DBRS Assigns Provisional Ratings to Wells Fargo Commercial Mortgage Trust 2016-C34

DBRS, Inc. (DBRS) has today assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C34 (the Certificates) to be issued by Wells Fargo Commercial Mortgage Trust (WFCM) 2016-C34. 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-SB at AAA (sf)
-- Class A-3FL at AAA (sf)
-- Class A-3FX 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-FG at AAA (sf)
-- Class X-H at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (high) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

Classes X-E, X-FG, X-H, A-3FL, A-3FX, D, E, F and G will be privately placed.

The Class X-A, X-B, X-E, X-FG and X-H 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.

The collateral consists of 68 fixed-rate loans secured by 92 commercial and multifamily properties. The transaction is a sequential-pay pass-through structure. The conduit pool was analyzed to determine the provisional ratings, reflecting the long-term probability of loan default within the term and its liquidity at maturity. When the cut-off loan balances were measured against the DBRS Stabilized net cash flow (NCF) and their respective actual constants, 11 loans, representing 14.3% of the total 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. This resulted in 36 loans, representing 65.1% of the pool, having Refinance (Refi) DSCRs below 1.00x. The loans’ probability of default (POD) is based on the more constraining of the DBRS Term or Refi DSCR.

Only six loans, representing 6.6% of the pool, are secured by properties that are either fully or primarily leased to a single tenant. This is lower than some recent conduit transactions that have shown single-tenant concentrations in excess of 15.0% of the pool. Loans secured by properties occupied by single tenants have been found to suffer from higher loss severities in the event of default. As such, DBRS modeled single-tenant properties with a higher POD and cash flow volatility compared with multi-tenant properties. None of the loans in the pool are secured by student or military housing properties, which often exhibit higher cash flow volatility than traditional multifamily properties. While no loans in the pool are secured by properties exhibiting Above Average or Excellent quality, only two loans, representing 1.6% of the pool, were deemed to be Below Average property quality. The remaining loans were considered Average property quality.

The pool is relatively more concentrated than recent WFCM transactions, with the top ten loans accounting for 50.2% of the pool. The deal’s concentration profile is equivalent to that of a pool of 27 equal-sized loans, which is less than favorable. The transaction has a high concentration of loans suffering from elevated refinance risk. Thirty-six loans, accounting for 65.1% of the pool, have DBRS Refi DSCRs less than 1.00x. Nine of these loans, representing 21.0% of the pool, have DBRS Refi DSCRs less than 0.90x. Twenty-two loans, representing 20.2% of the pool, are secured by properties located in tertiary or rural markets, including two of the top ten loans. The deal appears concentrated by property type, with 33 loans (nine of the top 15 loans), representing 46.2% of the pool, secured by retail properties. None of the retail properties are outlet or regional malls.

The DBRS sample included 35 loans of the 68 loans in the pool. Site inspections were performed on 40 of the 92 properties in the portfolio (66.1% of the pool by allocated loan balance). DBRS conducted meetings with the on-site property manager, leasing agent or a representative of the borrowing entity for 52.6% of the pool. The DBRS sample had an average NCF variance of -7.8%, ranging from -2.6% to 1.7%. Ten loans, representing 30.4% of the pool, have sponsorship and/or loan collateral associated with a voluntary bankruptcy filing, a prior discounted payoff, loan default, limited net worth and/or liquidity, a historical negative credit event and/or inadequate commercial real estate experience. DBRS increased the POD for the loans with identified sponsorship concerns.

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 North American CMBS Rating Methodology, which can be found on our website under Methodologies.

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form 15-E) which contains the description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not rely on the due diligence services outlined in Form 15-E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.