DBRS Morningstar Downgrades Seven Classes of Wells Fargo Commercial Mortgage Trust 2016-C34

DBRS Limited (DBRS Morningstar) downgraded seven classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C34 issued by Wells Fargo Commercial Mortgage Trust 2016-C34 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 B (high) (sf) from BBB (low) (sf)
-- Class X-E to B (low) (sf) from BB (low) (sf)
-- Class E to CCC (sf) from B (high) (sf)
-- Class F to CCC (sf) from B (sf)

In addition, DBRS Morningstar confirmed the ratings on the following classes:
-- 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-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-FG at B (low) (sf)
-- Class G at CCC (sf)

DBRS Morningstar also discontinued the rating on Class A-1 as the class was repaid with the December 2020 remittance. Classes C, D, E, F, G, X-E, and X-FG were removed from Under Review with Negative Implications where they were placed on August 6, 2020. In addition, the designation of Interest in Arrears was placed on Classes E, F, and G.

All trends are Stable, with the exception of Classes B, C, D, X-B, X-E, and X-FG, which have Negative trends. Classes E, F, and G are assigned ratings that do not carry a trend.

The ratings downgrades and Negative trends are reflective of the increased risks to the trust since issuance, which are generally concentrated in two of six specially serviced top 10 loans in this transaction. Both of these loans were liquidated in the analysis for this review, suggesting losses to the trust could be realized that would put significant negative pressure on the two lowest rated classes, Classes E and F, which were assigned CCC (sf) ratings with this review. These largest loans in special servicing have been in default for the last year or more and DBRS Morningstar previously downgraded the ratings for five classes in this transaction in February 2020. However, in the last year, the outlook for these loans has deteriorated, as further discussed below, supporting the additional downgrades taken with this review.

These loans include the largest loan in the pool, Regent Portfolio (Prospectus ID#1;10.2% of the pool balance), which is primarily secured by a portfolio of medical office properties in New York and Florida. The loan transferred to special servicing in June 2019 for payment default and, as of the January 2021 remit, is over 30 days delinquent. According to the servicer, workout discussions were ongoing when the borrower filed for Chapter 11 bankruptcy in February 2020. As of January 2021, the discussions with the special servicer are continuing. The portfolio is primarily owned by Dr. John Hajjar, a medical doctor as well as the primary owner of the portfolio’s largest tenant, Sovereign Medical Services Inc. (SMS). At issuance, SMS was 70.0% owned and controlled by Dr. Hajjar and SMS guarantees the leases of all its affiliates. The most recently reported occupancy rate for the portfolio was 78.5% as of March 2020, down from 90.0% at issuance.

Since the loan’s transfer to special servicing, one of the portfolio properties was sold in the Hajjar MOB – Wayne property, located in Wayne, New Jersey. The net proceeds of $11.3 million from the sale compare with the issuance appraised value of $13.9 million for that property and funds were used to recover outstanding servicer advances and to pay past due debt service payments. An updated appraisal has not been obtained to date, but, given the differential between the sale proceeds and the issuance valuation for the Wayne property, it is likely the as-is value for the portfolio is well below the issuance figures. The increased risks with the outstanding defaults and long-term stint in special servicing suggest the prospects for a resolution without a significant loss to the trust are quite dim. A loss severity in excess of 25.0% was assumed as part of this review.

The other specially-serviced loan driving the rating actions taken with this review is the 200 Precision and 425 Privet Portfolio (Prospectus ID#6; 4.2% of the pool balance), which is secured by two mixed-use properties in Horsham, Pennsylvania. The loan transferred to special servicing in November 2019 following the loss of a major tenant, Teva Pharmaceuticals, which previously occupied 48.7% of the portfolio’s combined net rentable area (NRA), as the tenant exercised its early termination option. In addition, the collateral previously lost the former second-largest tenant, Optium Finisar (25.8% of the portfolio NRA) in 2018 and occupancy has been depressed since, with the June 2020 occupancy reported at 39.8%. Based on the December 2020 appraisal, the collateral was valued at $21.3 million, which is a 45.5% decline from the issuance value of $39.1 million. A foreclosure was finalized in November 2020 and the servicer expects the title transfer to be finalized in the near term. DBRS Morningstar’s analysis assumed a loss severity in excess of 40.0%, based on the December 2020 appraisal figure.

DBRS Morningstar has been monitoring another top 10 loan in special servicing in the Shoppes at Alafaya (Prospectus ID #10, 3.0% of the pool). That loan is secured by a retail property in Orlando, Florida, that has been in special servicing since October 2018, following the loss of the property’s Toys “R” Us (TRU) store, which represented approximately 49.0% of the NRA. However, Burlington recently backfilled the majority of the former TRU space, moving into the property in 2020. The space was built out during 2020 and the tenant was open for business by the fourth quarter of 2020. A December 2020 value obtained by the special servicer showed an as-is value of $25.5 million, still below issuance but above the total trust exposure of $22.6 million as of January 2021 and above the appraisal showing an as-is value of $22.0 million in December 2018.

In addition to the above-mentioned loans, three loans in special servicing are secured by hotel properties that were negatively affected by the Coronavirus Disease (COVID-19) pandemic. With the January 2021 remittance, loans representing 33.4% of the pool balance are in special servicing. There is also a high concentration of loans backed by retail properties in the transaction, representing 39.5% of the pool balance. Retail properties have also been among the most severely affected by the impact of the pandemic.

According to the January 2021 remit, one loan is fully defeased, representing 0.7% of the pool balance, and 24 loans are on the servicer’s watchlist, representing 39.0% of the pool balance. The watchlisted loans are being monitored for various reasons, including a low debt-service coverage ratio, low occupancy, forbearance requests, trigger events, or upcoming loan maturity.

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-E, and X-FG 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 – Regent Portfolio (10.2% of the pool)
-- Prospectus ID#3 – Hilton & Homewood Suites Philadelphia (6.4% of the pool)
-- Prospectus ID#5 – Marriott Monterey (4.3% of the pool)
-- Prospectus ID#6 – 200 Precision & 425 Privet Portfolio (4.2% of the pool)
-- Prospectus ID#10 – Shoppes at Alafaya (3.0% of the pool)
-- Prospectus ID#11 – Embassy Plaza (2.7% 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 the North American CMBS Surveillance Methodology (Marcy 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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