DBRS Morningstar Confirms Ratings on All Classes of Wells Fargo Commercial Mortgage Trust 2016-C32, Removes Six Classes from Under Review with Negative Implications
CMBSDBRS Limited (DBRS Morningstar) confirmed the ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C32 issued by Wells Fargo Commercial Mortgage Trust 2016-C32 (the Trust) as follows:
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-3FL at AAA (sf)
-- Class A-3FX at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class X-D at BBB (low) (sf)
-- Class X-E at BB (sf)
-- Class E at BB (low) (sf)
-- Class X-F at B (sf)
-- Class F at B (low) (sf)
With this review, DBRS Morningstar removed the ratings on Classes D, X-D, X-E, E, X-F, and F from Under Review with Negative Implications, where they were placed on August 6, 2020. The trends on Classes X-E, E, X-F, and F are Negative; all other trends are Stable.
The Negative trends reflect the elevated credit risk posed by six loans in special servicing, including one loan that is expected to become real estate owned by the Trust. In addition to the six loans in special servicing (5.3% of the current pool balance) as of the January 2021 remittance, there also are 18 loans (36.8% of the current pool balance) on the servicer’s watchlist. Eleven of these loans (19.1% of the current pool balance) were watchlisted because of performance declines. Excluding two loans that have not yet provided Q3 2020 reporting, these loans reported a weighted-average debt service coverage ratio (DSCR) of 0.82 times (x) based on the most recent reporting, compared with the year-end 2019 figure of 2.22x.
As of the January 2021 remittance, 109 out of 112 of the original loans remain in the pool, with a collateral reduction of 8.2% since issuance as a result of loan amortization and loan repayment. By property type, the deal is most concentrated by retail (26.9% of the current pool balance) and hotel (14.3% of the current pool balance) assets, which is significant given that these property types have been the most severely affected by the Coronavirus Disease (COVID-19) pandemic. There are also 30 loans (11.8% of the current pool balance) secured by cooperative properties, which benefit from very low leverage profiles. In addition, nine loans (3.5% of the current pool balance) are secured by collateral that has been fully defeased.
All six loans in special servicing transferred as a result of ongoing difficulties caused by the coronavirus pandemic. The largest of these loans, Northline Industrial (Prospectus ID#12, 2.1% of the current pool balance), failed to pay off at its maturity in October 2020 but has continued to make debt service payments postmaturity. According to servicer commentary, the borrower is expected to close on refinancing by early February 2020.
Among the watchlisted loans, the Marriott Melville Long Island (Prospectus ID#2, 6.7% of the current pool balance) is the largest credit concern. The loan, secured by a 396-key full-service hotel in Melville, New York, approximately 32 miles east of Manhattan, was added to the servicer’s watchlist in January 2021 because of a sharp decline in performance following the outbreak of the coronavirus pandemic. As of Q3 2020, the loan reported a trailing 12 months (T-12) net cash flow of $2.5 million resulting in a DSCR of 0.83x, well below the year-end 2019 figure of $10.0 million (3.28x). The year-end 2019 figure showed substantial growth over the previous year’s reporting and the sponsor has undertaken approximately $9.6 million in renovations since 2015. As of September 2020, the property reported T-12 occupancy, average daily rate, and revenue per available room figures of 37.6%, $179, and $67, respectively, compared with year-end 2019 figures of 72.8%, $195, and $142, respectively. Demand segmentation at issuance was 50.0% corporate, 25.0% meeting, and 25.0% leisure, with the corporate demand generally driven by the heavy concentration of local employers and nearby office developments.
While the improvements made to the property are notable, DBRS Morningstar did raise concerns at issuance over the sponsor, Columbia Sussex Corporation, which is a privately held hospitality company based out of Kentucky with approximately 50 hotels under ownership and management. The concerns at issuance cited a number of unfavorable workouts of the sponsor’s CMBS portfolio, including foreclosures and defaults, that arose as a result of the last major credit crisis, which required the sponsor to deleverage its CMBS portfolio. DBRS Morningstar has maintained its negative view of the sponsorship group, despite the investment into the subject property. The probability of default was increased for this loan to reflect the increased credit risk to the Trust given the recent decline in performance and concerns with the sponsorship.
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.
DBRS Morningstar materially deviated from its North American CMBS Insight Model when determining the rating assigned to Class B, as the quantitative results suggested a higher rating on the Class. The material deviation is warranted given the uncertain loan-level event risk with the loans in special servicing and on the servicer’s watchlist.
Classes X-A, 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#2 – Marriott Melville Long Island (6.7% of the pool)
-- Prospectus ID#6 – 10 South LaSalle Street (3.4% of the pool)
-- Prospectus ID#7 – Hilton Wilmington/Christiana (3.2% of the pool)
-- Prospectus ID#21 – Hampton Inn Suites Ontario (1.3% 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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