DBRS Confirms Ratings on Wells Fargo Commercial Mortgage Trust 2015-LC20

DBRS Limited (DBRS) has today confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2015-LC20 issued by Wells Fargo Commercial Mortgage Trust, Series 2015-LC20 as follows:

-- 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-S at AAA (sf)
-- Class A-SB 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)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction since closing. At issuance, the collateral consisted of 68 fixed-rate loans secured by 122 commercial properties. The transaction had a DBRS weighted-average (WA) debt service coverage ratio (DSCR) and a DBRS WA debt yield of 1.46 times (x) and 8.2%, respectively. As of the March 2016 remittance, loans representing 52.8% of the current pool balance are reporting YE2015 financials, and loans representing 42.6% of the current pool balance are reporting 2015 partial-year financials. The eight loans in the Top 15 loans (representing 32.6% of the current pool balance) reporting YE2015 figures showed a WA amortizing DSCR of 1.41x, with a WA net cash flow growth over the respective DBRS underwritten figures of 15.0%. All loans remain in the pool, with collateral reduction of 0.5% since issuance as a result of scheduled loan amortization.

As of the March 2016 remittance, there are no loans in special servicing, and six loans are on the servicer’s watchlist, representing 7.2% of the current pool balance, including one loan in the Top 15. The majority of the watchlisted loans are flagged for non-performance issues relating to deferred maintenance or near-term tenant rollover risk. The loans flagged for upcoming tenant lease expirations have either successfully extended their leases or are in negotiations with the respective tenants, according to the servicer. The largest loan in the pool and one loan on the watchlist are discussed below.

The 3 Columbus Circle loan (Prospectus ID#1, 9.1% of the current pool balance) is secured by the borrower’s fee interest in a 525,000 square foot (sf) office property located just south of the Columbus Circle in Midtown Manhattan, New York. The property was renovated between 2011 and 2013 in order to reposition the tower as a modern Class A property. The building is divided into 21 condominium units, one unit of which totals approximately 214,000 sf across floors three through eight and does not serve as collateral, as it is owner-occupied by Young and Rubicam Inc. (Y&R). The subject property is used as Y&R’s corporate headquarters, and Y&R occupies an additional 159,000 sf of space (29.7% of the net rentable area (NRA)) within the collateral portion of the property as well. According to the September 2015 rent roll, the collateral occupancy was 86.6%, which is above the in-place occupancy of 82.7% at issuance. Y&R is the largest tenant and has a lease expiry in August 2033. The second- and third-largest tenants are Emerge212 (10.7% of NRA) and Gilder, Gagnon, Howe & Co. (6.7% of NRA), with leases expiring in 2028 and 2017, respectively. Based on the leased rates, the average rental rate was $84 psf, up from $81 psf at issuance. Class A office properties in the Columbus Circle Office submarket had an average rental rate of $64 psf, a vacancy rate of 9.7% and an availability rate of 14.2% as reported by CoStar. Although the subject property reported a higher vacancy rate of 13.4%, the subject’s average rental rate of $80 psf is significantly higher than the submarket. According to the property’s website, approximately 16,000 sf of collateral space (3.1% of NRA) was listed as available, with asking prices ranging from $75 psf to $82 psf.

According to the YE2015 financials, the 3 Columbus Circle loan has a DSCR of 1.89x, which is a decrease from the DBRS underwritten DSCR of 2.16x. The decline in net cash flow was primarily driven by a decrease in effective gross income (EGI). The base rental revenue decreased by 5.0% from the DBRS underwritten figure, which can be attributed to the $1.6 million of free rent provided to new tenants. In addition, expense reimbursement was reported at approximately $3.3 million, a 54.3% decrease from the DBRS underwritten level. Historically, the subject property reported expense reimbursements of approximately $7.0 million, which only declined when occupancy was low. DBRS has requested an explanation for the decrease from the servicer and expects the figure may be low because of a reporting error, with cash flows stabilizing at or above the underwritten levels in the near term.

The SCORE Industrial Portfolio loan (Prospectus ID#14, 1.9% of the current pool balance) is secured by seven industrial properties across South Carolina, three of which were acquisitions financed by the subject loan. All of the properties are located in secondary markets and were built between 1965 and 2005. This loan was placed on the servicer’s watchlist because the DSCR was low, reporting at a 1.04x as of YE2015, which is a decrease from the DBRS underwritten DSCR of 1.32x. The decline in net cash flow is driven by a 25.4% increase in tenant improvements and a 14.3% decrease in EGI, specifically the base rental revenue and expense reimbursements, which were down 6.1% and 43.9% from the DBRS underwritten figures, respectively. According to the servicer’s commentary, the 1255 Commerce property was vacant at closing, and a tenant was expected to occupy 100.0% of the property beginning in June 2015; however, the tenant did not occupy the space until October 2015. The servicer also stated that the borrower did not collect the January and February 2015 rent from the newly acquired properties, the Victory Tail and Atlas properties, because of a reported issue in the changing of hands for those properties with the borrower’s acquisition. As these issues are resolved, DBRS expects the portfolio’s performance will improve to the DBRS underwritten levels.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

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

The applicable methodologies are North American CMBS Rating Methodology (March 2016) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.