DBRS Morningstar Confirms Ratings on All Classes of WFCM 2015-LC22, Changes Trends on Four Classes to Stable from Negative

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2015-LC22 issued by Wells Fargo Commercial Mortgage Trust 2015-LC22 as follows:

-- Class A-3 at AAA (sf)
-- 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)
-- Class X-E at BB (sf)
-- Class E at BB (low) (sf)
-- Class X-F at B (high) (sf)
-- Class F at B (sf)

DBRS Morningstar changed the trends on Classes E, F, XE, and XF to Stable from Negative. All remaining classes have Stable trends. The rating confirmations and trend changes reflect the improved overall outlook for the loans in special servicing and the improved performance of the loans on the servicer’s watchlist since the transaction’s last review.

As of the July 2022 remittance, 95 of the original 100 loans remain in the trust, with an aggregate balance of approximately $801.6 million, representing a collateral reduction of 16.8% since issuance. Additionally, 13 loans, representing 14.6% of the current pool balance are fully defeased. Homewood Suites Houston Intercontinental (Prospectus ID #39) was liquidated in March 2022 at a realized loss of $2.6 million, below the loss estimate at last review. Also as of the July 2022 remittance, four loans, representing 4.3% of the current pool balance, are in special servicing, and 19 loans, representing 25.4% of the pool, are on the servicer's watchlist for a variety of performance-related concerns.

The largest specially serviced loan, Clearwater Collection (Prospectus ID #17, 1.6% of the pool), is secured by a 134,361-square foot (sf) retail property in Clearwater, Florida. The loan was transferred to the special servicer in July 2018 because of payment default when the sponsor, Gary J. Dragul of GDA Real Estate Services, was indicted for fraudulent activities. The special servicer pursued a foreclosure strategy with the appointed receiver working toward selling the properties. Recently, in April 2022, the Borrower filed Chapter 11 bankruptcy in Colorado, and the litigation remains ongoing. The special servicer is anticipating a Receiver’s sale that will reportedly result in a full payoff of the loan, per the most recent servicer commentary.

According to the March 2022 rent roll, the property is 54.4% occupied by two tenants, Floor & Decor Outlets of America, Inc. (Floor & Decor; 49% of the net rentable area (NRA), lease expiry recently extended to May 2027) and Blazin Wings (formerly 5.4% of the NRA, lease expiry July 2022). Blazin Wings seems to have left the property following its lease expiration, leaving Floor & Decor as the sole tenant. The YE2021 debt service coverage ratio (DSCR) was reported at 0.44 times (x), compared with the YE2020 DSCR of 0.24x and the YE2019 DSCR of 2.32x. According to the July 2021 appraisal, the property was valued at $10.8 million, which is slightly above the October 2020 appraisal value of $10.4 million but a 41.6% decrease from the issuance value of $18.5 million. As of this review, DBRS Morningstar liquidated this loan from the pool, which resulted in a loss severity in excess of 25%.

The largest loan on the servicer's watchlist, 40 Wall Street (Prospectus ID#1; 9.6% of pool), also the largest loan in the pool, is secured by the leasehold interest in a 71-story, 1.2-million sf office building at 40 Wall Street, one block from the New York Stock Exchange. The loan is on the watchlist because of a low DSCR, with the YE2021 DSCR reported at 1.13x, YE2020 DSCR of 1.25x, and DBRS Morningstar DSCR of 1.53x at issuance. The decline in net cash flow was mainly driven by a decrease in base rental revenue because the borrower had offered rent concessions to some of its tenants amid the pandemic with the goal of retaining tenants long term, while other tenants had delayed move-in dates. According to the servicer, the borrower will not be forgiving any rents and is expecting revenues to rebound.

According to the most recent financial reporting, the property had trailing three month (T-3) ended March 31, 2022, an occupancy rate of 83.5%, slightly below the YE2021 and YE2020 occupancy rates of 86.0% and 87.2%, respectively, as well as issuance occupancy of 97.8%. The former third-largest tenant at the subject, Thorton Tomasetti (5.2% of the NRA) recently vacated the premises to relocate to its new headquarters and paid a lease cancellation fee. Other large tenants remaining at the property include Green Ivy (7.4% of NRA, lease expires in November 2061) and Country Wide Insurance (7.3% of NRA, lease expires in August 2036). The property benefits from an ideal location as well as a granular rent roll with minimal rollover in the next 12 months. The Downtown submarket reported a Q1 2022 vacancy rate of 12.4%, compared with Q1 2021 and Q1 2020 vacancy rates of 11.8% and 11.7%, respectively. The sponsor, Donald J. Trump of the Trump Organization, has made headlines for inconsistent reporting of his corporate financial statements and generally withholding information regarding his real estate portfolio. Considering the decline in performance because of dropping occupancy and general challenges that the sponsor is currently encountering, DBRS Morningstar analyzed this loan with an elevated probability of default to increase the expected loss with this review.

The second-largest loan on the servicer’s watchlist loan is West Palm Beach Marriott (Prospectus ID#6; 3.4% of the pool), which is secured by a 352-key, full-service hotel in West Palm Beach, Florida. This loan is on the watchlist because of a low DSCR, with T-12 ended December 31, 2021, DSCR reported at 0.24x, an improvement from the YE2020 DSCR of -0.45x but below the YE2019 DSCR of 1.96x and the DBRS Morningstar DSCR of 1.66x. It is noteworthy that despite the poor performance, the loan is current and the borrower did not request any relief during the pandemic.

According to article published by Real Deal in December 2019, the Marriott family sold the subject to Jackson Hole Trust Company, which manages real estate, businesses, and other investments on behalf of families in the U.S. and internationally. More recently, in May 2022, an article from Palm Beach Post noted that the property owners want to build a 327,000-sf office and conference complex. Considering the decline in performance of the hotel and the general uncertainty surrounding the repurposing of the subject by the new owners, DBRS Morningstar will continue to monitor the loan for any developments.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance 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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

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.

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.

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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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