DBRS Finalizes Provisional Ratings on Wells Fargo Commercial Mortgage Trust 2016-LC25

DBRS, Inc. (DBRS) has today finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-LC25 (the Certificates) issued by Wells Fargo Commercial Mortgage Trust 2016-LC25:

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

All trends are Stable.

Classes X-D, D, E, F and G have been privately placed.

The X-A, X-B and X-D 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 80 fixed-rate loans secured by 135 commercial properties and multifamily properties, comprising a total transaction balance of $954,965,554. The transaction is a sequential-pay pass-through structure. One loan, representing 5.2% of the pool, is shadow-rated investment grade by DBRS. Proceeds for the shadow-rated loan are floored at its respective rating within the pool. When 5.2% of the pool has no proceeds assigned below the rating floor, the resulting pool subordination is diluted or reduced below that rated floor. 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, four loans, representing 5.8% 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 57.3% of the pool, having a DBRS Refinance (Refi) DSCR below 1.00x; however, the DBRS Refi DSCRs for the loans are based on a weighted-average (WA) stressed refinance constant of 10.23%, which implies an interest rate of 9.66%, amortizing on a 30-year schedule. This represents a significant stress of 4.46% over the WA contractual interest rate of the loans in the pool. The loans’ probability of default (POD) is based on the more constraining of the DBRS Term or Refi DSCR.

One loan exhibits credit characteristics consistent with an investment-grade shadow rating: 9 West 57th Street, the largest loan in the pool, represents 5.2% of the pool and has credit characteristics consistent with a AAA shadow rating. Additionally, 13 loans, representing 6.7% of the pool, are secured by cooperative properties and are very low-leverage, with minimal term and refinance default risk. Overall, the pool exhibits a relatively strong DBRS WA Term DSCR of 1.61x based on the whole loan balance, which indicates moderate term default risk. Even with the exclusion of 9 West 57th Street and the 13 loans secured by cooperative properties, the deal exhibits a favorable DBRS Term DSCR of 1.40x. Furthermore, only 12 loans, representing 8.5% of the pool, are secured by properties that either fully or primarily leased to a single tenant. 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. The pool is relatively diverse based on loan size, with a concentration profile equivalent to that of a pool of 43 equal-sized loans. Diversity is further enhanced by four loans, representing 11.1% of the pool, that are secured by multiple properties (59 in total). Increased pool diversity insulates the higher-rated classes from event risk.

The transaction’s WA DBRS Refi DSCR, excluding the 13 NCB loans, is 1.00x, indicating a higher refinance risk on an overall pool level. Furthermore, 12 loans, representing 11.3% of the pool, including one of the largest ten loans, are structured with full-term IO payments. An additional 31 loans, comprising 52.8% of the pool, have partial IO periods ranging from 12 months to 60 months. The DBRS Term DSCR is calculated by using the amortizing debt service obligation and the DBRS Refi DSCR is calculated considering the balloon balance and lack of amortization when determining refinance risk. DBRS determines the POD based on the lower of Term or Refi DSCR, so loans that lack amortization will be treated more punitively. Twenty-eight properties, comprising 33.7% of the pool, are secured by properties located in tertiary or rural markets. Properties located in tertiary and rural markets are modeled with significantly higher loss severities than those located in urban and suburban markets.

The DBRS sample included 29 of the 80 loans in the pool. Site inspections were performed on 41 of 135 properties in the portfolio (62.4% of the pool by allocated loan balance). DBRS conducted meetings with the on-site property manager, listing agent or a representative of the borrowing entity for 44.3% of the pool. The DBRS sample had an average NCF variance of -8.9%, ranging from -21.7% to -1.0%. DBRS identified eight loans, representing 7.3% of the pool, with unfavorable sponsor strength, including one of the top ten loans. DBRS increased the POD for the loans with identified sponsorship concerns.

The rating assigned to Class G differs 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 that could result in upgrades or downgrades by DBRS after the date of issuance.

For more information on this transaction and supporting data, DBRS will have the transaction available on DBRS CMBS IReports. 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.

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

The applicable methodology is North American CMBS Rating Methodology (March 2016), 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.