DBRS Morningstar Confirms Ratings on Wells Fargo Commercial Mortgage Trust 2015-LC22, Maintains Negative Trends on Four Classes

DBRS Limited (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2015-LC22 issued by Wells Fargo Commercial Mortgage Trust 2015-LC22 as follows:

-- Class A-3 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 B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class PEX at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class X-E at BB (sf)
-- Class E at BB (low) (sf)
-- Class X-F at B (high) (sf)
-- Class F at B (sf)

All trends are Stable, with the exception of Classes E, F, X-E, and X-F, which maintained Negative trends as a reflection of the potential for further declines in the outlook for the loans in the pool that are in special servicing and on the servicer’s watchlist because of the effects of the Coronavirus Disease (COVID-19) pandemic, as further detailed below. As of the September 2021 remittance, six loans are in special servicing and 22 loans are on the servicer’s watchlist, representing 5.8% and 27.8% of the pool, respectively. In addition, the transaction is concentrated by property type as retail and hospitality properties represent 21.9% and 15.1% of the pool, respectively. These property types experienced some of the worst initial effects of the pandemic with forced closures and capacity limitations. While the overall conditions have incrementally improved in the last year, there remain risks as the pandemic’s effects linger.

As of the September 2021 remittance, 94 of the original 100 loans remain in the pool, representing a collateral reduction of 14.8% since issuance. Ten loans, representing 13.2% of the current pool balance, are fully defeased.

The largest loan in special servicing is the Clearwater Collection loan (Prospectus ID#17; 1.5% of the current trust balance), which is secured by a 134,00 square foot (sf) retail property in Clearwater, Florida. The loan was transferred to the special servicer in July 2018 because of a payment default. According to the servicer, the sponsor, Gary J. Dragul, was indicted for fraudulent activities unrelated to the subject asset in April 2018 and a receiver was appointed for all assets controlled by the sponsor. However, the court-appointed receiver abandoned the property in April 2020 and, as a result, the special servicer appointed a new receiver. In March 2020, the largest tenant, LA Fitness (33.5% of the net rentable area (NRA)), stopped paying rent and has since defaulted on its lease, which was set to expire in April 2022. Before the pandemic, LA Fitness indicated that it planned to vacate the subject, but had agreed to continue paying rent for the remainder of the lease. The sponsor had previously filed a suit to retrieve rents owed by the tenant but it is uncertain whether this is recoverable.

According to the YE2020 financials, the property was 54.4% occupied with a debt service coverage ratio (DSCR) of 0.24 times (x). The largest tenant is Floor & Decor Outlets of America, Inc., which represents 48.9% of NRA with a lease expiring in May 2022. The special servicer is currently pursuing a foreclosure and an update regarding the status of the workout was requested from the servicer. According to the July 2021 appraisal, the property was valued at $10.8 million, which is a 41.6% decrease from the issuance value of $18.5 million and is below the current loan balance of $13.2 million. DBRS Morningstar analyzed this loan with a liquidation scenario, which resulted in a loss severity in excess of 35.0%.

The largest loan in the pool is 40 Wall Street (Prospectus ID#1; 9.7% of pool), which is secured by the leasehold interest in a 71 story, 1.2 million sf office building located at 40 Wall Street, one block from the New York Stock Exchange in New York City. The loan is on the watchlist for a low DSCR, with the trailing three months ended March 31, 2021 figure reported at 0.88x compared with the YE2020 DSCR of 1.25x and YE2019 DSCR of 1.67x. The decline in net cash flow was mainly driven by a decrease in base rental revenue as the borrower had offered rent concessions to some of its tenants amid the pandemic while other tenants had delayed move-in dates. According to the servicer, the borrower will not be forgiving any rents and is expecting revenues to rebound.

According to the July 2021 rent roll, the property was 84.4% occupied, which is slightly below the YE2020 occupancy rate of 86.2%. The third largest tenant at the subject, Thorton Tomasetti (5.2% of NRA, lease expires in January 2033), is reportedly relocating its headquarters as per a January 2020 news article published by The Real Deal. DBRS Morningstar has requested a leasing update from the servicer. Other large tenants at the property include Green Ivy (7.4% of NRA, lease expires in November 2061) and Country Wide Insurance (7.3% of NRA, lease expires in August 2036). There is minimal tenant rollover risk as tenants representing 8.7% of NRA have leases expiring in the next 12 months. Additionally, according to an article published by Commercial Observer in September 2021, Liakas Law P.C. signed a 15-year lease at the subject for 13,445 sf of space (1.2% of NRA). Considering the decline in performance and general challenges that the sponsor is currently encountering, DBRS Morningstar analyzed this loan with an elevated probability of default (POD) to increase the expected loss with this review.

The second-largest loan on the servicer’s watchlist loan is West Palm Beach Marriott (Prospectus ID#6; 3.4% of pool), which is secured by a 352 key, full-service hotel in West Palm Beach, Florida. The loan was assumed in December 2019 when the property was sold to LR West Palm Beach, LLC, a joint venture between Jackson, Wyoming-based Willow Lake Holdings and London + Regional Properties. This loan is on the servicer’s watchlist because of a low DSCR, which at YE2020 was reported at -0.45x compared with the YE2019 DSCR of 1.96x. Despite the poor performance metrics, the loan is current and the borrower did not request relief during the pandemic. According to the YE2020 operating statement analysis report, the property reported an occupancy rate, average daily rate (ADR), and revenue per available room (RevPAR) of 42.3%, $154.94, and $65.46, respectively. In comparison, the YE2019 occupancy rate, ADR, and RevPAR were 80.3%, $159.19, and $127.74, respectively. Considering the decline in performance and general uncertainty surrounding the subject’s recovery from the effects of the pandemic, DBRS Morningstar analyzed this loan with an elevated POD to increase the expected loss with 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-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.

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 the 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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.

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].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. + 416 593-5577