DBRS Morningstar Confirms Ratings on Wells Fargo Commercial Mortgage Trust 2016-NXS5

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2016-NXS5 issued by Wells Fargo Commercial Mortgage Trust 2016-NXS5 as follows:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-6 at AAA (sf)
-- Class A-6FL at AAA (sf)
-- Class A-6FX 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 (low) (sf)
-- Class B at A (high)
-- Class C at BBB (high) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (high) (sf)
-- Class X-F at B (sf)
-- Class F at B (low) (sf)
-- Class G at CCC (sf)

DBRS Morningstar discontinued its rating on Class X-G as its reference class is rated CCC (sf). In addition, DBRS Morningstar changed the trends on Classes X-B, B, and C to Stable from Negative, while Classes D, E, X-F, and F continue to carry Negative trends. The trends on all other classes remain Stable with the exception of Class G, which has a rating that does not carry a trend. Class G continues to carry an Interest in Arrears designation.

The rating confirmations and the trend changes reflect a slight improvement in expected outcomes for the transaction. First, the loans in special servicing since before the Coronavirus Disease (COVID-19) pandemic continue to struggle and are anticipated to incur significant losses from a percentage standpoint. At the same time, other loans that have been in special servicing or on the watchlist have improved in occupancy and performance and anticipated potential resolutions have improved, mitigating the impact of such anticipated losses, with potential to actually recover to performing status.

As of the November 2021 remittance, 59 of the original 64 loans remain in the pool with a current balance of $710.2 million, representing a collateral reduction of 18.8% since issuance. This reduction includes two small loans that have left the pool since DBRS Morningstar last reviewed this transaction, including the Holiday Inn Express & Suites Allen loan (Prospectus ID#36), which was liquidated resulting in a nominal realized loss to the trust of $1.5 million, contained to the unrated Class H.

As of the November 2021 reporting, six loans (representing 8.7% of the current pool balance) were in special servicing. Four of these loans, representing 4.9% of the current pool balance, were in special servicing prior to the outbreak of coronavirus pandemic and are in various stages of the foreclosure process. DBRS Morningstar expects several of these loans to take losses upon their final resolution, with loss severities ranging from 31.6% to 82.0%; however, given the loan sizes, the modeled losses upon liquidation for these loans would remain contained to Class H. There were also 10 loans (representing 20.5% of the current pool balance) on the servicer’s watchlist.

The largest loan in special servicing is The Shoppes at Zion (Prospectus ID #11, 3.0% of the current pool balance). The loan is secured by a 118,956 square feet (sf) unanchored retail property in St. George, Utah. The loan transferred to special servicing in May 2020 for imminent monetary default as a result of tenant hardship brought on by the pandemic. The borrower requested and was denied a five-month forbearance request, and the loan has remained 30-59 days delinquent for several remittance periods, with the borrower making back payments to keep the loan from slipping beyond 60 days delinquent. The special servicer is continuing to dual track resolution, although the remittance report indicates the resolution strategy as a likely modification. Historically, cash flow at the property has been stable along with occupancy above issuance levels, however, the net cash flow (NCF) reported at YE2020 was 48% below the issuer’s NCF from issuance with a debt service coverage ratio (DSCR) of 0.59 times (x). The year-to-date financials reported as of June 2021 showed some improvement over the YE2020 with a reported DSCR of 0.95x, despite a small occupancy decline to 92.6%. There is additional risk looming as the property has nine tenants (representing 22.1% of net rentable area (NRA)) with lease expirations through 2022, including the third-largest tenant Eddie Bauer Outlet (representing 5.6% of NRA). Given the collateral’s performance decline from issuance, paired with the near-term lease rollover risk, DBRS Morningstar analyzed this loan with an elevated probability of default.

The second-largest loan in special servicing is 1006 Madison Avenue (Prospectus ID #16, 2.4% of the current pool balance). The loan is secured by a 3,917-sf single-tenant retail property on Manhattan’s Upper East Side. The property has 15 feet of frontage along Madison Avenue and its immediate surrounding area is considered to be one of the most premier retail corridors in New York. Sponsorship for the loan is provided by Joseph Sitt, president and CEO of Thor Equities LLC. The loan transferred to the special servicer in October 2018 for imminent monetary default, following the departure of the property’s sole tenant in late 2018, with the property remaining vacant since. The special servicer filed a foreclosure action in May 2019, and a receiver is currently in place, but the resolution has been delayed. The special servicer plans to proceed with foreclosure as the courts reopen upon the termination of the New York State foreclosure moratorium. A July 2021 appraisal valued the property at $7.4 million, down 69% from the issuance appraised value of $24.0 million. This valuation results in a loan-to-value ratio of 230%. As the loan has been delinquent for more than two years, and with mounting servicing advances and the extended vacancy and significant value decline, DBRS Morningstar liquidated the loan in its analysis with a resulting loss severity of 82.6%.

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, X-F, and X-G 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#11 – The Shoppes at Zion (3.0% of the pool)
-- Prospectus ID#16 – 1006 Madison Avenue (2.4% 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 (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 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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