DBRS Morningstar Confirms All Ratings on Wells Fargo Commercial Mortgage Trust 2015-C27

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2015-C27 issued by Wells Fargo Commercial Mortgage Trust 2015-C27 as follows:

-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (sf)
-- Class C at BBB (sf)
-- Class PEX at BBB (sf)
-- Class X-B at B (sf)
-- Class D at B (low) (sf)
-- Class E at CCC (sf)
-- Class F at C (sf)

All trends are Stable with the exception of Classes E and F, which have ratings that do not typically carry a trend in commercial mortgage-backed securities (CMBS) ratings. The rating confirmations reflect the overall stable performance of the underlying collateral, which remains in line with DBRS Morningstar’s expectations since the last rating action. As of the April 2023 remittance report, 75 of the original 95 loans remain in the pool, representing a collateral reduction of 25.0% since issuance as a result of loan amortization, loan repayments, and loan liquidations. Seventeen loans, representing 11.8% of the pool, have been fully defeased. Four loans, representing 13.8% of the pool, are in special servicing. Since DBRS Morningstar’s last rating action, two loans previously in special servicing, representing 0.9% of the pool at the time of the last rating action, were repaid in full with no loss to the trust, and one has become real estate owned.

The CCC (sf) and C (sf) ratings on Classes E and F, respectively, reflect DBRS Morningstar’s loss expectations for the specially serviced loans, which includes the largest loan in the pool, Westfield Palm Desert (Prospectus ID#1; 7.9% of the pool), as well as DBRS Morningstar’s cautious outlook on loans secured by office properties. Although the pool benefits from the relatively low concentration of loans backed by office properties (18.9%), the bulk of these loans are secured within the top 15 loans in the pool, representing 16.6% of the pool balance, including the second-largest specially serviced loan, 300 East Lombard (Prospectus ID#9; 3.1% of the pool), and generally exhibit significantly weaker performance than the pool as a whole. As such, DBRS Morningstar applied additional stress to the analysis of these loans given the low investor appetite for the property type and the locations of these properties in secondary and tertiary markets, resulting in a weighted-average expected loss (EL) at approximately 125.2% of the pool average EL.

The largest specially serviced loan is secured by a 572,724-square-foot (sf) portion of the 977,888-sf Westfield Palm Desert regional mall in Palm Desert, California. The pari passu $125.0 million interest-only (IO) whole loan transferred to special servicing in August 2020 because of payment default and, as of the April 2023 remittance, the loan remains delinquent. A receiver was appointed in October 2021, shortly after which the property was rebranded as The Shops at Palm Desert. The special servicer is reportedly pursuing foreclosure. The property’s occupancy rate has declined to 80.8% as of January 2023 from 95.9% at issuance. According to the servicer-reported financials, the annualized net cash flow (NCF) for the year-to-date period ended June 30, 2022, was $10.2 million, which is an increase from the YE2021 and YE2020 figures of $6.6 million and $9.0 million, respectively, but remains below the issuer’s NCF of $12.7 million. Per the January 2023 financial package, total in-line sales for 2022 were $385.39 per square foot (psf), a 25.3% drop from the previous year.

Overall, DBRS Morningstar expects performance to decline in the near to medium term. A major tenant, Tristone Cinemas (previously 3.3% of the net rentable area (NRA)), closed in February 2023. More than 35 additional tenants representing more than 15.0% of the NRA have leases scheduled to expire over the next 12 months, including a major tenant, Dick’s Sporting Goods (4.7% of the NRA; expiration in January 2024). The receiver continues to tour prospective tenants. The most recent appraisal is dated July 2022 and valued the property at $68.0 million. Although this represents a 23.2% improvement from the July 2021 appraised value of $55.2 million, the updated figure is well below the issuance value of $212.0 million. DBRS Morningstar’s analysis, which includes a liquidation scenario based on a stress to the most recent appraisal, is indicative of a loss severity of nearly 75.0%.

The second-largest loan in special servicing is 300 East Lombard (Prospectus ID#9; 3.1% of the pool), secured by a 20-story, 225,485-sf office property in the Baltimore central business district. The loan was transferred in March 2022 because of imminent monetary default. According to the special servicer, the loan has not yet made the April 2023 payment. After the property lost its largest tenant, Ballard Spahr (previously 15.0% of the NRA), upon its lease expiration in April 2022, occupancy dropped to 65.9%, where it currently remains as of YE2022 reporting, well below the occupancy rate of 96.0% at issuance. The debt service coverage ratio (DSCR) has declined as a result and was reported to be 0.54 times (x) for the trailing six-month period ended June 2022. Although the borrower has received approval to commence a major lease with the State of Maryland, the signed effective rent of $23.76 psf is below the average submarket asking rent of $27.87 psf according to Reis. In addition, approximately 15 tenants (approximately 26.2% of the NRA) have lease expirations scheduled in the next 12 months, including the second-largest tenant, Offit Kurman P.A. (7.0% of the NRA, expiration in May 2023).

DBRS Morningstar believes the sponsor will have challenges backfilling the space in the near term given the sluggish market conditions, highlighted by a submarket vacancy rate of 17.9% as of February 2023, indicating significantly increased credit risk from issuance. DBRS Morningstar took a conservative approach in its analysis of this loan, given the uncertainty of the office market and upcoming rollover, by incorporating a stressed loan-to-value (LTV) ratio and an elevated probability of default (POD), resulting in an EL that is double the pool average.

The largest loan on the servicer’s watchlist, 312 Elm (Prospectus ID#3; 27.2% of the pool), is secured by an office property in Cincinnati and is being monitored on the servicer’s watchlist for low cash flows as a result of sustained decline in occupancy. A previous major tenant, the General Services Administration, vacated in 2018, causing the property’s occupancy to fall to 65.0%. Two new tenant leases were signed in 2021, bringing occupancy up to 70%. However, the property’s largest tenant, Gannett (28.9% of the NRA), vacated the property at its lease expiration in December 2022, bringing occupancy down again, to 49.1% as of YE2022. The YE2022 NCF, although up 21.2% compared with the previous year, represents a -30.9% variance from the issuance figure and is expected to decline further following Gannett’s exit. DBRS Morningstar projects the resulting DSCR will dip below 1.0x. An additional two tenants, representing 2.7% of the NRA, have lease expirations in the next 12 months. According to Reis, the submarket vacancy is at 15.6% as of February 2023, putting the property well below market occupancy. DBRS Morningstar’s analysis includes a stressed LTV and an elevated POD to reflect its concerns for this loan, resulting in an EL that is triple the pool average.

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 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 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.

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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 Version 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].