Fitch Ratings has downgraded two classes and affirmed 12 classes of Citigroup Commercial Mortgage Trust CGCMT 2016-P3 commercial mortgage pass-through certificates.
RATING ACTIONS
Entity / Debt
Rating
Prior
CGCMT 2016-P3
A-2 29429CAB1
LT
AAAsf
Affirmed
AAAsf
A-3 29429CAC9
LT
AAAsf
Affirmed
AAAsf
A-4 29429CAD7
LT
AAAsf
Affirmed
AAAsf
A-AB 29429CAE5
LT
AAAsf
Affirmed
AAAsf
A-S 29429CAF2
LT
AAAsf
Affirmed
AAAsf
B 29429CAG0
LT
AA-sf
Affirmed
AA-sf
C 29429CAH8
LT
A-sf
Affirmed
A-sf
D 29429CAM7
LT
BB-sf
Affirmed
BB-sf
E 29429CAP0
LT
CCCsf
Downgrade
Bsf
Page
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VIEW ADDITIONAL RATING DETAILS
KEY RATING DRIVERS
Increased Loss Expectations: The downgrades reflect increased modeled losses since Fitch's last rating action primarily driven by the Empire Mall (9.2%) and The Round (3.2%) loans. Four loans within the top 15 (27.8%) were flagged as Fitch Loans of Concern (FLOCs) due to declining occupancy following the loss of large tenants or as a result of the pandemic. Fitch's current ratings reflect a base case loss of 8.9%.
The largest contributor to expected losses and largest loan in the pool is the Empire Mall (9.3%). The loan is secured by a 1,124,178-sf superregional mall located in Sioux Falls, SD. The largest tenants include JCPenney (12% of NRA, lease expires in April 2026), Macy's (ground leased; 9%, March 2024), Hy-Vee Food Stores (7.7%, December 2026), Dick's Sporting Goods (4.5%, January 2024), and The District (restaurant; 3.6%, January 2024). Collateral occupancy for the mall has rebounded to 76% as of YE 2021 from 68% at YE 2020 but remains below occupancy prior to the pandemic and from issuance. As of YE 2021, NOI debt service coverage ratio (DSCR) declined to 1.42x from 1.59x at YE 2020 and is well below the DSCR of 2.46x at YE 2018.
In-line sales as of YE 2021 have improved to $441 psf, a rebound from trough sales of $327 psf in 2020 and higher than historical levels and from issuance. Sales for the anchors are mixed, with JCPenney reporting declining sales of $77 psf at YE 2021 compared to $123 psf at YE 2020 and $134 psf prior to the pandemic at YE 2019. Macy's sales have recovered to $122 psf as of YE 2021 from $90 psf at YE 2020 but remains below sales of $143 psf prior to the pandemic. Dick's sales have improved to $169 psf as of YE 2021, well above sales of $96 psf at YE 2020 and higher than sales of $130 psf at YE 2019. TTM 2022 tenant sales were requested, but were not provided.
Fitch's base case loss of approximately 43% reflects a 20% cap rate and 5% stress on the YE 2021 NOI. Fitch's high loss expectations reflect refinance concerns related to the tertiary location, low sales, low coverage (DSCR reported to be 1.42x as of YE 2021) and the large outstanding total debt of $177 million, of which $60 million was contributed to this transaction.
The second largest contributor to expected losses, The Round (3.2% of pool), is secured by 146,027 sf mixed use property (92% office/8% retail by sf) located in Beaverton, OR. The largest tenants are Workday (16%: 11% and 5% expire in November 2028 and February 2023, respectively), Exterro (14% NRA and 18% base rent; expires Feb. 28, 2023) and RGN-Beaverton III LLC (7.8%; expires November 2026). Performance has been slow to rebound following large tenants vacating in 2020 prior to their original lease expirations: 24 Hour Fitness (25% NRA and 34% rent; 2023 original lease exp) and Pioneer Pacific College (11% NRA; 2025 original lease exp). Occupancy declined to 64% at YE 2020 from 96% at YE 2019. It has since increased to 72% as of September 2022, however, rents declined during the same period. Additionally, 18.4% NRA and 24% base rent expires in 2023 including a portion of the largest tenant and the second largest tenant. Details regarding leasing and rent abatements were requested but not provided. Fitch's base case loss of approximately 53% reflects a 10% cap rate and 5% stress on the YE 2021 NOI.
The third largest contributor to expected losses, Marriott Midwest Portfolio (8.4% of pool), is secured by a portfolio of 10 hotels (1,103 rooms) located across the midwestern U.S., including three properties in Michigan (36% loan balance, 338 rooms), six properties in Minnesota (54%, 653 rooms) and one property in Wisconsin (10%, 112 rooms). Three of the hotels operate as SpringHill Suites and seven operate as TownePlace Suites. Each of the hotels is in a 15-year franchise agreement with Marriott that expires February 2031, nearly 10 years past the loan's maturity.
The loan was transferred to special servicing in June 2020 due to coronavirus-related hardships. It was returned to master May 2022 after loan modification, which extended the maturity from March 2021 to November 2024 and brought the loan current. Fitch's base case loss of approximately 9% reflects a value per key of approximately $60,778.
Increased Credit Enhancement/Defeasance: As of the January 2023 distribution date, the pool's aggregate principal balance has been reduced by 15.4% to $652.2 million from $771.0 million at issuance. Five loans (9.8%) are fully defeased, of which the 28th largest loan in the pool (0.7%) was defeased since Fitch's last rating action. Ten loans (42%) are full-term IO and 13 loans (46.4) have a partial-term, IO component of which all have begun to amortize. The remaining 11 loans (11.7%) are amortizing balloon loans.
Investment-Grade Credit Opinion Loan: One loan, 225 Liberty Street (6.2% of the pool), received an investment-grade credit opinion of 'BBBsf' on a stand-alone basis at issuance.
Maturity Concentration: One loan (8.4%) matures in 2024; five loans (18.6%) in 2025 and 28 loans (73%) in 2026.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Downgrades to classes A-2, A-3, A-4, A-AB, A-S and X-A are not likely due to their position in the capital structure and the high credit enhancement (CE); however, downgrades to these classes may occur should interest shortfalls occur. Downgrades to class B, X-B, C and EC would occur if loss expectations increase significantly and/or should CE be eroded. Downgrades to the classes D, X-D, E and F would occur if the performance of the FLOCs continues to decline and/or fail to stabilize or loans transfer to special servicing.
Fitch has identified both a baseline and a worse-than-expected, adverse stagflation scenario based on fallout from the Russia-Ukraine war whereby growth is sharply lower amid higher inflation and interest rates; even if the adverse scenario should play out, Fitch expects virtually no impact on ratings performance, indicating very few rating or Outlook changes. However, for some transactions with concentrations in underperforming retail exposure, the ratings impact may be mild to modest, indicating some changes on sub-investment-grade notes.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Upgrades of classes B, X-B, C and EC would occur with continued improvement in CE and/or defeasance and continued stable to improving performance of the overall pool. Upgrades of classes D, X-D, E and F may occur with significant improvement in CE and/or defeasance, but would be limited based on sensitivity to concentrations or the potential for future concentration. Classes would not be upgraded above 'Asf' if there is a likelihood for interest shortfalls.
Best/Worst Case Rating Scenario
International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
Additional information is available on www.fitchratings.com
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