DBRS Morningstar Downgrades Ratings on Two Classes of Wells Fargo Commercial Mortgage Trust 2015-NXS2, Changes Trends on Six Classes to Negative

DBRS Limited (DBRS Morningstar) downgraded its ratings on two classes of the Commercial Mortgage Pass-Through Certificates, Series 2015-NXS2 (the Certificates) issued by Wells Fargo Commercial Mortgage Trust 2015-NXS2 as follows:

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

DBRS Morningstar also confirmed its ratings on the following classes:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 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 F at CCC (sf)

DBRS Morningstar changed the trends on Classes B, C, D, E, X-E, and PEX to Negative from Stable. Class F has a rating that does not generally carry a trend in commercial mortgage-backed securities (CMBS). All other trends are Stable.

The downgrades and Negative trends reflect DBRS Morningstar’s increasing concerns surrounding the pool’s exposure to the office sector, specifically loans in the top 15. Office properties represent 23.4% of the pool balance, including Campbell Technology Park (Prospectus ID#2, 8.5% of the pool balance), Sea Harbor Office Center (Prospectus ID#6, 5.7% of the pool balance), and Colman Building (Prospectus ID#10, 3.2% of the pool balance). Given the shift in demand for office space that has continued to take shape following the Coronavirus Disease (COVID-19) pandemic, DBRS Morningstar anticipates higher vacancy rates, longer re-leasing periods, and related effects in lower investor demand and value declines, even for performing assets. In the analysis for this review, DBRS Morningstar analyzed loans backed by office and other properties that were showing performance declines from issuance or otherwise exhibiting increased risks from issuance with stressed scenarios to increase the expected loss as applicable. This includes the aforementioned loans, where the expected loss was about 130% above the pool’s weighted-average (WA) expected loss.

As of the March 2023 remittance, 56 of the original 63 loans remain in the pool with an aggregate balance of $704.1 million, representing a collateral reduction of 23.0% since issuance. Eleven loans, representing 18.1% of the pool balance, are fully defeased. In addition, eight loans are in special servicing, totaling 19.8% of the current pool balance, and two of those loans, representing 7.4% of the pool, are likely to return to the master servicer soon. Twelve loans, representing 29.6% of the pool, are on the servicer's watchlist, with 11 of those loans being monitored for occupancy issues as well as low debt service coverage ratios (DSCRs).

The largest loan on the servicer’s watchlist, Campbell Technology Park, was added to the watchlist in February 2022 because of a low DSCR and declining occupancy figures. The loan is secured by a four-building office complex in Campbell, California, totaling approximately 280,000 square feet (sf). As of the September 2022 rent roll, the property's occupancy rate was 62.0%, compared with 64.7% by YE2021, and well below 93.4% at issuance. There is elevated tenant rollover risk within the next 12 months, representing 33.2% of the net rentable area (NRA). This includes the largest tenants, Dialog-Renesas (16.0% of NRA, lease expired in February 2023) and Moss Adams (14.2% of NRA), which has a lease expiring near the 12-month mark in May 2024. Cushman & Wakefield listed approximately 178,000 sf, or 63.5% of NRA, as available for lease, indicating an effective occupancy of 36.5%. The two largest tenants’ spaces were not listed as available; however, DBRS Morningstar has requested a leasing update from the servicer. As expected, financial performance continues to decline, with the YE2022 DSCR at 1.32 times (x), compared with the YE2021 DSCR of 1.77x and the DBRS Morningstar DSCR of 1.67x. Per Q4 2022 Reis data, the Campbell submarket reported a 17.4% vacancy rate and an average asking rent of $47.27 per square foot (psf), compared with the Q4 2021 vacancy rate of 17.2% and average asking rents of $46.68 psf. Given the declining trend in occupancy, significant tenant rollover risk, and weak submarket, the property’s value has likely decreased from issuance. As such, DBRS Morningstar analyzed this loan with an increased probability of default (POD) and a stressed loan-to-value ratio (LTV) for this review, resulting in an expected loss that was 160% above the pool’s WA expected loss.

The largest loan in special servicing, Sea Harbor Office Center, is secured by a 359,514-sf suburban office building in Orlando. The loan originally transferred to special servicing in January 2019 for nonmonetary imminent default where the borrower was disputing a cash flow trigger with the servicer related to a credit rating downgrade on the largest tenant, Wyndham Hotels & Resorts, Inc., and as such, the borrower did not comply with setting up a cash management account. However, cash management was eventually implemented in June 2021 because Wyndham Hotels & Resorts, Inc. had exercised a one-time termination option to give back a floor, reducing its footprint to 72.4% of NRA on a lease through October 2025 from 84.6% of NRA at issuance. According to the March 2023 loan-level reserve report, the loan reported $3.2 million across all reserves, including $2.7 million in other reserves and approximately $335,000 in tenant reserves. The loan was current through to February 2023, but the borrower did not make its March 2023 payment. However, the borrower remains in the 30-day grace period. The loan initially was pending a return to the master servicer in 2022 but with the most recent reporting, the workout has yet to be determined. As of the September 2022 rent roll, the subject’s occupancy rate was 87.8%, compared with 88.0% by YE2021 and 100.0% by YE2020.

Besides the downsizing of the largest tenant, the second-largest tenant, Visit Orlando (12.4% of the NRA), has a lease expiring in December 2024, prior to the loan maturity of June 2025. The special servicer continues to monitor the lease-up of the vacant space as well as ongoing discussions with the borrower regarding the renewal probability of the two largest tenants. Although performance remains healthy with a trailing six months ended June 2022 DSCR of 2.19x with a moderate amount in reserves, the significant tenant rollover risk near loan maturity reflects the increased refinance risk, especially during the current office and economic environment. As such, DBRS Morningstar analyzed this loan with an elevated POD and stressed LTV, resulting in an expected loss that was about 40% above the pool’s WA expected loss.

The second-largest loan in special servicing, Embassy Suites Nashville (Prospectus ID#5, 5.5% of the pool balance), is secured by a 208-room full-service hotel in Nashville. The loan was transferred to special servicing in June 2020 because of payment default as a result of the pandemic. The borrower has complied with all terms under the February 2021 forbearance agreement, and the loan is likely to return to the master servicer. As of the December 2022 STR report, the trailing 12-month occupancy was 72.9%, average daily rate was $213.82, and revenue per available room (RevPAR) was $155.94, outperforming its competitive set with a RevPAR penetration of 149.6%. Financial performance has recovered from its initial transfer, with the trailing nine-month ended September 2022 financials reporting a DSCR of 1.78x, compared with theYE2021 and YE2020 DSCRs of 0.50x and -0.17x, respectively. A September 2022 appraisal obtained by the servicer reported a valuation of $66.7 million, slightly above the issuance appraised value of $66.4 million.

ENVIRONMENTAL, SOCIAL, AND 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-E 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 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 credit rating assigned to Class B materially deviates from the rating implied by the predictive model. DBRS Morningstar typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit rating would consider a three-notch or more deviation from the credit rating stresses implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviations is uncertain loan-level event risk. The analysis for this review included stressed scenarios for several office loans given the general stress for that property type in the current environment. Given the uncertain loan-level event risk for those loans, the material deviation was warranted.

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.

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.

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

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 )

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 )

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