DBRS Morningstar Takes Rating Actions on Wells Fargo Commercial Mortgage Trust 2016-NXS5

DBRS Limited (DBRS Morningstar) downgraded the ratings on nine classes of Commercial Mortgage Pass-Through Certificates, Series 2015-C28 issued by Wells Fargo Commercial Mortgage Trust 2016-NXS5 (the Issuer) as follows:

-- Class X-B to AA (low) (sf) from AA (sf)
-- Class B to A (high) (sf) from AA (low) (sf)
-- Class C to BBB (high) (sf) from A (low) (sf)
-- Class D to BBB (low) (sf) from BBB (sf)
-- Class E to BB (high) (sf) from BBB (low) (sf)
-- Class X-F to B (sf) from B (high) (sf)
-- Class F to B (low) (sf) from B (sf)
-- Class X-G to B (low) (sf) from B (sf)
-- Class G to CCC (sf) from B (low) (sf)

The trends on these classes are Negative, excluding Class G, which carries no trend. DBRS Morningstar also removed Classes D, E, F, G, X-F, and X-G from Under Review with Negative Implications, where they were placed on August 6, 2020.

In addition, DBRS Morningstar confirmed the ratings on the remaining classes as follows:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-6 at AAA (sf)
-- Class A-6FL at AAA (sf)
-- Class A-6FX at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)

The trends on these classes are Stable.

The Negative trends and rating downgrades reflect the continued performance challenges facing the underlying collateral, much of which has been driven by the impacts of the Coronavirus Disease (COVID-19) global pandemic. In addition to the seven loans in special servicing, representing 9.5% of the current pool balance, as of the November 2020 remittance, DBRS Morningstar also notes that the pool has a high concentration of retail and hospitality properties, representing 29.6% and 17.5% of the pool balance, respectively. The initial effects of the coronavirus pandemic have affected these property types most severely and, as such, those concentrations suggest increased risks for the pool, particularly at the lower rating categories, since issuance.

As of the November 2020 remittance, 61 of the original 64 loans remain in the pool, representing a collateral reduction of 16.4% since issuance. Seven loans, representing 9.5% of the current pool balance, are in special servicing. Five of these loans, representing 5.7% of the current pool balance, were in special servicing prior to the coronavirus outbreak and are either real estate owned or in various stages of foreclosure. DBRS Morningstar expects all of these loans to take losses upon their final resolution, with loss severities ranging from 40% to 80%. The remaining two loans in special servicing, representing 3.8% of the current pool balance, are recent transfers to special servicing as a result of coronavirus impacts.

The Shoppes at Zion (Prospectus ID#11; 3.0% of the pool), which is 60 days to 89 days delinquent, is secured by a 118,433 square foot (sf) retail plaza in St. George, Utah. The loan transferred to special servicing in May 2020 for imminent monetary default as a result of tenant hardship. While the loan reported an annualized debt service coverage ratio of 1.13 times (x) as of Q2 2020, the borrower has been uncooperative since requesting and being denied a forbearance. The property has a mixture of local and national retailers and restaurants, and generally drives a portion of demand from tourists exploring the nearby national parks, including the Grand Canyon. Given the collateral’s performance decline, paired with the borrower’s unresponsiveness, DBRS Morningstar analyzed this loan with an elevated probability of default. Comfort Inn York (Prospectus ID#42; 0.8% of the pool), which is 30 days to 59 days delinquent, is secured by 129-key, limited-service hotel in York, Pennsylvania. The loan transferred to special servicing for monetary default in June 2020 and, at this point, the workout strategy is still being assessed. Prior to the coronavirus outbreak, the loan had performed well, most recently reporting a year-end (YE) 2018 DSCR of 1.42x.

According to the November 2020 remittance, 18 loans are on the servicer’s watchlist, representing 18.9% of the current pool balance. These loans are being monitored for various reasons, including low DSCR or occupancy, tenant rollover risk, and/or pandemic-related forbearance requests. Two loans, representing 2.1% of the current pool balance, are fully defeased. Based on the most recent YE financials, the pool had a weighted-average DSCR of 1.65x, relatively in line with the Issuer’s figures, demonstrating the lack of overall cash flow growth and the performance challenges facing the underlying collateral.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Classes X-A, X-B, X-C, X-D, X-E, and X-F 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 are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#1 – 10 South LaSalle (10.2% of the pool)
-- Prospectus ID#11 – The Shoppes at Zion (3.0% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

The principal methodology is North American CMBS Surveillance Methodology (March 6, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. 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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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 [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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