DBRS Morningstar Downgrades Two Classes of Wells Fargo Commercial Mortgage Trust 2015-C31

DBRS Limited (DBRS Morningstar) downgraded two classes of the Commercial Mortgage Pass-Through Certificates, Series 2015-C31 issued by Wells Fargo Commercial Mortgage Trust 2015-C31 as follows:

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

In addition, DBRS Morningstar confirmed the remaining classes as follows:

-- 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 X-A at AAA (sf)
-- Class X-B at AA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class PEX at A (low) (sf)
-- Class X-D at BBB (sf)
-- Class D at BBB (low) (sf)

The trend on Class E has been changed to Stable from Negative. All trends are Stable with the exception of Class F, which has a rating that generally does not carry a trend in Commercial Mortgage-Backed Securities ratings.

The rating downgrades reflect the continued concerns and projected losses with the two loans in special servicing but the overall stable performance of the remaining loans in the pool supports the rating confirmations with Stable trends, including the trend change on Class E.

At issuance, the transaction consisted of 102 fixed-rate loans secured by 118 commercial and multifamily properties with an initial trust balance of $988.5 million. As of the June 2022 remittance report, 91 loans remain in the transaction with a trust balance of $876.0 million, representing a collateral reduction of approximately 11.4%. Thirteen loans, representing 7.9% of the current pool balance, are fully defeased. Two loans, representing 8.1% of the pool, are in special servicing and 20 loans, representing 31.1% of the pool, are on the servicer’s watchlist.

The largest specially serviced loan, Sheraton Lincoln Harbor Hotel (Prospectus ID#2; 6.8% of the pool), is secured by a 343-room, full-service hotel in Weehawken, New Jersey. The loan transferred to special servicing in January 2021 because of imminent default and was last paid in October 2020. The sponsor is no longer supporting the hotel and is cooperating with the foreclosure process. A receiver is managing the marketing efforts, which began in May 2022, with a sale expected to take place in late summer or early fall of 2022. As of the most recent appraisal, dated March 2021, the property’s as-is value was $87.4 million, representing a 32.0% decline from the issuance appraised value of $128.0 million. The most recent financials reported, for the trailing six months ended June 30, 2021, showed a debt service coverage ratio (DSCR) of -0.41 times (x) compared with the YE2020 DSCR of -1.42x. Based on a haircut to the most recent appraisal, DBRS Morningstar’s liquidation scenario for the loan results in a loss to the trust of just over $19.0 million, a loss severity of 32%.

The remaining loan in special servicing, Holiday Inn – Lafayette (Prospectus ID#23; 1.2% of the pool) is secured by a 147-room, full-service hotel in Lafayette, Indiana. The loan transferred to special servicing in May 2019 for delinquent payments and, initially, the servicer appeared poised to initiate foreclosure proceedings. However, a forbearance agreement was reached in early 2020 and the loan was expected to return to the master servicer, but the onset of the Coronavirus Disease pandemic meant the sponsor could not comply with the terms of the forbearance and the loan remained in default. Most recently, the servicer has reported that a settlement agreement has been reached with the sponsor for an amount that will cover the outstanding loan balance and most of the incurred fees but, as of the May 2022 remittance, the loan remained outstanding. Given the sponsor’s previous difficulties and the 30% value decline for the property according to the September 2021 appraisal, in its analysis for this review, DBRS Morningstar assumed a loss to the trust of approximately $1.2 million will be incurred at disposition.

The second-largest loan on the servicer’s watchlist, City Place I (Prospectus ID#3; 5.1% of the pool) is secured by a 39-story, Class A office property totalling 884,366 square feet (sf) in downtown Hartford, Connecticut. The loan was added to the servicer’s watchlist in January 2021 for a low DSCR, which was driven by lower revenues tied to occupancy declines. Most recently, the loan reported a DSCR of 1.59x and an occupancy rate of 85.0% as of the trailing three months ended March 31, 2022, compared with the DSCR of 1.37x and occupancy rate of 85.2% in 2021. The most noteworthy of the tenancy changes since issuance is that of UnitedHealthcare Services Inc. (42.4% of the net rentable area; lease expiry in July 2023), which downsized to 375,000 sf from 444,000 sf in 2017. There do not appear to be any cash sweep provisions tied to UnitedHealthcare’s July 2023 lease expiry, but DBRS Morningstar has asked the servicer to confirm. The March 2022 remittance showed $1.3 million in the leasing reserve for this loan and a LoopNet listing located online as of June 2022 showed spaces for lease that suggest a current availability rate of approximately 16%. As of a Q1 2022 Reis report, the Hartford central business district submarket reported an average 2022 vacancy rate of 19.2%, which is expected to remain at 19.3% in 2023. Given the soft market and upcoming lease expiry for a sizeable tenant, the loan was analyzed with an elevated probability of default to increase the expected loss for this review.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/Governance (ESG) factors that had a significant or relevant effect on the credit analysis.

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/396929.

Classes X-A, X-B, and X-D 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.

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 the 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.

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.

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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