanding as of the date of this press release. Despite the potential benefits that could be realized should the development be approved, DBRS Morningstar believes the current value of the property is materially lower than the issuance value of $336.0 million given the previously mentioned challenges. To recognize the increased credit risk for this loan, DBRS Morningstar applied an elevated POD adjustment in its analysis, resulting in an expected loss that was more than double pools overall expected loss.
The second-largest loan on the watchlist is 101 Hudson (Prospectus ID#3, 8.9% of the pool), secured by a 1.3 million-sf, Class A office property on the waterfront in Jersey City, New Jersey. The loan has been monitored on the servicer's watchlist because of declines in occupancy following the departure of the property's former second-largest tenant, National Union Fire Insurance (formerly 20.2% of NRA), which vacated in 2018. Occupancy has remained steady since then, with the property maintaining an occupancy rate in the mid-70.0% range. As of March 2023, the property reported an occupancy rate of 73.0%. Despite the sustained low occupancy, the loan's DSCR was reported at 2.35x as of YE2022 but remains below the DBRS Morningstar DSCR of 2.88x. Although DBRS Morningstar remains concerned about the broader office market and declines in occupancy, the collateral's value is in excess of the current loan amount, as evidenced by The Birch Group's acquisition of the collateral in October 2022 at a value of $346.0 million, implying a current LTV of 72.3%.
At issuance, DBRS Morningstar assigned an investment-grade shadow rating to Potomac Mills (Prospectus ID#6, 5.6% of the pool). DBRS Morningstar has confirmed that the performance of this loan remains consistent with the investment-grade loan characteristics.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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/416784 (July 4, 2023).
Classes X-A, X-B, X-D, X-E, and X-F 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 credit ratings are subject to surveillance, which could result in credit 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 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 credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit 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 credit rating action.
This is a solicited credit rating.
Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.
DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577
The credit 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 (August 23, 2023; https://www.dbrsmorningstar.com/research/419592)
Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)
Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)
A description of how DBRS Morningstar analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.
MACY'S, INC. 
