DBRS Morningstar Confirms Ratings on All Classes of Wells Fargo Commercial Mortgage Trust 2016-C37

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C37 issued by Wells Fargo Commercial Mortgage Trust 2016-C37 as follows:

-- Class A-3 at AAA (sf)
-- 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 X-B at AA (high) (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class X-D at A (low) (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (sf)
-- Class X-EF at BBB (sf)
-- Class F at BBB (low) (sf)
-- Class X-G at BBB (low) (sf)
-- Class G at BB (high) (sf)
-- Class X-H at BB (low) (sf)
-- Class H at B (high) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations since the last review. The transaction as a whole continues to benefit from increased credit support to the bonds as a result of scheduled amortization, loan repayments, and defeasance. Two former top five loans, Walmart Shadow Anchored Portfolio and Quantum Park, which represented 12.2% of the trust balance at issuance, repaid in September and October 2021, respectively. According to the June 2023 remittance, 58 of the original 63 loans remain within the transaction with a trust balance of $583.7 million, reflecting collateral reduction of 22.2% since issuance. In addition, six loans, representing 8.1% of the pool, have fully defeased. Only one loan, representing 1.0% of the pool, is in special servicing; however, six loans, representing 20.6% of the pool, are on the servicer’s watchlist.

The transaction is concentrated by property type, with loans representing 25.3%, 22.9%, and 18.4% of the current pool balance collateralized by retail, lodging, and multi-family properties, respectively. In addition, three loans are secured by office properties, which represent 10.9% of pool. Operating performance at these office properties is generally trending below issuance expectations, as evidenced by the historical occupancy rates and cash flow trends demonstrated over the last few reporting periods. In general, DBRS Morningstar has a cautious outlook for this asset type, as sustained upward pressure on vacancy rates in the broader office market may challenge landlords’ efforts to backfill vacant space and, in certain instances, contribute to value declines, particularly for assets in noncore markets and/or with disadvantages in location, building quality, or amenities offered. DBRS Morningstar applied stressed loan-to-value (LTV) ratios, and where applicable, increased the probability of default penalties for these loans, resulting in a weighted-average expected loss that is approximately 2.3 times (x) the pool average.

The largest loan on the servicer’s watchlist, 1140 Avenue of the Americas (Prospectus ID#6; 5.1% of the pool), is secured by a 247,183-square foot (sf) Class A office building in Midtown Manhattan. The loan was added to the servicer’s watchlist in October 2020 for a low debt service coverage ratio (DSCR) after three tenants that formerly occupied 30,784 sf (12.7% of net rentable area (NRA)) vacated prior to their lease expirations. Subsequently, four additional tenants vacated the property in November 2021, pushing the occupancy rate down to a low of 66.1%. Although the borrower has successfully executed a lease extension for the largest tenant, City National Bank (14.4% of NRA) through 2033, the low occupancy rate has significantly affected cash flows. According to the YE2022 financial reporting, occupancy rate, net cash flow (NCF) and DSCR were 71.0%, $2.5 million, and 0.61 times (x), respectively. Although the YE2022 NCF figure was 16.6% higher than the prior year, it remains 40.8% and 71.5% below the YE2020 and issuance levels, respectively.

Waterfall Asset Management (WAM), which formerly occupied 10.5% of the NRA on a lease through August 2022, had been subleasing its space at the property to two tenants. Although WAM did not renew its lease, the servicer confirmed that the former subtenants have signed direct leases for that space. Overall, the tenant roster is relatively granular with no single tenant (except for the largest tenant, City National Bank) accounting for more than 7.0% of the NRA. No updated appraisal has been provided since issuance, when the property was valued at $180.0 million; however, given the low occupancy rate and general challenges for office properties in today’s environment, DBRS Morningstar notes that the collateral’s as-is value has likely declined significantly, elevating the credit risk to the trust. As such, DBRS Morningstar increased the probability of default for this loan and derived a stressed value based on the property’s in-place cash flow, using the high end of DBRS Morningstar’s capitalization rate range for office properties, with the resulting LTV ratio well above 100.0%.

The second-largest loan on the servicer’s watchlist, Franklin Square III (Prospectus ID #5; 4.9% of the pool), is secured by a 272,222-sf power centre in Gastonia, North Carolina, approximately 16 miles west of the Charlotte, North Carolina, central business district. The loan has been monitored on the servicer’s watchlist since 2018 after the property’s second largest tenant, Gander Mountain (formerly 15.8% of the NRA; lease through February 2028), filed for bankruptcy and vacated. Gander Mountain was acquired out of bankruptcy by Camping World Inc.; however, the subject location remained dark until December 2022, when a new tenant, Painted Tree, signed a10-year lease for the entirety of the space. In addition, PetSmart (9.6% of the NRA) executed a 10-year lease renewal, pushing its expiration date to 2035 from 2025. As of YE2022, the property was 91.0% occupied and generated $2.2 million of NCF resulting in a DSCR of 1.06x, an improvement from the YE2020 figures of $1.9 million and 0.94x, but approximately 20.0% below the issuance figures of $2.7 million and 1.33x. DBRS Morningstar notes that cash flows may trend upward in the near to moderate term, given that Old Navy (5.6% of the NRA; lease through July 2025), in conjunction with Painted Tree’s opening, reverted to paying full rent; up from the 50.0% it had been paying since the departure of Gander Mountain and prior to the recent leasing activity at the property.

At issuance, DBRS Morningstar shadow-rated the Hilton Hawaiian Village loan (Prospectus ID#1; 9.0% of the pool) and the Potomac Mills loan (Prospectus ID#4; 6.2% of the pool) as investment grade. This assessment was supported by the loans’ strong credit metrics, strong sponsorship strength, and historically stable collateral performance. With this review, DBRS Morningstar confirms that the characteristics of these loans remain consistent with the investment-grade shadow rating.

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 (July 4, 2023) at https://www.dbrsmorningstar.com/research/416784.

Classes X-A, X-B, X-D, X-EF, X-G, and X-H 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 credit ratings are subject to surveillance, which could result in credit 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 credit 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 credit rating process.

DBRS Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The credit 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 (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)

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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