DBRS Morningstar Confirms Ratings on All Classes of Wells Fargo Commercial Mortgage Trust 2015-SG1 Commercial Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2015-SG1 issued by Wells Fargo Commercial Mortgage Trust 2015-SG1 as follows:

-- 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 B (high) (sf)
-- Class E at B (sf)
-- Class F at CCC (sf)

All trends are Stable with the exception of Class F, which has a rating that does 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 review.

As of the June 2023 remittance, 67 of the original 72 loans remain in the pool with an aggregate principal balance of $608.1 million, representing a collateral reduction of 15.1% since issuance as a result of loan repayment, scheduled loan amortization, and the liquidation of four loans. Since the last rating action in November 2022, one loan has been defeased, bringing the total defeased collateral to 9.8% of the pool balance. There are currently seven loans, representing 16.4% of the pool, on the servicer’s watchlist and three loans, representing 9.6% of the pool, in special servicing.

Since the last review, Holiday Inn & Suites – Salt Lake City (Prospectus ID#36, 1.0% of the pool) was returned to the master servicer as a corrected loan, while Boca Park Marketplace (Prospectus ID#2, 6.9% of the pool) and Columbus Hotel Portfolio (Prospectus ID#26, 1.1% of the pool) are expected to be returned to the master servicer in the near term, according to servicer commentary. The remaining loan in special servicing, Bella at Baton Rouge (Prospectus ID#19, 1.6% of the pool), has been real estate owned since June 2022, with marketing efforts to sell the property under way. Based on the September 2022 appraisal, the property was valued at $9.5 million (resulting in a loan-to-value ratio (LTV) of 129.6% based on the total loan exposure), an increase from $8.5 million in January 2022 but well below the issuance value of $16.6 million. In its analysis for this review, DBRS Morningstar maintained its liquidation of this loan from the trust, resulting in a projected loss of nearly $5.0 million or an implied loss severity in excess of 50.0%.

The largest loan in special servicing, Boca Park Marketplace, is secured by a 148,000-square-foot (sf) portion of a larger anchored retail property in Las Vegas and was transferred to special servicing in June 2020 at the borrower’s request because of challenges during the Coronavirus Disease (COVID-19) pandemic. The special servicer was contemplating foreclosure; however, a reinstatement agreement was executed in October 2022 and the loan was brought current. While collateral occupancy has historically remained healthy, generally operating above 90.0%, the property had issues with three tenants, collectively representing 30.5% of the net rentable area (NRA), that were paying cotenancy deficiency rents, triggered by the departure of noncollateral tenants Haggen Food & Pharmacy and Fry’s Electronics in 2015 and 2016, respectively. According to the February 2023 appraisal, however, 99 Ranch Market will backfill the dark space, and the borrower has negotiated a lease contract with the largest of the three tenants, Ross (20.7% of the NRA; expiring January 2027) to pay its full contractual rent. The borrower also has plans to work with Tillys (5.4% of the NRA; expiring September 2025) and Famous Footwear (4.4% of the NRA; expiring January 2025) to renegotiate their lease terms.

Per the February 2023 appraisal, the property was valued at $54.3 million (reflecting an LTV of 77.4% based on the total loan balance), an improvement from the May 2022 appraisal value of $47.1 million but below the issuance value of $62.0 million. Despite the borrower’s recent challenges, the loan is expected to be returned to the master servicer during Q3 2023. With this review, DBRS Morningstar applied a stressed LTV ratio, resulting in an expected loss that was nearly double the pool’s weighted-average (WA) expected loss.

The largest loan in the pool, Patrick Henry Mall, is secured by the fee-simple interest in 432,401 sf of a 716,558-sf mid-tier regional mall in Newport News, Virginia. The mall’s owner and operator is Pennsylvania Real Estate Investment Trust (PREIT), which emerged from Chapter 11 in December 2020 after a restructuring plan was agreed upon. The property is anchored by JCPenney (19.7% of the NRA; expiring October 2025) and Dick's Sporting Goods (11.6% of the NRA; expiring January 2027), and per the December 2022 rent roll, the collateral was 97.1% occupied. As of YE2022, the loan reported a net cash flow of $8.4 million (a debt service coverage ratio (DSCR) of 1.46 times (x), down from $9.0 million (a DSCR of 1.56x) at YE2021 and the Issuer’s underwritten figure of $9.5 million (a DSCR of 1.66x). The issuance value of $155.0 million implies a going-in LTV of 61.7%, which is moderate for the property type and asset location; however, value has likely declined since the loan was originated in 2015, and the loan’s maturity is upcoming in March 2025. As a result, DBRS Morningstar maintained its elevated probability of default assumption for this review given the credit risk posed to the trust.

The three largest property type concentrations for nondefeased loans are retail (35.2% of the pool), lodging (21.9% of the pool), and office (18.2% of the pool). There is continued uncertainty related to end-user demand and investor appetite for this property type. DBRS Morningstar anticipates upward pressure on vacancy rates in the broader office market, challenging landlords’ efforts to backfill vacant space, and, in certain instances, contributing to value declines, particularly for assts in noncore markets and/or with disadvantages in location, building quality, or amenities offered. While the majority of loans secured by office properties in this transaction continue to exhibit healthy performance metrics, DBRS Morningstar did increase the probability of default penalties, and, in certain cases, applied stressed LTV ratios for loans that are secured by office properties, including The Fairfax Building (Prospectus ID#8, 2.5% of the pool) and 580 Market (Prospectus ID#11, 2.6% of the pool), which have both experienced recent increases in vacancy.

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-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 stress(es) implied by the predictive model to be a significant factor in evaluating the credit rating. The rationale for the material deviation on Class B is the uncertain loan-level event risk associated with certain loans, namely those in the top 10, which had a WA expected loss approximately 35.0% higher than the WA pool expected loss.

Despite the negative pressure indicated by the predictive model, the overall performance of the pool remains in line with DBRS Morningstar’s expectation since the last review. Moreover, two of the three loans in special servicing are expected to be returned to the master servicer during the near term, most notably the second-largest loan in the pool, Boca Park Marketplace. Furthermore, while the largest loan in the pool, Patrick Henry Mall, remains a loan of concern given the associated refinance risk, performance has been stable since the sponsor’s emergence from bankruptcy, while the loan continues to benefit from amortization, which provides some cushion against the likely value decline.

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.

DBRS Limited
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Toronto, ON M5H 3M7 Canada
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 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 (June 9, 2023), https://www.dbrsmorningstar.com/research/415687

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].