DBRS Morningstar Downgrades Ratings on 10 Classes of Wells Fargo Commercial Mortgage Trust 2016-C36, Changes Trends on Two Classes to Stable From Negative

DBRS Limited (DBRS Morningstar) downgraded its ratings on 10 classes of the Commercial Mortgage Pass-Through Certificates, Series 2016-C36 issued by Wells Fargo Commercial Mortgage Trust 2016-C36 as follows:

-- Class E-2 to B (high) (sf) from BB (sf)
-- Class E to B (high) (sf) from BB (sf)
-- Class F-1 to B (sf) from B (high) (sf)
-- Class F-2 to B (low) (sf) from B (sf)
-- Class F to B (low) (sf) from B (sf)
-- Class EF to B (low) (sf) from B (sf)
-- Class G-1 to CCC (sf) from B (low) (sf)
-- Class G-2 to C (sf) from CCC (sf)
-- Class G to C (sf) from CCC (sf)
-- Class EFG to C (sf) from CCC (sf)

DBRS Morningstar also confirmed its ratings on the remaining classes 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 X-B at AA (high) (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class X-D at BBB (high) (sf)
-- Class D at BBB (sf)
-- Class E-1 at BBB (low) (sf)

DBRS Morningstar also changed the trends on Classes D and X-D to Stable from Negative. The trends on classes E-1, E-2, E, F-1, F-2, EF, and F remain Negative. All other trends are Stable with the exceptions of Classes G-1, G-2, G, and EFG, which are assigned ratings that generally do not carry a trend for Commercial Mortgage-Backed Securities (CMBS) ratings. The rating downgrades and Negative trends reflect the continued performance challenges for the loans showing increased risks from issuance including one specially serviced loan and the largest watchlisted loan, as further described below. In particular, DBRS Morningstar anticipates sizable losses for the Mall at Turtle Creek, which would erode the unrated classes and could spill over into Class G, prompting the aforementioned downgrades.

The trust consists of 66 of the original 73 loans with an aggregate principal balance of $741.9 million, reflecting a collateral reduction of 13.5% since issuance. As of July 2022, there are 15 loans, representing 30.8% of the pool, on the servicer’s watchlist. There are four loans, representing 10.7% of the pool, in special servicing and two loans, representing 4.1% of the pool, are delinquent. Nine loans, representing 4.3% of the current pool, have fully defeased. The pool is concentrated by property type, with 33.7% of the pool secured by retail properties, 24.1% of the pool secured by retail properties, and 12.8% of the pool secured by multifamily properties.

The largest loan, Gurnee Mills (Prospectus ID#1, 10.1% of the current pool), is secured by a regional mall in Gurnee, Illinois. The loan is sponsored by Simon Property Group (Simon) and was previously in special servicing before it was brought current, cash management was initiated and returned to the master servicer in June 2021. The servicer approved a loan modification that allowed for a period of deferred debt service payments and interest-only (IO) debt service payments, with deferred amounts to be paid in 24 installments beginning in March 2021. The loan has consistently reported cash flows below the Issuer’s figure of $25.1 million, with occupancy decreases driving the bulk of the declines. These trends preceded the onset of the Coronavirus Disease (COVID-19) pandemic, which exacerbated those previous trends and contributed to the default on the loan in 2020.

The property was 81.9% occupied as of March 2022, slightly increasing from 77.5% at year end (YE) 2021 but still below the issuance occupancy rate of 91%. The loan reported a debt service coverage ratio of 1.74 times (x) as of March 2022, remaining in line with YE2021. However, this appears to be based on the in-place debt service obligation with the modified loan terms; based on the original debt service amount, the implied coverage is much lower, at 1.13x. There is limited rollover risk within the next 12 months, with 9.3% of net rentable area (NRA) scheduled to expire. As of July 2022, all anchor units were fully or partially occupied, with Hobby Lobby (4.0% of the net rentable area (NRA)), partially back-filling the former Sears space (previously 11.9% of the NRA), space. No recent sales were provided in response to DBRS Morningstar’s request of the servicer. Although the in-place coverage is healthy, the occupancy declines from issuance and the sharp decline in cash flow from issuance to $17.8 million at YE2021 suggests there has likely been a significant value decline in that time. Simon appears committed to the loan and property, however, and there have been some recent positive developments in the leasing activity and cash flow improvements from YE2020. Given the increased risks for this loan, DBRS Morningstar assumed a stressed scenario to increase the expected loss in the analysis.

The largest specially serviced loan, Mall at Turtle Creek (Prospectus ID#7, 3.5% of the current pool) is secured by a portion of a regional mall in Jonesboro, Arkansas. The loan transferred to special servicing in August 2020 for imminent default and remains delinquent. The property was largely destroyed by a tornado in March 2020, with only noncollateral tenants, Dillards, JCPenney, and Target, reopening later that year. The majority of the mall was later demolished. As of July 2022, servicer commentary reports the majority of the mall has been demolished and the borrower is unwilling to rebuild the property and carry the loan. As of July 2022, the servicer commentary shows that the servicer expects to take title of the property within the next few months. The mall was showing significant performance declines prior to the tornado event, with YE2019 net cash flow at $5.3 million, down from the Issuer’s figure of $7.1 million. Given these factors, the insurance settlement could be reduced to reflect the likely value decline from issuance. Given these factors, DBRS Morningstar believes a high loss severity is likely at disposition and assumed a loss severity exceeding 75.0% in the analysis for this review.

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-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 this transaction.

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.

On October 28, 2022, the press release was updated to reflect the downgrade to Class EFG.

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.

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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