DBRS Assigns Provisional Ratings to Wells Fargo Commercial Mortgage Trust 2018-C43

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-C43 (the Certificates) to be issued by Wells Fargo Commercial Mortgage Trust 2018-C43:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at A (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (low) (sf)
-- Class X-D at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

Classes X-D, D, E and F will be privately placed. The Class X-A, Class X-B and Class X-D balances are notional.

The collateral consists of 63 fixed-rate loans secured by 132 commercial and multifamily properties. The transaction is a sequential-pay pass-through structure. The trust asset contributed from two loans, representing 11.6% of the pool, are shadow-rated investment grade by DBRS. Proceeds for each shadow-rated loan are floored at their respective rating within the pool. When 11.6% of the pool has no proceeds assigned below the rated floor, the resulting pool subordination is diluted or reduced below the 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 stabilized net cash flow and their respective actual constants, two loans, representing 2.4% 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 17 loans, representing 38.8% of the pool, having refinance DSCRs below 1.00x, and eight loans, representing 25.6% of the pool, with refinance DSCRs below 0.90x. These credit metrics are based on whole-loan balances.

Two of the ten largest loans in the pool — Moffett Towers II – Building 2 and Apple Campus 3 — exhibit credit characteristics consistent with shadow ratings of BBB and AA (high), respectively. These loans represent 11.6% of the transaction balance. The hotel concentration of six loans, representing 6.6% of the pool balance, is at a lower level than recent transactions that typically have concentrations around 15.0% or more. Hotel properties have higher cash flow volatility than traditional property types, as their income, which is derived from daily contracts rather than multi-year leases, and their expenses, which are often mostly fixed, are quite high as a percentage of revenue. These two factors cause revenue to fall swiftly during a downturn and cash flow to fall even faster because of the high operating leverage.

Term default risk is low, as indicated by the relatively strong DBRS Term DSCR of 1.69x. In addition, 31 loans, representing 58.0% of the pool, have a DBRS Term DSCR in excess of 1.50x. This includes nine of the largest 15 loans. Even when excluding the two loans shadow-rated investment grade, the deal exhibits a robust weighted-average (WA) DBRS Term DSCR of 1.61x.

Nine loans, comprising 27.2% of the transaction balance, are secured by properties that are either fully or primarily leased to a single tenant. This includes five of the largest ten loans: Moffett Towers II – Building 2, Houston Distribution Center, Apple Campus 3, Walmart Supercenter Houston and FedEx Distribution Center. Loans secured by properties occupied by single tenants have been found to suffer higher loss severities in an event of default. As a result, excluding Moffett Tower II – Building 2 and Apple Campus 3, both of which are shadow-rated investment grade, DBRS applied a penalty for single-tenant properties that resulted in higher loan-level credit enhancement. The Houston Distribution Center is a single-tenant building that is 100.0% leased to Academy Sports, whose 220,000 square foot headquarters is located directly to the south. Walmart signed a 20-year lease in July 2015 at The Walmart Supercenter Houston where the lease extends seven years beyond the loan term. With regard to FedEx Distribution Center, FedEx has invested $35.0 million ($115 per square foot) in capital improvements to the facility and views the asset as mission critical. Additionally, the loans where tenants have leases expiring during the loan term have been structured with cash flow sweeps prior to tenant expiry that will help to defray re-leasing costs in the event the single tenant vacates.

Twenty-six loans, representing 23.3% of the pool, are secured by properties located in tertiary or rural markets, including one 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. Further, the WA DBRS Debt Yield and DBRS Exit Debt Yield for such loans are 10.0% and 11.6%, respectively, which are materially higher than the overall pool metrics.

Classes X-A, X-B and X-D are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated reference tranche adjusted upward by one notch if senior in the waterfall.

For more information on this transaction and supporting data, please log into www.viewpoint.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS Viewpoint platform.

Notes:
All figures are in U.S. dollars unless otherwise noted.

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), 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 require due diligence services outlined in Form-15E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

The principal methodology is North American CMBS Multi-borrower Rating Methodology, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. Please note that not every related methodology listed under a principal Structured Finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

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

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

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