DBRS Morningstar Downgrades Three Classes, Confirms Eight Classes, Discontinues One Class of Wells Fargo Commercial Mortgage Trust 2015-SG1

DBRS Limited (DBRS Morningstar) downgraded the following ratings of the Commercial Mortgage Pass-Through Certificates, Series 2015-SG1 issued by Wells Fargo Commercial Mortgage Trust 2015-SG1:

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

DBRS Morningstar also confirmed its ratings on eight classes as follows:

-- 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)

Finally, DBRS Morningstar discontinued the rating on Class X-F because it references a class with a CCC (sf) rating.

DBRS Morningstar changed the trends on Classes B, C, and PEX to Stable from Negative. The trends on Classes D, X-E, and E are Negative. While the rating on Class F does not carry a trend, the Interest in Arrears designation has been maintained. All other trends remain Stable.

The downgrades and Negative trends reflect DBRS Morningstar’s views on the credit risks for some loans in the pool, most notably the two largest loans in special servicing, Boca Park Marketplace (Prospectus ID#2, 6.8% of the current pool balance) and Bella of Baton Rouge (Prospectus ID#19, 1.6% of the current pool balance), and the largest loan in the pool, Patrick Henry Mall (Prospectus ID#1, 9.7% of the current pool balance).

According to the October 2021 remittance, 68 of the original 72 loans remain in the trust, with a trust balance of $635.4 million, representing a collateral reduction of 9.1% since issuance as a result of loan repayments, scheduled amortization, and the liquidation of four loans. Three loans, representing 1.9% of the current pool balance, are defeased.

The pool has a high concentration of retail and hospitality properties, representing 34.2% and 21.8% of the pool balance, respectively. There are currently four loans, representing 10.5% of the current pool balance, in special servicing, and 21 loans, representing 35.1% of the current pool balance, on the servicer’s watchlist.

DBRS Morningstar assumes the trust will incur a loss exceeding $3.0 million upon the resolution of Bella of Baton Rouge, a 220-unit multifamily property in Baton Rouge, Louisianna. The special servicer is currently pursuing foreclosure, and the borrower has indicated no additional capital will be contributed to loan payments or capital expenditures. Based on the April 2021 appraisal, the property was valued at $11.0 million (resulting in a loan-to-value ratio (LTV) of 91.9%), well below the issuance figure of $16.6 million. In addition, the property incurred significant damage as a result of Hurricane Ida in August 2021, although according to the September 2021 site inspection, an insurance claim has been made.

The largest loan in special servicing, Boca Park Marketplace, is secured by a 148,000-square-foot (sf) portion of a larger anchored retail property in Las Vegas and was transferred to special servicing in June 2020 at the borrower’s request because of challenges faced during the pandemic. While workout discussions appear to be ongoing, the loan is 121+ days delinquent as of the October 2021 remittance. Collateral occupancy remains healthy at 93.5%. However, three tenants, Ross (20.7% of the net rentable area (NRA); expiring January 2022), Tillys (5.4% of the NRA; expiring September 2025), and Famous Footwear (4.4% of the NRA; expiring January 2025) are paying cotenancy deficiency rents, triggered by the departure of Haggen Food & Pharmacy and Fry’s Electronics in 2015 and 2016, respectively. These two tenant spaces are not part of the loan collateral but are directly across from the subject and remain vacant. According to the September 2021 appraisal, Ross, Tillys, and Famous Footwear are paying rates ranging between 67% and 75% of their respective base contracts, which has led to a below breakeven cash flow. Considering the loan’s delinquency status and uncertainty surrounding the workout plan, for this review, DBRS Morningstar analyzed this loan with an elevated probability of default to increase the expected loss.

The largest loan in the pool, Patrick Henry Mall, is secured by a fee-simple interest in 432,401-sf of a 716,558-sf midtier regional mall in Newport News, Virginia. The mall owner and operator is Pennsylvania Real Estate Investment Trust (PREIT), which emerged from Chapter 11 in December 2020 after a restructuring plan was agreed upon, in which PREIT extended its debt maturity schedule and provided $130.0 million in new funding for recapitalization. The property is anchored by JCPenney (19.7% of the NRA; expiring October 2025) and Dick's Sporting Goods (11.6% of the NRA; expiring January 2022), and per the June 2021 rent roll, the collateral was 95.1% occupied. As of Q2 2020, the loan had net cash flow of $3.9 million (a debt service coverage ratio (DSCR) of 1.39 times (x)) for the trailing six months ended June 30, 2020, or an annualized figure of $7.9 million, compared with $7.2 million (a DSCR of 1.27x) at YE2020 and $8.8 million ( a DSCR of 1.53x) at YE2019. The issuance value of $155.0 million implies a going-in LTV of 61.7%, which is moderate for the property type and asset location. Additionally, loan amortization provides some cushion against the value decline that seems likely since the loan was made in 2015.

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.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#1 – Patrick Henry Mall (9.7% of the pool)
-- Prospectus ID#2 - Boca Park Marketplace (6.8% of the pool)
-- Prospectus ID#3 – Fifth Third Center (5.6% 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.

On November 2, 2022, the press release was updated to further clarify that Class F does not carry a trend.

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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