DBRS Assigns Provisional Ratings to Wells Fargo Commercial Mortgage Trust 2018-C45

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-C45 (the Certificates) to be issued by Wells Fargo Commercial Mortgage Trust 2018-C45:

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

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

The collateral consists of 49 fixed-rate loans secured by 89 commercial and multifamily properties. The transaction is a sequential-pay pass-through structure. The trust asset contributed from one loan, representing 3.0% of the pool, is shadow-rated investment grade by DBRS. Proceeds for the shadow-rated loan are floored at the respective rating within the pool. When 3.0% 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 NCF and their respective actual constants, two loans, representing 11.2% of the total pool, had a DBRS Term 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 25 loans, representing 70.9% of the pool, having refinance DSCRs below 1.00x, and ten loans, representing 31.1% of the pool, with refinance DSCRs below 0.90x. These credit metrics are based on whole-loan balances.

The hotel concentration of five loans, representing 6.7% of the pool balance, is at a lower level than recent transactions that typically have concentrations around 13.0% 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. Only six loans, totaling 9.9% of the transaction balance, are secured by properties that are either fully or primarily leased to a single tenant. The largest of these loans is 181 Fremont Street, which represents 3.0% of the pool balance and 30.7% of the single tenant concentration, and is shadow-rated investment grade. Additionally, 181 Fremont Street is a mission-critical space for Facebook, as it serves as the company’s headquarters. Loans secured by properties occupied by single tenants have been found to suffer higher loss severities in an event of default. Term default risk is low, as indicated by the relatively strong DBRS Term DSCR of 1.50x. Only one loan, representing 1.7% of the pool balance, has a DBRS Term DSCR below 1.10x. Additionally, eight of the largest 15 loans, totaling 28.7% of the pool balance, have a DBRS Term DSCR above 1.50x. The tenth-largest loan in the pool – 181 Fremont Street – exhibits credit characteristics consistent with a shadow rating of AA. This loan represents 3.0% of the transaction balance.

Nineteen loans, representing 27.9% 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. Further, the weighted-average (WA) DBRS Debt Yield and DBRS Exit Debt Yield for such loans are 9.0% and 10.0%, respectively, which are somewhat, though not materially, higher than the overall pool metrics.

The DBRS Refi DSCR is 0.99x, indicating a higher refinance risk on an overall pool level. In addition, 25 loans, representing 70.9% of the pool, have DBRS Refi DSCRs below 1.00x. Ten of these loans, comprising 31.1% of the pool, have DBRS Refi DSCRs less than 0.90x, including three of the top ten loans and five of the top 15 loans. The pool’s DBRS Refi DSCRs for these loans are based on a WA stressed refinance constant of 9.87%, which implies an interest rate of 9.24% amortizing on a 30-year schedule. This represents a significant stress of 4.34% over the WA contractual interest rate of the loans in the pool. DBRS models the probability of default (POD) based on the more constraining of the DBRS Term DSCR and DBRS Refi DSCR.

Ten loans, representing 25.5% of the pool, including five of the largest 15 loans, are structured with interest-only (IO) payments for the full term. An additional 21 loans, representing 56.8% of the pool, have partial IO periods remaining that range from 24 months to 60 months. 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 the Term or Refi DSCR; therefore, loans that lack amortization will be treated more punitively. This concentration includes the shadow-rated loan, which totals 3.0% of the pool and is full-term IO.

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.

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 Multi-borrower CMBS 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.

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