DBRS Assigns Provisional Ratings to Wells Fargo Commercial Mortgage Trust 2016-C37

DBRS, Inc. (DBRS) has today assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C37 (the Certificates) to be issued by Wells Fargo Commercial Mortgage Trust 2016-C37:

-- 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-D at AAA (sf)
-- Class X-EF at AAA (sf)
-- Class X-G at AAA (sf)
-- Class X-H at AAA (sf)
-- Class X-J at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (sf)
-- Class F at BBB (low) (sf)
-- Class G at BB (high) (sf)
-- Class H at B (high) (sf)

All trends are Stable.

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

The Class X-A, X-B, X-D, X-EF, X-G, X-H and X-J 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’ positions within the transaction payment waterfall when determining the appropriate ratings.

The collateral consists of 63 fixed-rate loans secured by 141 commercial and multifamily properties. Two of the loans are cross-collateralized and cross-defaulted into one crossed group. The DBRS analysis of this transaction incorporates this crossed group, resulting in a modified loan count of 62, and the loan number references within this report reflect this total. 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, no loans 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 15 loans, representing 41.6% of the pool, having Refinance (Refi) DSCRs below 1.00x. These credit metrics are based on whole-loan balances. Two of the pool’s loans with DBRS Refi DSCRs below 0.90x, Hilton Hawaiian Village and Potomac Mills which total 11.9% of the transaction balance, are shadow-rated and have large pieces of subordinate mortgage debt outside the trust. Based on A-note balances only, the deal’s weighted-average DBRS Refi DSCR improves to 1.22x and the concentration of loans with DBRS Refi DSCRs below 1.00x and 0.90x reduces to 31.3% and 6.7%, respectively.

Three of the largest four loans, Hilton Hawaiian Village, Quantum Park and Potomac Mills, have trust participations that exhibit credit characteristics consistent with investment-grade shadow ratings. Combined, these loans represent 18.8% of the pool. Hilton Hawaiian Village and Quantum Park have credit characteristics consistent with a BBB (high) shadow rating while Potomac Mills exhibits credit characteristics consistent with an A (low) shadow rating. In addition, 30 loans, representing 54.4% of the pool, have a DBRS Term DSCR in excess of 1.50x. This includes eight of the largest 15 loans. Even when excluding the three shadow-rated loans, each of which has large pieces of subordinate mortgage debt held outside the trust, the deal continues to exhibit a favorable DBRS Term DSCR of 1.50x. DBRS sampled 29 of the 62 loans in the pool, which represents a considerable 73.4% of the transaction balance. The loan sellers appear to have exercised relatively prudent underwriting standards with the DBRS average NCF haircut of -6.2% for sampled loans. This compares favorably with more recent transactions by DBRS, where the average sampled haircut is typically in excess of -7.5% and commonly around -10.0%.

The transaction has a moderate concentration of loans that is secured by assets either fully or primarily used as retail at 29.3%. The retail sector has generally underperformed since the Great Recession because of a general decline in consumer spending power, store closures, chain bankruptcies and the rapidly growing popularity of ecommerce. According to the U.S. Census Bureau, ecommerce sales represented 7.0% of total retail sales in 2015 compared with 3.9% in 2009. As the ecommerce share of sales is expected to continue to grow significantly in the coming years, the retail real estate sector may continue to be relatively weak. DBRS considers 60.2% of this concentration to be secured by either anchored or regional mall properties, which are more desirable and have shown lower rates of default historically. Just over 16% of this retail concentration consists of Potomac Mills, which is a dominant regional mall in an established suburban market. The property is owned and operated by Simon Property Group, which DBRS considers to be one of the strongest in its industry. Additionally, Potomac Mills is shadow-rated A (low) by DBRS. DBRS identified 12 loans, representing 16.3% of the pool, which have sponsorship and/or loan collateral associated with a voluntary bankruptcy filing, a prior DPO, loan default, limited net worth and/or liquidity, a historical negative credit event and/or inadequate commercial real estate experience. This concentration includes three of the top 11 loans, and eight loans, representing 8.3% of the pool, made to the same sponsor. DBRS increased the POD for loans with identified sponsorship concerns. Furthermore, twenty-three loans, representing 26.3% of the pool, are secured by properties located in tertiary or rural markets, including three of the top 15 loans. Properties located in tertiary and rural markets are modeled with significantly higher loss severities than those located in urban and suburban markets.

The ratings assigned to Classes B, C and H differ from the higher rating implied by the quantitative model. DBRS considers this difference to be a material deviation and, in this case, the ratings reflect the dispersion of loan-level cash flows expected to occur post-issuance.

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.

For more information on this transaction and supporting data, please log into www.ireports.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS CMBS IReports platform.
Notes:
All figures are in U.S. dollars unless otherwise noted.

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

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

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form 15-E), which contains a 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.

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