DBRS Morningstar Confirms Ratings on Wells Fargo Commercial Mortgage Trust 2016-LC25, Maintains Three Negative Trends

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of the Commercial Mortgage Pass-Through Certificates, Series 2016-LC25 issued by Wells Fargo Commercial Mortgage Trust 2016-LC25 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 B at AA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at A (sf)
-- Class C at A (low) (sf)
-- Class X-D at BBB (high) (sf)
-- Class D at BBB (sf)
-- Class E at BB (high) (sf)
-- Class F at B (high) (sf)
-- Class G at B (low) (sf)

Classes E, F, and G continue to carry Negative trends, which is largely reflective of the continuing performance issues with the two loans in special servicing, representing a combined 4.5% of the current pool balance. All other trends remain Stable.

The confirmations reflect overall stable performance since the last rating action. As of the January 2022 remittance, 77 of the original 80 loans remain in the pool, with an aggregate principal balance of $838.3 million, representing a collateral reduction of 12.2% since issuance. An additional four loans, representing 6.3% of the current pool balance, are fully defeased. Loans secured by retail properties represent the greatest property type concentration with 29.1% of the pool followed closely by office properties at 26.0% and lodging properties a distant third at 14.8% of the pool balance.

There were also 22 loans being monitored on the servicer’s watchlist, representing 24.4% of the pool balance.

The largest loan in special servicing, The Shops at Somerset Square (Prospectus ID#7, 3.6% of the pool), is secured by an unanchored retail property in Glastonbury, Connecticut, sponsored by Brookfield Property Partners. It transferred to special servicing in August 2020 for payment default caused by operating shortfalls stemming from the Coronavirus Disease (COVID-19) pandemic. The special servicer is dual-tracking a deed-in-lieu of foreclosure and loan assumption and modification as potential workout strategies.

According to the June 2021 rent roll, the property was 72.8% occupied, down from 82.6% at YE2019. The five largest tenants, representing 25.5% of the net rentable area (NRA) combined, including Talbots (7.4% of the NRA) and Jos. A. Bank (4.4% of the NRA), all have near-term lease expirations. Overall, 11% of leases are scheduled to roll in 2022, and an additional 28% will roll by YE2023. The special servicer has not provided an updated operating statement analysis report; however, an operating statement dated June 2021 indicated that the trailing 12-month net operating income was down over 30% from YE2019. Following the recent conversion from interest-only (IO) to amortizing payments, DBRS Morningstar expects ongoing debt service coverage ratio to fall below breakeven. The property was reappraised in August 2021, reflecting a 51% value reduction since issuance and a current loan-to-value ratio of 146.8%. Given the increasing exposure relative to value, low occupancy, and concentrated near-term rollover risk, DBRS Morningstar liquidated this loan in its analysis, resulting in an implied loss severity of over 50%, which is confined to the nonrated class.

At issuance, DBRS Morningstar assigned an investment-grade shadow rating to the largest loan in the pool, 9 West 57th Street (Prospectus ID#1, 6.0% of the pool), which is secured by an office tower in Midtown Manhattan. With this review, DBRS Morningstar maintains that the performance of this loan remains consistent with investment-grade loan characteristics.

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.

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

-- Prospectus ID#7 – The Shops at Somerset Square (3.6% 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.

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.

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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