DBRS Morningstar Confirms All Classes of Wells Fargo Commercial Mortgage Trust 2015-C27

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2015-C27 issued by Wells Fargo Commercial Mortgage Trust 2015-C27 as follows:

-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (sf)
-- Class C at BBB (high) (sf)
-- Class PEX at BBB (high) (sf)
-- Class X-B at BB (sf)
-- Class D at BB (low) (sf)
-- Class E at CCC (sf)
-- Class F at C (sf)

Classes C, D, X-B, and PEX continue to carry Negative trends, reflecting the uncertainty of resolution for the pool’s seven specially serviced loans. All other trends are Stable. The Interest in Arrears designation has been removed from the Class E certificate as those were repaid with the February 2022 remittance. Interest in Arrears remains in place for the Class F certificate.

The confirmations reflect the overall stable performance of the transaction since the last rating action. As of the March 2022 remittance, 78 of the original 95 loans remain in the pool, with a collateral reduction of 21.5% since issuance as a result of loan amortization, loan repayments, and the liquidation of two loans. An additional 12 loans, representing 8.4% of the current trust balance, have been fully defeased. The seven loans in special servicing represent 16.1% of the current pool balance. There are also 18 loans (28.4% of the current pool balance) on the servicer’s watchlist. Since DBRS Morningstar’s last review of this transaction, the $2.7 million Peoria Multifamily Portfolio (Prospectus ID#78; 1.4% of the pool) liquidated, resulting in a $2.7 million loss to the unrated Class G. The loss was in line with DBRS Morningstar’s prior loss forecast of $2.6 million.

The primary contributor to the ratings downgrades previously taken in May 2021 for this transaction, as well as the Negative trends that were maintained with this review, is the pool’s largest loan in special servicing, Westfield Palm Desert (Prospectus ID#1; 7.6% of the pool), which is on the DBRS Morningstar Hotlist. The pari passu $125.0 million whole loan is fully interest only (IO) and is secured by a 572,724-square-foot (sf) portion of a 977,888-sf regional mall in Palm Desert, California. The loan transferred to special servicing in August 2020 due to payment default and most recently reported current as of the March 2022 remittance. According to the most recent commentary, the special servicer continues to pursue foreclosure after receivership was granted in October 2021. While in receivership, the property was rebranded as The Shops at Palm Desert and is expected to be marketed for sale once foreclosure is complete, according to the special servicer.

An updated appraisal completed in July 2021 valued the property at $55.2 million, down 16.2% from the September 2020 value of $65.9 million and down 73.9% from the appraised value of $212.0 million at issuance. The sharp value decline is generally the product of cash flow declines that preceded the onset of the Coronavirus Disease (COVID-19) pandemic; however, the weakened appeal of regional mall properties, as well as the subject mall’s tertiary location and related limitations in attracting replacement tenants to backfill existing vacancies were also significant contributors to the loss in value since the subject loan was made in 2015. It is also worth noting that the master servicer’s reporting for the subject transaction does not appear to count the full debt service obligation for the subject loan, with the debt service coverage ratio (DSCR) reported artificially high since issuance. The reporting for the companion loan, held in Morgan Stanley Bank of America Merrill Lynch Trust 2015-C21 (also rated by DBRS Morningstar), does show the correct debt service calculation. Most recently, the special servicer reported a trailing 12 months’ ended June 30, 2021, DSCR of 0.95 times (x), a decline compared with the year-end (YE) 2019 and YE2018 DSCR figures of 1.97x and 2.26x, respectively. Although the 2018 and 2019 figures were well above breakeven, those figures represent significant declines from the issuer’s DSCR of 2.61x.

The second-largest loan in special servicing is also exhibiting significantly increased risks from issuance. The 300 East Lombard (Prospectus ID#9; 3.0% of the pool) loan transferred to special servicing in March 2022 and is secured by a 20-story, 225,485-sf office property in the Baltimore central business district. The reason for the loan’s transfer has not been provided as of yet, but DBRS Morningstar believes it is likely due to imminent monetary default related to the upcoming loss of the property’s largest tenant; Ballard Spahr (15.0% of net rentable area (NRA)) is expected to vacate upon its April 2022 lease expiration, which will decrease occupancy to 65.0%, which is well below the occupancy rate of 96.0% at issuance.

Given the low in-place occupancy rate, the loan has been placed on the DBRS Morningstar Hotlist. The sponsor will likely have challenges backfilling the space in the near term given the sluggish market conditions highlighted by a submarket vacancy rate of 18.9% according to Reis as of Q4 2021, which Reis expects to increase to 21.0% by 2025. There is a leasing reserve in place, with a balance of $1.0 million reported as of the March 2022 remittance. The most recent year-end financial reporting ended 2020 showed cash flow was in line with issuance levels with a DSCR of 1.37x; however, the DSCR fell to 1.27x for the Q3 2021 reporting period and it is worth noting that the subject property’s occupancy rate has historically hovered around 80.0% since 2017, suggesting the soft submarket conditions have affected leasing efforts in recent years. The loan was analyzed with an elevated probability of default (PoD) to increase the expected loss in the analysis for this review.

The transaction’s third-largest loan, 312 Elm (Prospectus ID#3; 5.2% of the pool), secured by an office property in Cincinnati, is being monitored on the servicer’s watchlist for cash flow declines from issuance. These trends are directly tied to occupancy losses, as the property’s occupancy rate fell to 65.0% in 2017 (down from 85.0% at issuance) after the property’s second- and third-largest tenant, General Services Administration (GSA), vacated at the respective lease expiration dates. Occupancy improved to 70.0% after two leases totaling 22,423 sf were signed in 2021. While the YE2021 net cash flow is up 40.8% compared with the previous year, the figure is 43.0% below issuance. The YE2021 DSCR was reported just above breakeven, at 1.02x; the coverage was below 1.0x for 2020 (0.73x at YE2020) and in line with the YE2021 figure at YE2019. The loan has been cash managed since the GSA leases were not renewed and has never been reported delinquent; it is also worth noting that no coronavirus-related relief request was processed in the last few years.

Although the recent lease signings are concerning, DBRS Morningstar notes it appears likely the property’s largest remaining tenant, Gannett Satellite Info Network (29.0% of the NRA), will not be renewing at its lease in December 2022 based on the availability rate of 57.2% in a CBRE listing for the property found online as of March 2022. DBRS Morningstar has requested a leasing update from the servicer, but notes the DSCR will fall well below breakeven if that tenant’s space is vacated and not backfilled in short order. The servicer’s reporting shows a balance of approximately $1.8 million in the leasing reserve, which would equate to approximately $9.50 per sf on the space needed to be leased to get the property back to the issuance occupancy rate of 85.0%, based on the CBRE listing availability; this figure is exponentially lower than what would be required to fund tenant improvements and leasing commissions for such an endeavor. Given the high availability rate, the loan has been added to the DBRS Morningstar Hotlist. The loan was analyzed with an increased PoD to stress the expected loss in the analysis for 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 and X-B 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#1 – Westfield Palm Desert (7.6% of the pool)
-- Prospectus ID#3 – 312 Elm (5.2% of the pool)
-- Prospectus ID#9 – 300 East Lombard (3.0% of the pool)

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 4, 2022), 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 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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