DBRS Morningstar Confirms Ratings on Wells Fargo Commercial Mortgage Trust 2016-C37; Removes Two Classes from Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) confirmed all classes of the Commercial Mortgage Pass-Through Certificates, Series 2016-C37 issued by Wells Fargo Commercial Mortgage Trust 2016-C37 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-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 X-D at A (low) (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (sf)
-- Class X-EF at BBB (sf)
-- Class F at BBB (low) (sf)
-- Class X-G at BBB (low) (sf)
-- Class G at BB (high) (sf)
-- Class X-H at BB (low) (sf)
-- Class H at B (high) (sf)

In addition, DBRS Morningstar discontinued the rating on Class A-1 as it was paid out as of the December 2020 remittance.

Classes H and X-H were removed from Under Review with Negative Implications where they were placed on August 6, 2020. All trends are Stable except for Classes H and X-H, which carry Negative trends. The Negative trends reflect the continued performance challenges for the underlying collateral, much of which has been driven by the impact of the Coronavirus Disease (COVID-19) pandemic. In addition to one loan representing 1.0% of the pool in special servicing as of the December 2020 remittance, DBRS Morningstar also notes that the pool has a significant concentration of retail and hospitality properties, representing 29.7% and 19.4% of the pool balance, respectively. These property types have been the most severely affected by the initial effects of the coronavirus pandemic and, as such, those concentrations suggest increased risks for the pool, particularly at the lower rating categories, since issuance.

As of the December 2020 remittance, 62 of the original 63 loans remain in the pool, with a collateral reduction of 5.0% as a result of loan paydown and scheduled amortization. There is one loan, Holiday Inn Express Cheektowaga North East (Prospectus ID#34, 1.0% of the pool), that is specially serviced and 16 loans, representing 35.5% of the pool, that are being monitored on the servicer’s watchlist. These loans are being monitored for various reasons, including low debt service coverage ratio (DSCR) or occupancy, tenant rollover risk, and/or pandemic-related forbearance requests.

Two of the largest watchlisted loans, Hilton Hawaiian Village (Prospectus ID#1, 7.4% of the pool) and Franklin Square III (Prospectus ID#5, 4.2% of the pool), are both being monitored for cash flow declines amid the pandemic. Hilton Hawaiian Village, secured by a 22-acre beachfront resort, has seen its DSCR fall to 0.63 times (x) from 2.70x at YE2019 as of the trailing 12 months ended Q3 2020 financials. Although there are concerns about the current reported cash flow, DBRS Morningstar believes the property is well-positioned in the long term because of its desirable beachfront location on Waikiki beach in Hawaii and its historic strong credit metrics. Franklin Square III, secured by an anchored retail property in Gastonia, North Carolina, continues to be monitored for a low DSCR as well as a major tenant departure as Gander Mountain (formerly 15.8% of the net rentable area) vacated in 2018 when its parent company filed for bankruptcy. Camping World Inc., which acquired Gander Mountain out of bankruptcy, continues to pay the agreed-upon rent despite the space remaining vacant, resulting in a physical occupancy rate of approximately 77.0% as of June 2020. Given the risks surrounding the collateral property, DBRS Morningstar analyzed this loan with an elevated probability of default for this review.

At issuance, DBRS Morningstar shadow-rated three loans, Hilton Hawaiian Village, Quantum Park (Prospectus ID#2, 7.3% of the pool), and Potomac Mills (Prospectus ID#4, 5.1% of the pool), as investment grade. This assessment was supported by the loans’ strong credit metrics, strong sponsorship strength, and historically stable collateral performance. With this review, DBRS Morningstar confirms that the characteristics of these loans remain consistent with the investment-grade shadow rating.

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-D, X-EF, X-G, and X-H 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 loan in the transaction:

-- Prospectus ID#5 – Franklin Square III (4.2% 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 info@dbrsmorningstar.com.

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 info@dbrsmorningstar.com.

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