DBRS Assigns Provisional Ratings to Wells Fargo Commercial Mortgage Trust 2018-C47

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-C47 to be issued by Wells Fargo Commercial Mortgage Trust 2018-C47:

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

The Classes X-A, X-B and X-D balances are notional.

The collateral consists of 74 fixed-rate loans, secured by 106 commercial and multifamily properties. The transaction is a sequential-pay pass-through structure. 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. Trust assets contributed from three loans, representing 13.2% of the pool, are shadow-rated investment grade by DBRS. Proceeds for the shadow-rated loans are floored at their respective rating within the pool. When the combined 13.2% of the pool has no proceeds assigned below the rating floor, the resulting pool subordination is diluted or reduced below that rated floor. When the cut-off loan balances were measured against the DBRS Stabilized NCF and their respective actual constants, three loans, representing 5.4% 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 38 loans, representing 58.5% of the pool, having whole-loan refinance DSCRs below 1.00x and 21 loans, representing 39.1% of the pool, having whole-loan refinance DSCRs below 0.90x. Aventura Mall and Christiana Mall, two of the pool’s loans with a DBRS Refi DSCR below 0.90x and which represent 10.5% of the transaction balance, are shadow-rated investment grade by DBRS and have a large piece of subordinate mortgage debt outside the trust.

Nine loans, representing 20.9% of the pool, are located in urban and super-dense urban gateway markets with increased liquidity that benefit from consistent investor demand, even in times of stress. Urban markets represented in the deal include New York, Miami and Palo Alto. Three loans – Aventura Mall, Christiana Mall and 2747 Park Boulevard – representing a combined 13.2% of the pool, exhibit credit characteristics consistent with investment-grade shadow ratings. Aventura Mall exhibits credit characteristics consistent with a BBB (high) shadow rating, Christiana Mall exhibits credit characteristics consistent with an A (sf) shadow rating and 2747 Park Boulevard exhibits credit characteristics consistent with an A (sf) shadow rating. Term default risk is moderate, as indicated by the strong WA DBRS Term DSCR of 1.52x. In addition, 22 loans, representing 45.5% of the pool, have a DBRS Term DSCR above 1.50x. Even when excluding the five investment-grade shadow-rated loans, the deal exhibits an acceptable WA DBRS Term DSCR of 1.47x.

The deal appears concentrated by property type with 27 loans, representing 38.0% of the pool, secured by retail properties. Of these, 20.3% of the retail property concentration is located in a tertiary market. Of the retail property concentration, 15.8% of the loans are located in urban markets. Two loans, representing 3.3% of the retail concentration, are secured by multiple properties (six in total), which insulates the loans from issues at any one property. Two of these loans – Aventura Mall and Christiana Mall – representing 27.7% of the retail concentration and 10.5% of the total pool balance, are shadow-rated investment grade by DBRS. Nine loans, representing 22.1% of the pool, are secured by 31 hotel properties, including four of the top 15 loans. Hotels have the highest cash flow volatility of all major property types as their income, which is derived from daily contracts rather than multi-year leases and their largely fixed expenses, 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 as a result of high operating leverage. DBRS cash flow volatility for such hotels, which ultimately determines a loan’s POD, assumes between a 10.6% and 37.8% cash flow decline for a BBB stress and a 41.9% and 83.3% cash flow decline for a AAA stress. To further mitigate the more volatile cash flow of hotels, the loans in the pool secured by hotel properties exhibit a WA DBRS Debt Yield and DBRS Exit Debt Yield of 9.8% and 10.8%, respectively, which compare quite favorably with the comparable figures of 8.4% and 9.2%, respectively, for the non-hotel properties in the pool. Additionally, two loans, representing 23.1% of the hotel concentration, are located in established urban or suburban markets that benefit from increased liquidity and more stable performance.

The transaction’s WA DBRS Refi DSCR is 0.97x, indicating higher refinance risk on an overall pool level. In addition, 38 loans, representing 58.5% of the pool, have DBRS Refi DSCRs below 1.00x, including six of the top ten loans and nine of the top 15 loans. Twenty-one of these loans, comprising 39.1% of the pool, have DBRS Refi DSCRs less than 0.90x, including five of the top ten loans and six of the top 15 loans. These credit metrics are based on whole-loan balances. When measured against A-note balances only, the pool WA DBRS Refi DSCR rises to 1.02x. Two of the pool’s loans with DBRS Refi DSCRs below 0.90x – Aventura Mall and Christiana Mall – which represent 10.5% of the transaction balance, are shadow-rated investment grade by DBRS and have large pieces of subordinate mortgage debt outside the trust. The pool’s DBRS Refi DSCRs for these loans are based on a WA stressed refinance constant of 9.89%, which implies an interest rate of 9.27%, amortizing on a 30-year schedule. This represents a significant stress of 4.31% over the WA contractual interest rate of the loans in the pool.

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.

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.

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.