Morgan Stanley Bank of America Merrill Lynch Trust 2016-C31 Annual Report

Welcome to the annual performance review for the Morgan Stanley Bank of America Merrill Lynch Trust 2016-C31, covering the fiscal year ended December 31, 2023. This report distills the essential financial performance, operational changes, and risk factors investors need to know.

Business Overview: Understanding Your CMBS Investment

The Morgan Stanley Bank of America Merrill Lynch Trust 2016-C31 is a Commercial Mortgage-Backed Security (CMBS) Trust. This means the Trust holds a collection of commercial mortgage loans, or parts of them, all backed by income-generating commercial properties. These loans are often structured so that different investors or trusts own equal-priority shares of a larger mortgage (known as "loan combinations" or "pari passu" loans). The Trust's performance directly depends on whether these property owners can make their mortgage payments.

Here's a snapshot of the Trust's loan portfolio as of December 31, 2023:

• Original Pool Balance: Approximately $1.05 billion
• Current Outstanding Pool Balance: Approximately $820 million (reflecting principal paydowns over time)
• Number of Loans: 45 loans
• Weighted Average Loan-to-Value (LTV): 68.5% (based on original appraisals, with updated valuations for specially serviced loans)
• Weighted Average Debt Service Coverage Ratio (DSCR): 1.65x (indicating healthy cash flow relative to debt payments for performing loans)
• Weighted Average Remaining Term: 5.2 years

The Trust's portfolio includes interests in loans backed by a diverse range of properties, including:

• Huntington Center (Office)
• Vintage Park (Retail)
• TEK Park (Office/Flex)
• The Shops at Crystals (Retail)
• International Square (Office)
• Simon Premium Outlets (Retail)
• One Stamford Forum (Office)
• SSTII Self Storage Portfolio (Self-Storage)
• Harlem USA (Retail)
• Coconut Point (Retail)
• MY Portfolio (Mixed-Use)

Financial Performance Highlights for Fiscal Year 2023

For the fiscal year, the Trust generated approximately $38.5 million in net interest income, leading to total distributions of $32.1 million to certificate holders, which included both interest and scheduled principal payments. The overall principal balance of the Trust's loans decreased by $45 million due to scheduled amortization and prepayments.

Key Performance Indicators:

• Delinquency Rate: The delinquency rate rose to 3.8% (by outstanding balance) from 2.5% in the prior year. This increase primarily stemmed from two office properties experiencing lease rollovers and one retail property facing tenant vacancies.
• Loans in Special Servicing: The Special Servicer currently manages 7 loans, representing 11.2% of the outstanding balance. This marks an increase from 5 loans (7.5%) at the end of 2022. These loans are mainly concentrated in the office and regional mall retail sectors.
• Losses/Resolutions: The Trust recorded $2.3 million in realized losses during the year. These losses primarily resulted from resolving one defaulted retail loan through foreclosure and a subsequent discounted sale. The Trust realized no significant gains from loan resolutions.

Risk Factors

The Trust's performance faces various risks, which became particularly evident in 2023:

• Commercial Real Estate Market Downturn: The office sector continues to face headwinds from remote work trends. This leads to higher vacancy rates and potential valuation declines, impacting loans backed by office properties.
• Interest Rate Fluctuations: Rising interest rates could hinder borrowers' ability to refinance maturing loans, potentially increasing default risk.
• Tenant Concentration Risk: Some properties in the portfolio rely heavily on a single tenant or a few large tenants. This makes them vulnerable if those tenants declare bankruptcy or do not renew their leases.
• Geographic Concentration: Although diversified, certain regions might experience localized economic downturns. These downturns could affect property values and tenant demand.

Management Discussion (MD&A Highlights)

Several entities are responsible for the day-to-day management and oversight of the Trust's loan portfolio:

• Certificate Administrator: Wells Fargo Bank, National Association
• Master Servicer & Primary Servicer: These roles involve collecting payments and managing routine loan administration.
• Special Servicer: Steps in when loans become distressed, aiming to mitigate losses.
• Custodian: Holds all original loan documents.
• Operating Advisor: Provides independent oversight of the servicers' activities.

Significant Servicer Transition:

Effective March 1, 2024, Trimont LLC assumed the roles of Master Servicer and Primary Servicer for a substantial portion of the Trust's loans, taking over from Wells Fargo Bank, National Association. This transition affects approximately 75% of the outstanding loan balance. While such changes can introduce temporary administrative adjustments, the Trust anticipates a seamless transition. Trimont LLC's expertise in commercial real estate loan servicing is expected to maintain efficient operations. Investors should monitor future reports for any impact on servicing efficiency or loan performance metrics following this change.

Other key participants include:

• Rialto Capital Advisors, LLC and Greystone Servicing Company LLC continue to serve as Special Servicers for various loans, actively managing distressed assets.
• Park Bridge Lender Services LLC remains the Operating Advisor, providing independent oversight.
• KeyBank National Association acts as a Primary Servicer for specific loans.
• Wilmington Trust, National Association and Wells Fargo Bank, National Association serve as Trustees.

The rise in delinquency rates and loans entering special servicing, especially within the office and regional mall retail sectors, reflects broader market challenges. The Master and Special Servicers are actively managing these situations. Their strategies include loan modifications, forbearance agreements, or resolution strategies like foreclosure and sale, all aimed at mitigating potential losses to the Trust. The $2.3 million in realized losses during the year highlights the impact of these challenging market conditions on specific assets within the portfolio.

Financial Health (Debt, Cash, Liquidity)

The Trust's primary financial obligation is to its certificate holders, whose investment is represented by the Current Outstanding Pool Balance of approximately $820 million. Cash flow generated from the underlying commercial mortgage loans supports this balance.

For the fiscal year, the Trust generated net interest income of approximately $38.5 million, which, along with principal collections, funded distributions to certificate holders totaling $32.1 million. The Trust operates as a pass-through entity, with cash flow from loan payments generally distributed to certificate holders after covering administrative expenses and any required reserve allocations.

The Weighted Average Debt Service Coverage Ratio (DSCR) of 1.65x for performing loans offers a key insight: it indicates that, on average, the underlying properties' net operating income sufficiently covers their debt service obligations. This ratio measures the health of the collateral's cash flow. The Trust typically holds minimal specific cash balances because it promptly distributes funds. However, the consistent generation of interest income and principal collections, combined with the DSCR, are crucial indicators of the Trust's ongoing ability to meet its obligations and maintain liquidity for distributions. Servicers may hold reserves for specific purposes, such as for defaulted loans or property protection advances.

Future Outlook (Guidance, Strategy)

Looking ahead, the Trust's performance will largely depend on the stability of the broader commercial real estate market, particularly the recovery of the office and retail sectors. The increased rate of loans in special servicing highlights ongoing challenges, and the effectiveness of the Special Servicers in resolving these issues will be critical. The new Master and Primary Servicer, Trimont LLC, will play a key role in managing the performing portfolio and ensuring timely collections. Investors should continue to monitor delinquency rates, special servicing resolutions, and the overall economic environment. The strategy for the Trust remains focused on maximizing recoveries from distressed assets through diligent special servicing and efficient administration of performing loans to ensure timely distributions to certificate holders.

Competitive Position

For a CMBS Trust, "competitive position" means something different than it does for an operating company. The Trust does not compete for market share or customers. Instead, its standing primarily comes from the quality and performance of its underlying collateral pool compared to other CMBS transactions and the broader commercial real estate debt market.

The Trust's portfolio, with a Weighted Average LTV of 68.5% (based on original appraisals) and a Weighted Average DSCR of 1.65x (for performing loans), provides insight into the credit quality of the initial collateral. However, the current economic environment, particularly the challenges in the office and retail sectors, has impacted the performance of certain loans, as evidenced by the increase in delinquencies and special servicing.

The Trust's ability to maintain its standing in the CMBS market depends on successfully resolving its distressed assets and the continued performance of its healthy loans. The expertise of its servicers and the structural protections within the CMBS framework work to manage risks and preserve value for certificate holders, especially when compared to other commercial real estate debt investment opportunities.

In summary, the Trust's performance in 2023 reflects a challenging commercial real estate market, particularly in the office and retail sectors, as evidenced by increased delinquencies and special servicing. However, the underlying portfolio's initial credit quality, active management by servicers, and the structural protections of the CMBS framework aim to mitigate risks. Investors should carefully consider these factors, monitor ongoing market developments, and review future reports to make informed decisions about their investment in the Trust.