DBRS Finalizes the Provisional Ratings on Wells Fargo Commercial Mortgage Trust 2015-LC20

DBRS, Inc. (DBRS) has today finalized the provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2015-LC20 (the Certificates) to be issued by Wells Fargo Commercial Mortgage Trust 2015-LC20. The trends are Stable.

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class X-E at AAA (sf)
-- Class X-F at AAA (sf)
-- Class X-G at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class PEX at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

Classes D, E, F, G, X-E, X-F and X-G will be privately placed.

The X-A, X-B, X-E, X-F and X-G balances are notional. DBRS ratings on interest-only (IO) certificates address the likelihood of receiving interest based on the notional amount outstanding. DBRS considers the IO certificates’ position within the transaction payment waterfall when determining the appropriate rating.

Up to the full certificate balance of the Class A-S, Class B and Class C certificates may be exchanged for the Class PEX certificates. Class PEX certificates may be exchanged for the full certificate balance of the Class A-S, Class B and Class C certificates.

The collateral consists of 68 fixed-rate loans secured by 122 commercial and multifamily properties, comprising a total transaction balance of $829,624,317. The conduit pool was analyzed to determine the provisional ratings, reflecting the long-term probability of loan default within the loan term and its liquidity at maturity. When the cut-off loan balances were measured against the DBRS Stabilized Net Cash Flow and their respective actual constants, nine loans, representing 21.8% of the pool, had a DBRS Term Debt Service Coverage Ratio (DSCR) below 1.15 times (x), a threshold indicative of a higher likelihood of mid-term default. Additionally, to assess refinance risk given the current low interest rate environment, DBRS applied its refinance constants to the balloon amounts, resulting in 66.6% of the pool having DBRS refinance DSCRs below 1.00x. However, the DBRS Refi DSCR for the loans are based on a weighted-average (WA) stressed refinance constant of 9.8%, which implies an interest rate of 9.4%, amortizing on a 30-year schedule. This represents a significant stress of 5.0% over the WA interest rate of the loans in the pool.

Thirteen loans, representing 19.3% of the pool, are secured by hotels, which have the highest cash flow volatility of all major property types, as their income is derived from daily contracts rather than multi-year leases, and their expenses, which are often mostly fixed, are quite high as a percent of revenue. These two factors cause revenue to fall swiftly during a downturn and cash flow to fall even faster due to the high operating leverage. In addition, the pool has a high concentration of single-tenant assets, as 18 loans, representing 21.0% of the pool, are leased to single tenants. The largest loan in the pool secured by a single-tenant property represents a 29-property portfolio leased to Walgreen Co., which is rated investment grade, on long-term leases that extend more than four years past loan maturity. The pool has six loans, representing 19.2% of the pool, being located in urban markets, which benefits from consistent demand even in times of stress.

The DBRS sample included 26 of the 68 loans in the pool, representing 66.7% of the pool by loan balance. The DBRS average sample NCF adjustment for the pool was -11.5%. Of the sample loans, two loans, representing 12.6% of the pool, were modeled with Above Average property quality; two loans, representing 2.7% of the pool, were modeled with Below Average property quality; and one loan, representing 1.9% of the pool, was modeled with Poor property quality. Overall, the pool is diverse based on loan size, with a concentration profile equivalent to that of a pool of 31 equal-sized loans. Furthermore, nine loans, representing 20.9% of the pool, are secured by multiple properties (60 properties in total).

The ratings assigned to the Certificates by DBRS are based exclusively on the credit provided by the transaction structure and underlying trust assets. All classes will be subject to ongoing surveillance, which could result in upgrades or downgrades by DBRS after the date of issuance.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is CMBS Rating Methodology, which can be found on our website under Methodologies.

The Rule 17g-7 Report of Representations and Warranties is hereby incorporated by reference and can be found by clicking on the link to the right under Other Research or by contacting us at info@dbrs.com.