DBRS Confirms Ratings on Wells Fargo Commercial Mortgage Trust 2015-C28

DBRS Limited (DBRS) has today confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2015-C28 issued by Wells Fargo Commercial Mortgage Trust 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-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A 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. DBRS does not rate the first loss piece, Class G.

The rating confirmations reflect the stable performance of the transaction since closing. At issuance, the collateral consisted of 99 fixed-rate loans secured by 134 commercial properties. As of the April 2016 remittance, the pool has experienced a collateral reduction of 0.5% as a result of scheduled loan amortization. Loans representing 62.8% of the pool are reporting YE2015 financials, and loans representing 29.9% of the pool are reporting 2015 partial-year financials. Eleven loans in the Top 15 (representing 44.3% of the current pool balance) reporting YE2015 figures exhibit a weighted-average (WA) amortizing debt service coverage ratio (DSCR) of 1.67 times (x) with WA net cash flow growth over the respective DBRS underwritten figures of 4.2%. As of the April 2016 remittance, four loans, representing 3.1% of the current pool balance, are on the servicer’s watchlist. Two of the loans on the watchlist were flagged for deferred maintenance issues or upcoming tenant rollover; however, the loan flagged for tenant rollover has leasing traction at the property as advised by the servicer. One loan in the Top 15 and the largest loan on the watchlist are discussed below.

The Eastgate One Phases I-VII & XII loan (Prospectus ID#3, 6.5% of the current pool balance) is secured by the borrower’s fee interests in an 860,000 sf office complex in San Diego, California. The subject consists of 16 two-story Class B buildings and, together with Prospectus ID#5 – Eastgate Two Phases VIII-X, forms the 24-building, 1.4 million square feet (sf) Eastgate Campus. The campus is located approximately 15 miles north of downtown San Diego. As of the September 2015 rent roll, the property was 75.9% occupied, which is a decrease from the issuance occupancy rate of 85.3%. In addition, the former second-largest tenant, Qualcomm Inc. (Qualcomm), which occupied 8.8% of the net rentable area (NRA), vacated the property at its lease expiration in March 2016. Qualcomm’s departure from the subject was expected at lease expiry following its announcement in October 2015 to terminate approximately 1,300 workers as early as November 2015. Jones Lang LaSalle predicts approximately 300,000 sf of office space leased to Qualcomm located in the UTC/Eastgate (the subject’s submarket), Sorrento Mesa and Del Mar Heights submarkets will not be renewed by Qualcomm. It was known at issuance that Agena Bioscience Inc. (7.4% of NRA) executed a lease commencing in January 2016, which was reflected in the September 2015 rent roll. When considering Qualcom’s departure and the entry of Agena Bioscience Inc., occupancy would be approximately 75.0%. As of September 2015, the entire Eastgate Campus was 83.4% occupied. According to the borrower’s website, approximately 292,000 sf of space (21.0% of NRA of the Eastgate Campus) was listed as available, including Qualcomm’s former space. In comparison to the UTC Class B office submarket, as of May 2016, CoStar reported a vacancy rate of 12.0% and an availability rate of 14.2%. The September 2015 OSAR reported an annualized DSCR of 1.31x, which is in line with the DBRS underwritten DSCR of 1.33x; however, it only reported the previous three months’ financials. Given the recent decline in occupancy from issuance levels, the YE2015 net cash flow figure may fall below DBRS underwritten levels. As such, this loan was modeled with a stressed cash flow.

The Flatiron Hotel loan (Prospectus ID#12, 1.9% of the current pool balance) is secured by the borrower’s fee interest in a 64-key full-service boutique hotel in New York. It was built in 1927 and is considered a New York City landmark building located in the Madison Square District. The loan was placed on the watchlist because of the low DSCR of 0.23x at YE2015 with an occupancy rate of 66.7%. These figures represent declines from the DBRS underwritten DSCR of 1.28x and the T-12 March 2015 occupancy rate of 87.4%. The decline in occupancy and performance was a direct result from renovations and a flood that occurred at the property in April 2015 from a burst pipe, as well as the repairs following the damage. The borrower was renovating several floors at the property, as well as the ground floor lobby and restaurant at issuance, and has advised the servicer that physical renovations were completed in October 2015. In terms of the water damage from the burst pipe, the borrower received $1.1 million in insurance proceeds and has advised that recovery of the subject is on track and performance is expected to improve beginning in May 2016. According to the T-12 November 2015 Smith Travel Research report, the subject’s occupancy was 72.6% with an average daily rate (ADR) and revenue per available room (RevPAR) of $226 and $164, respectively. These figures are below the competitive set occupancy rate of 86.3% with ADR and RevPAR at $246 and $212, respectively. At issuance, the subject reported an ADR of $244, which is above the subject’s current ADR of $226. While it appears property performance will improve in the near term, given the uncertainty surrounding the loan’s current performance after the completion of repairs and renovations, this loan was modeled with a stressed cash flow.

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.