DBRS Morningstar Downgrades 10 Classes of Wells Fargo Commercial Mortgage Trust 2016-C36

DBRS Limited (DBRS Morningstar) downgraded the following ratings of the Commercial Mortgage Pass-Through Certificates, Series 2016-C36 issued by Wells Fargo Commercial Mortgage Trust 2016-C36:

-- Class E-2 to BB (sf) from BB (high) (sf)
-- Class E to BB (sf) from BB (high) (sf)
-- Class F-1 to B (high) (sf) from BB (sf)
-- Class F-2 to B (sf) from BB (low) (sf)
-- Class EF to B (sf) from BB (low) (sf)
-- Class F to B (sf) from BB (low) (sf)
-- Class G-1 to B (low) (sf) from B (sf)
-- Class G-2 to CCC (sf) from B (low) (sf)
-- Class EFG to CCC (sf) from B (low) (sf)
-- Class G to CCC (sf) from B (low) (sf)

DBRS Morningstar confirmed the remaining classes as follows:

-- Class A-2 at AAA (sf)
-- 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 X-B at AA (high) (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class X-D at BBB (high) (sf)
-- Class D at BBB (sf)
-- Class E-1 at BBB (low) (sf)

DBRS Morningstar changed the trends on Classes D, X-D, E-1, E-2, and E to Negative from Stable. Classes F-1, F-2, EF, F, and G-1 continue to carry Negative trends. Following the downgrades to CCC (sf), Classes G-2, EFG, and G no longer carry any trends. Classes G-1, G-2, G, and EFG no longer carry an Interest in Arrears designation.

The Negative trends and downgrades reflect the continued performance challenges for the underlying collateral, much of which has been driven by the impact of the Coronavirus Disease (COVID-19) global pandemic. As of the October 2021 remittance, there are eight loans, representing 15.1% of the pool, in special servicing; DBRS Morningstar assumed liquidation scenarios on two of the loans, with loss severities exceeding 30.0%. In addition to the loans in special servicing, there are 14 loans, representing 21.2% of the pool, on the servicer’s watchlist. These loans are generally being monitored for coronavirus relief requests, low occupancy, and declining debt service coverage ratios (DSCR). DBRS Morningstar notes that the pool has a high concentration of retail properties, representing 32.1% of the pool, and lodging properties, representing 15.4% of the pool, as of the October 2021 remittance, which have been disproportionately negatively affected by the coronavirus pandemic.

The largest loan in the pool, Gurnee Mills (Prospectus ID#1, 9.5% of the pool), is secured by a single-level enclosed regional mall totalling 1.9 million square feet (sf), of which 1.7 million sf is part of the collateral. Simon Property Group (Simon) owns and operates the collateral portion of the property. At issuance, the largest tenants were Sears, Bass Pro Shops, and Macy’s. The Sears closed in 2018 and the sponsor has yet to backfill the space. The loan transferred to the special servicer in June 2020 as a result of monetary default related to the effects of the coronavirus pandemic. A forbearance was agreed upon, allowing the borrower to defer debt service payments from May 2020 through February 2021, with the loan converting to interest only (IO) during this period. Beginning in March 2021, principal payments resumed and the deferred payments are to be repaid in 24 equal monthly installments. The loan was returned to the master servicer in May 2021 after the borrower made three consecutive payments. Occupancy fell to 80.3% at Q1 2021 with the annualized Q1 2021 DSCR reported at 1.09x.

Performance for the subject property was declining prior to the coronavirus pandemic, with cash flow trending downward for the past three consecutive years. The 2020 year-end net cash flow (NCF) decreased 14.4% compared with year-end 2019 and declined 29.4% compared with the Issuer’s NCF. DBRS Morningstar notes the increased risks for the loan from issuance given the difficulty in backfilling the former Sears space and the property’s exposure to struggling retailers, including Macy’s. Given these factors, as well as the decline in performance prior to the pandemic, DBRS Morningstar applied a stressed probability of default for this loan in the analysis for this review, increasing the expected loss.

The Mall at Turtle Creek (Prospectus ID#7, 3.5% of the pool) is secured by a portion of a single-storey regional mall in Jonesboro, Arkansas, and is operated by an affiliate of Brookfield Properties. The loan transferred to special servicing in August 2020 for monetary default and has remained delinquent ever since. In addition to business interruptions from the pandemic, the mall sustained significant damage from a tornado in March 2020 and the majority of the mall has been demolished. Non-collateral anchors Dillard’s, JCPenney, and Target received less damage than the in-line space and have since reopened. A settlement is currently under discussion that would have the lender take title of the property. DBRS Morningstar analyzed this loan with a liquidation scenario with an implied loss severity in excess of 30.0%.

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 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.

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. 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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