DBRS Morningstar Confirms All Classes of Wells Fargo Commercial Mortgage Trust 2016-C34

DBRS Limited (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2016-C34 issued by Wells Fargo Commercial Mortgage Trust 2016-C34 as follows:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-3FL at AAA (sf)
-- Class A-3FX 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 (low) (sf)
-- Class B at A (high) (sf)
-- Class C at BBB (high) (sf)
-- Class D at B (high) (sf)
-- Class E at CCC (sf)
-- Class F at CCC (sf)
-- Class G at C (sf)

All classes have Stable trends with the exception of Classes E, F, and G which have ratings that generally do not carry trends in commercial mortgage-backed securities (CMBS). The rating confirmations reflect the overall stable performance of the transaction since last review. The CCC (sf) and C (sf) ratings on Classes E, F, and G are reflective of DBRS Morningstar’s loss expectations for the largest loan in special servicing, Regent Portfolio (Prospectus ID#1; 11.8% of the pool), as discussed below.

According to the March 2023 remittance, 62 of the original 68 loans remain in the pool, representing a 19.3% collateral reduction from issuance. The pool benefits from 10 loans, representing 7.6% of the pool, that are fully defeased. Four loans, representing 17.4% of the pool, are currently in special servicing and 10 loans, representing approximately 13.0% of the pool, are on the servicer’s watchlist. The pool has an office property concentration of approximately 13%, including the largest loan in the pool, Regent Portfolio, which is also the largest loan in special servicing.

At issuance, Regent Portfolio was secured by 13 buildings in New Jersey, New York, and Florida consisting of traditional office, medical office, and warehouse spaces. The loan sponsor is also the primary owner of the portfolio’s largest tenant, Sovereign Medical Services Inc. The loan transferred to special servicing in June 2019 and the borrower filed for bankruptcy in February 2020. Previously, a consensual bankruptcy was agreed upon in February 2022 that would give the borrower six months to pay off the loan with one three-month extension option. The initial six-month period ended in January 2023 at which point the borrower did not exercise its one extension option. As of the March 2023 reporting, the loan has become real estate owned (REO). Since the loan’s transfer to special servicing, one medical office building property in Wayne, New Jersey, was sold with net proceeds of $11.3 million, approximately $2.6 million below the issuance value. That amount was used to recover outstanding servicer advances and to pay past due debt service payments. The lack of updated financial reporting available and prolonged period likely needed to sell the remaining properties suggest the value has declined significantly from issuance. As such, DBRS Morningstar applied a stressed value in its liquidation scenario with this review, resulting in a loss severity in excess of 25.0%.

The second-largest loan in special servicing, Nolitan Hotel (Prospectus ID#8; 3.8% of the pool), is secured by a 57-room, full-service boutique hotel in New York City. The loan transferred to special servicing in December 2020 for payment default as it was last paid through September 2020. Dual tracking is underway, with workout discussions ongoing while foreclosure has been filed and a receivership appointed by the courts. Based on the December 2022 appraisal, the subject was valued at $36.8 million, an improvement from the January 2022 valuation of $30.2 million but still below the issuance value of $39.5 million. Based on the December 2022 value and the outstanding loan balance, this represents a generally healthy loan-to-value ratio (LTV) of 58.3%. An updated STR, Inc. report was not provided but based on the YE2022 financials, the occupancy rate, average daily rate (ADR), and revenue per available room (RevPAR) were reported at 91.1%, $239, and $217, respectively. At issuance, however, the subject reported an occupancy rate, ADR, and RevPAR of 87.7%, $320, and $280, respectively. Although performance has not returned to issuance levels and indeed remains delinquent, the strong LTV based on the December 2022 value suggests that the ultimate resolution will result in a relatively a minor loss to the trust. For this review, DBRS Morningstar maintained the elevated probability of default to increase the expected loss.

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 (May 17, 2022).

Classes X-A and X-B 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.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the North American CMBS Surveillance Methodology (March 16, 2023) https://www.dbrsmorningstar.com/research/410912.

Other methodologies referenced in this transaction are listed at the end of this press release.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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].

DBRS Limited
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Tel. +1 416 593-5577

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model v 1.1.0.0 (https://www.dbrsmorningstar.com/research/410913)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022; https://www.dbrsmorningstar.com/research/402153)

Legal Criteria for U.S. Structured Finance (December 7, 2022;
https://www.dbrsmorningstar.com/research/407008)

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