DBRS Confirms Ratings of Wells Fargo Commercial Mortgage Trust 2015-NXS2

DBRS Limited (DBRS) has today confirmed all classes of Commercial Mortgage Pass-Through Certificates, Series 2015-NXS2 (the Certificates) issued by Wells Fargo Commercial Mortgage Trust 2015-NXS2 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-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. The Class A-S, Class B and Class C Certificates may be exchanged for the Class PEX Certificates (and vice versa).

The rating confirmations reflect the overall stable performance of the transaction, which has experienced a collateral reduction of 0.5% since closing as the result of scheduled loan amortization. At issuance, the pool consisted of 63 fixed-rate loans secured by 77 commercial and multifamily properties. As of the June 2016 remittance, all of the original 63 loans remain in the pool with an aggregate outstanding principal balance of $910.1 million. There are 58 loans, representing 90.4% of the current pool balance, that are reporting YE2015 financials. These loans report a weighted-average (WA) debt service coverage ratio (DSCR) of 1.71 times (x) and a WA debt yield of 9.1%. At issuance, the DBRS WA DSCR and debt yield for the pool was 1.68x and 8.5%, respectively. DBRS believes reported cash flows are likely artificially depressed for some of the loans showing YE2015 metrics, as first-year reporting is often skewed compared with underwritten or historical figures, particularly when it comes to expenses. As such, DBRS expects the WA DSCR for the pool could improve with the 2016 reporting. DBRS maintains an investment-grade shadow rating on one loan in the pool, Patriots Park (Prospectus ID#1, 9.9% of the current pool balance). DBRS has today confirmed that the performance of this loan remains consistent with investment-grade loan characteristics.

As of the June 2016 remittance, there is one loan in special servicing, representing 2.5% of the current pool balance and one loan on the servicer’s watchlist, representing 1.7% of the current pool balance. These two loans and another loan in the top 15 are detailed below.

The 88 Hamilton Avenue loan (Prospectus ID#8, 2.53% of the current pool balance) is secured by a 154,533 square foot (sf) Class B industrial office and warehouse property in Stanford, Connecticut. The loan transferred to special servicing in January 2016 due to imminent monetary default as the servicer received notice that the borrower’s sole member and manager both filed for Chapter 11 bankruptcy protection. The servicer has noted that counsel has been engaged and efforts to protect the trust collateral through the bankruptcy are ongoing, with a court-ordered auction on June 20, 2016. The servicer advises that the trust submitted a credit bid to protect its interests and the loan will either be assumed with a full cure, paid off or the trust will retain the property through its credit bid.

According to the March 2016 rent roll, the property was 100% occupied with an average rental rate of $14.95 per square foot (psf) as compared with the issuance occupancy rate of 92.4% and average rental rate of $14.77 psf. There is no tenant rollover risk within the next 12 months with the largest three tenants collectively representing 96.9% of the net rentable area (NRA), on leases scheduled to expire between May 2018 and October 2023. The loan reported a YE2015 DSCR of 1.52x, reflective of a net cash flow (NCF) growth of 20.3% when compared to the DBRS UW DSCR of 1.26x. According to the March 2016 appraisal value of $27.5 million (resulting loan-to-value ratio of 83.6%), the value has declined by $5.0 million from the issuance value of $32.5 million, as a result of a slightly higher cap rate assumed in the latest appraisal as compared to the issuance valuation. Market fundamentals appear to remain in line with characteristics in place at issuance and, as such, DBRS believes the increased cap rate is conservative. The loan was modelled with an increased probability of default to account for the elevated risk associated with the monetary default and borrower bankruptcy.

The 100 West 57th Street loan (Prospectus ID#4, 4.9% of the current pool balance) is part of a $180 million whole loan evidenced by four pari passu notes secured by the leased fee interest in the 25,125 sf land parcel beneath the Carnegie House, a 21-storey mixed-use residential and retail cooperative building located in Midtown Manhattan, New York. The loan financed the sponsor’s acquisition of the collateral for $286.0 million, with approximately $124.1 million in equity contributed to close. At closing, a $605,510 holdback reserve was established to cover the cumulative difference between the ground rent and the debt service during the anticipated repayment date period, which has a five-year term ending in 2019. The servicer is reporting a YE2015 DSCR for the loan of 0.94x, but that coverage does not give credit to the reserve. The DBRS UW NCF figure implies coverage of 3.57x and is based on a look-through analysis of the building’s cash flow assuming no ground lease (for additional information, please see the DBRS rating report dated July 16, 2015). As the DBRS viewpoint remains unchanged since issuance, the DBRS UW NCF figure was modelled for this review.

The 655 K Street loan (Prospectus ID#15, 1.7% of the current pool balance) is secured by a 13,396 sf retail property in Washington, D.C. The loan was added to the watchlist due to a low YE2015 DSCR of 1.01x, which has declined when compared with the DBRS UW DSCR of 1.17x. The low YE2015 DSCR is attributable to delayed delivery for two spaces under construction at issuance from late summer 2015 to early Q2 2016. As of December 2015, the physical occupancy rate of the property was 78.3%, compared with the leased rate of 100%. The property is leased to three tenants: CVS (78.3% of the NRA), Pie 360 (10.8% of the NRA) and Shouk (10.9% of the NRA). All three leases extend beyond the loan term, expiring between 2025 and 2030. The DBRS UW NCF figure gives credit to the signed leases for tenants not yet in occupancy, with an above-market vacancy factor of 10.0% applied. Market characteristics remain similar to those at issuance, as according to CoStar, comparable retail properties within a 0.5-mile radius of the property were averaging a vacancy rate of 6.4% and a triple net rental psf of $37.85 psf, as of July 2016. The servicer reports that, as of May 2016, Shouk has taken occupancy of its space and is open for business, with delivery of the Pie 360 space expected to take place in the near term. DBRS expects cash flows to stabilize over the next 12 months and will continue to monitor for developments.

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 ww.dbrs.com or contact us at info@dbrs.com.