DBRS Morningstar Downgrades Four Classes of Wells Fargo Commercial Mortgage Trust 2017-RC1

DBRS Limited (DBRS Morningstar) downgraded its ratings on four classes of the Commercial Mortgage Pass-Through Certificates, Series 2017-RC1 issued by Wells Fargo Commercial Mortgage Trust 2017-RC1 as follows:

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

Classes D, E, F, and X-D were removed from Under Review with Negative Implications, where they were placed on January 19, 2021.

DBRS Morningstar also confirmed the ratings on the following classes as follows:

-- Class A-2 at AAA (sf)
-- Class A-3 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 (sf)
-- Class X-B at A (high) (sf)
-- Class C at A (sf)

DBRS Morningstar also changed the trends on Classes B, C, and X-B to Negative from Stable. The trends on Classes D and X-D are Negative. All other trends are Stable. Classes E and F have ratings that do not carry trends. DBRS Morningstar discontinued its ratings for Classes X-E and X-F as the referenced obligations, Classes E and F, were downgraded to CCC (sf) and C (sf), respectively.

The rating downgrades and trend changes reflect DBRS Morningstar’s loss expectations for the one loan in special servicing, which is also the largest loan in the pool, Hyatt Place Portfolio (Prospectus ID#1, 8.9% of the pool). In addition, two top-15 loans: Whitehall Corporate Center (Prospectus ID#12, 2.3% of the pool) and Peachtree Mall (Prospectus ID#14, 1.7% of the pool), secured by an office and a regional mall property, respectively, were analyzed with elevated probability of default figures to reflect the current risk profile for each asset.

As of the May 2021 remittance, the trust balance was reported at $599.9 million, representing a 4.0% collateral reduction since issuance due to scheduled loan amortization. There are 17 loans on the servicer’s watchlist, representing 15.0% of the current pool balance. These loans were flagged for minor deferred maintenance items, declining debt service coverage ratios (DSCRs), tenant rollover risk, and casualty event-related items.

The largest loan in the pool, Hyatt Place Portfolio, is secured by a portfolio of six limited service hotels located across six states, totaling 754 keys, that operate under the Hyatt Place flag. The loan transferred to special servicing in June 2020 for payment default and as of the most recent remittance, the loan is over 121 days delinquent. The discussion surrounding a loan modification has been ongoing since the loan’s transfer; however, negotiations remain ongoing and potential terms have not been finalized. Terms being contemplated generally include the deferral of the principal portion of debt service payments until January 2023, the full deferral of the interest portion of debt service payments until December 2021, and a 50.0% deferral of the interest portion of debt service from January 2022 to June 2022. The borrower is expected to resume its full principal and interest payments by January 2023. In terms of the furniture, fixtures, and equipment reserve, deposits will also be deferred until June 2021. The loan will be cash managed and excess cash would go towards repaying deferred amounts, with all amounts owing to be due at the February 2027 loan maturity. Despite the ongoing discussions surrounding the loan modification, the special servicer is also dual-tracking foreclosure.

According to the July 2020 appraisal, the property was valued at $54.9 million, a 35.5% decline from the issuance value of $85.1 million. Based on the trailing three months ended March 2020 financials, the loan reported a DSCR of -0.31 times (x), compared with the year-end (YE) 2019 DSCR of 0.97x, YE2018 DSCR of 1.99x and the DBRS Morningstar DSCR at issuance of 1.64x. Prior to the Coronavirus Disease (COVID-19) pandemic, the portfolio’s performance was already declining from issuance expectations. According to the trailing 12 months ended December 2019 STR report, the portfolio reported an occupancy rate, average daily rate (ADR), and RevPAR of 71.9%, $73.00, and $52.48, respectively. At issuance, the occupancy, ADR, and RevPAR were reported at 73.6%, $110.18, and $81.20, respectively. The sponsor contributed $30.5 million at issuance in order to purchase the portfolio but, considering the sharp value decline, which has likely further deteriorated given the current economic landscape for hotel properties and general uncertainty on whether performance could rebound to issuance figures, in addition to the prolonged discussions to finalize a workout at this time, it is likely that a resolution will result in a loss to the trust. As such, DBRS Morningstar analyzed this loan with a liquidation scenario, which results in a loss severity of 35.0%.

Whitehall Corporate Center is secured by a Class A office building in Charlotte, North Carolina. The subject was built in 2008 and is situated within the larger Whitehall Corporate Center office park, which consists of approximately 860,000 square feet (sf) of office space spread across six buildings. According to the YE2020 financials, the loan reported an occupancy of 75.9%, a decline from the YE2019 occupancy rate of 97.3%. This was a result of the departure of the largest tenant, Advantage Sales Marketing, which previously occupied 21.4% of net rentable area (NRA). According to the servicer, Advantage Sales Marketing exercised its termination option in 2019, paying a termination fee of $442,493, which is held in reserve by the lender. As of the YE2020 operating statement analysis report, the implied DSCR was 1.17x, excluding the $456,135 that was reported as other income, which included the aforementioned termination fee. In comparison with the previous year’s reporting, the YE2019 DSCR of 1.27x and the DBRS Morningstar DSCR of 0.95x. While the occupancy rate has rebounded to 88.2% per the March 2021 rent roll, the second-largest tenant, Homepointe Mortgage Inc., representing 20.1% of the NRA, has an upcoming lease expiry in December 2021.The property is located within the I-77 submarket as identified by Reis, which reported an elevated average vacancy rate of 24.3% across all office product as of Q1 2021, suggesting a softening market. Given these factors, DBRS Morningstar applied an elevated probability of default in the analysis for this loan to increase the expected loss for this review.

Peachtree Mall is secured by a regional shopping mall located in Columbus, Georgia, near the Georgia/Alabama state line. Built in 1975, the subject property is the only regional shopping center within a 60.0-mile radius and is owned and operated by Brookfield. The loan is anchored by a noncollateral Dillard’s with the largest collateral tenants including Macy's (26.0% of NRA, expiring September 2027) and JCPenney (15.4% of NRA, expiring November 2024). As of the March 2021 rent roll, the property reported an occupancy of 95.1% and while there were no recent announcements of store closures for the two department anchor tenants, Macy’s has announced plans to close an additional 45 stores in 2021 as it has stated a corporate-wide focus on desirable Class A and B malls. According to the trailing 12 months ended March 2020 sales report, in-line stores occupying less than 10,000 sf had sales of $356 per square foot (psf), a decline of 4.0% year over year (YOY) and in-line stores occupying greater than 10,000 sf had sales of $124 psf, a decline of 2.4% YOY. Additionally, Macy’s reported sales of $96 psf, a decline of 6.8% YOY, while JC Penney reported sales of $140 psf, similar with the previous year’s sales figures. AMC reported sales of $146,406 per screen, an increase of 12.2% YOY. As of the trailing nine months ended September 2020 financials, the subject reported a DSCR of 1.50x, compared with the YE2019 DSCR of 1.54x and DBRS Morningstar DSCR of 1.66x. Given the elevated risks surrounding the two department store anchor tenants, which occupy a combined 41.4% of the property NRA, along with the uncertainty of the property to be a core part of Brookfield’s portfolio, DBRS Morningstar applied an elevated probability of default in the analysis for this loan to increase the expected loss for this review.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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 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.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

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 26, 2021), 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.

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