DBRS Finalizes Provisional Ratings on Wells Fargo Commercial Mortgage Trust 2018-C44

DBRS, Inc. (DBRS) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-C44 issued by Wells Fargo Commercial Mortgage Trust 2018-C44:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class X-D at BBB (high) (sf)
-- Class D at BBB (sf)
-- Class E-RR at BBB (low) (sf)
-- Class F-RR at BB (sf)
-- Class G-RR at B (high) (sf)

All trends are Stable.

DBRS has withdrawn its provisional rating on the following class:

-- Class X-B at A (high) (sf)

DBRS has also assigned a new rating to the following class:

-- Class X-B at AA (high) (sf)

Classes X-D, D, E-RR, F-RR and G-RR have been privately placed. The Class X-A, X-B and X-D balances are notional.

As a result of the pricing of the transaction, no excess interest proceeds from the Class C certificates will be available to be contributed to the Class X-B certificates. Therefore, excess interest proceeds that will be contributed to Class X-B will only come from the Class A-S and B certificates. Per the DBRS “Rating North American CMBS Interest-Only Certificates” methodology, DBRS rates interest-only (IO) tranches to the lowest rated Applicable Reference Obligation, which in the case of Class X-B now references Classes A-S and B with a one-notch deviation.

The collateral consists of 44 fixed-rate loans secured by 55 commercial and multifamily properties. The transaction is a sequential-pay pass-through structure. One of the loans, representing 3.9% 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 3.9% 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, six loans, representing 19.0% 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 24 loans, representing 60.8% of the pool, having Refinance (Refi) DSCRs below 1.00x and 16 loans, representing 45.4% of the pool, with Refi DSCRs below 0.90x. These credit metrics are based on whole-loan balances.

One of the ten largest loans in the pool, 181 Fremont Street, exhibits credit characteristics consistent with a shadow rating of AA. This loan represents 3.9% of the transaction balance. None of the loans in the pool are secured by student or military housing properties, which often exhibit higher cash flow volatility than traditional multifamily assets. Additionally, DBRS did not deem any of the properties securing the loans to have Below Average or Poor property quality. Only one loan, Crossroads at Stony Point, was considered to have Average (-) property quality and represents 2.4% of the DBRS sample balance. Furthermore, nine loans, comprising 30.7% of the DBRS sample balance, were considered to have either Above Average or Average (+) property quality. The remaining loans were classified as having Average property quality. Lastly, term default risk is relatively low, as indicated by the strong DBRS Term DSCR of 1.55x. In addition, 19 loans, representing 51.6% 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 shadow-rated investment-grade loan, the deal exhibits a favorable WA DBRS Term DSCR of 1.49x.

Ten loans, comprising 25.9% of the transaction balance, are secured by properties that are either fully or primarily leased to a single tenant. This includes four of the largest ten loans: 3495 Deer Creek Road, Konica Minolta Business Solutions HQ, Re/Max Plaza and 181 Fremont Street. Loans secured by properties occupied by single tenants have been found to suffer higher loss severities in an event of default. DBRS applied a penalty for single-tenant properties that resulted in higher loan-level credit enhancement. Additionally, except for properties occupied by long-term credit tenants (LTCTs), single-tenant loans generally receive higher cash flow volatility. Four of the loans — Konica Minolta Business Solutions HQ, 181 Fremont Street, Whole Foods Pittsburgh and BITCO Insurance HQ — are fully occupied by LTCTs and represent 44.1% of the total single-tenant loan concentration based on cut-off-date trust balances.

Six loans, representing 23.0% of the pool, have sponsorship with negative credit history and/or loan collateral associated with a borrowing structure that DBRS deemed to be weak. Such sponsors were associated with a prior discounted payoff, loan default, voluntary bankruptcy filing, limited net worth and/or liquidity or a historical negative credit event. DBRS increased the probability of default (POD) for loans with identified sponsorship concerns, which include four of the top 15 loans.

The pool is relatively more concentrated than recent WFCM transactions, with the top ten loans accounting for 52.2% of the pool. This is above the top ten loan concentration seen in WFCM 2018-C43 of 49.4%. The deal’s concentration profile is equivalent to that of a pool of 26 equal-sized loans, which is less than favorable. DBRS applied a concentration penalty to the pool, effectively increasing the POD of all loans. Although the deal consists of only 44 loans, the mortgaged properties are located across 25 states, enhancing diversification. The highest state concentrations include California (21.6%), Virginia (9.8%) and Maryland (9.8%). Diversity is further enhanced by four loans, representing 14.2% of the pool, that are secured by multiple properties (15 in total). Increased pool diversity helps to insulate the higher-rated classes from event risk.

Seventeen loans, representing 43.7% of the pool, including six of the largest ten loans, are structured with IO payments for the full term. An additional 13 loans, representing 34.9% of the pool, have partial IO periods remaining ranging from ten months to 59 months. This concentration includes the shadow-rated loan, which totals 3.9% of the pool. The DBRS Term DSCR is calculated by using the amortizing debt service obligation, and the DBRS Refi DSCR is calculated by considering the balloon balance and lack of amortization when determining refinance risk. DBRS determines POD based on the lower of Term or Refi DSCRs; therefore, loans that lack amortization will be treated more punitively.

Classes X-A, X-B and X-D are 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.

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

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.