DBRS Changes Trends to Negative for Five Classes of Wells Fargo Commercial Mortgage Trust 2016-C34

DBRS Limited (DBRS) confirmed all classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C34 (the Certificates) issued by Wells Fargo Commercial Mortgage Trust 2016-C34 as follows:

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

In addition, however, DBRS changed the trend to Negative on Classes E, X-E, F, X-FG and G to reflect DBRS’s concerns with two of the top ten loans on the servicer’s watchlist, which collectively represent 7.0% of the pool balance, and with the loan in special servicing, which represents 0.7% of the pool balance.

All other trends are Stable.

At issuance, the collateral consisted of 68 fixed-rate loans secured by 92 commercial properties, for a total trust balance of approximately $703.0 million. As of the April 2018 remittance report, the trust balance was $694.1 million, representing a collateral reduction of 1.5% from issuance as a result of scheduled amortization, with all of the original loans remaining in the pool. Loans representing 80.6% of the pool are reporting YE2017 financials, with a weighted-average (WA) debt service coverage ratio (DSCR) and in-place debt yield of 1.55 times (x) and 10.0%, respectively. The largest 15 loans reported either partial-year or YE2017 financials, with a WA DSCR and WA debt yield of 1.53x and 9.7%, respectively, representing a WA cash flow improvement of 13.0% over the DBRS net cash flow figures derived at issuance. However, it should be noted that the cash flows for the 200 Precision & 425 Privet Portfolio loan (Prospectus ID#6; 4.0% of the pool) show a significant improvement over the DBRS figures of 30.9% as of the YE2017 reporting, but cash flows are expected to drop off significantly in the near term, as discussed below.

As of the April 2018 remittance, there were 11 loans on the servicer’s watchlist, collectively representing 26.2% of the pool, as well as one loan, representing 0.7% of the pool, in special servicing. The loans on the servicer’s watchlist are being monitored for a variety of reasons, including low DSCR, large tenant non-renewal events and bankruptcies, delinquent payments and fire damage. The previously mentioned 200 Precision & 425 Privet Portfolio loan is the second-largest loan on the watchlist. This loan is being monitored due to the impending loss of the second-largest tenant, which will be vacating the property at lease expiry in June 2018. In addition, the largest tenant has provided notice of plans to exercise its early termination option. These tenants collectively occupy 74.5% of the collateral’s net rentable area and make up 82.3% of rental income.

The collateral’s largest tenant, Teva Pharmaceuticals (Teva), originally had a lease expiration date of January 2025. Notice of exercising the termination option must be given before November 2017 and comes with a $1.25 million termination penalty. This will trigger a 24-month cash flow sweep for the loan. According to the servicer’s reporting, the new lease expiration date is now November 2019; however, servicer commentary, along with recent news articles, indicates that the tenant may vacate as early as Q2 2018. DBRS has asked for clarification on the details of Teva’s occupancy status and rental payments. In the analysis for this loan, a highly stressed cash flow scenario was applied, given the significant vacancy spike coming in the near term and the unknowns surrounding the cash flows over the next few years. For additional information on this loan, please see the loan commentary on the DBRS Viewpoint platform, for which information is provided below.

The loan in special servicing, Prospectus ID#37 – Wayne Place Apartments (0.7% of current pool balance), transferred in May 2017 for delinquent payments. The loan’s annualized DSCR as of March 2017 was 0.43x. The depressed cash flow stems from the cancellation of a Housing Assistance Payment voucher contract in March 2017. The property, which is situated in a low-income neighbourhood, has historically relied on government subsidies, as 79.0% of rental income at issuance was derived from subsidies. A receiver was appointed in September 2017, and the current workout strategy is foreclosure with a resolution date of June 2018. DBRS assumed a loss severity in excess of 40.0% for this loan and will continue to monitor for developments as a new appraisal is obtained and finalized by the special servicer.

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

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

As part of this review, DBRS has provided updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#1 – Regent Portfolio
-- Prospectus ID#2 – Congressional North Shopping Center & 121 Congressional Lane
-- Prospectus ID#6 – 200 Precision & 425 Privet Portfolio
-- Prospectus ID#8 – Nolitan Hotel
-- Prospectus ID#10 – Shoppes at Alafaya
-- Prospectus ID#15 – Perrysburg Market Center
-- Prospectus ID#28 – Dixie Center
-- Prospectus ID#37 – Wayne Place Apartments
-- Prospectus ID#53 – Maple Place Shopping Center

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrs.com. The platform includes issuer and servicer data for the entire commercial mortgage-backed security universe, as well as deal and loan-level commentary for all DBRS-rated transactions.

The ratings assigned to Classes E and F materially deviate from the higher ratings implied by the quantitative results. DBRS considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by the quantitative results that is a substantial component of a rating methodology. The deviations are warranted given loan level event risk and, as noted above, the trend on Classes E and F was changed to Negative.

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

The principal methodology is CMBS North American Surveillance, 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.

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 under Related Documents or by contacting us at info@dbrs.com.

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.

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