DBRS Morningstar Downgrades Ratings on Three Classes of Wells Fargo Commercial Mortgage Trust 2015-LC20

DBRS Limited (DBRS Morningstar) downgraded its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2015-LC20 issued by Wells Fargo Commercial Mortgage Trust 2015-LC20 as follows:

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

In addition, DBRS Morningstar confirmed the remaining classes as follows:

-- 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 X-B at A (sf)
-- Class C at A (low) (sf)
-- Class PEX at A (low) (sf)
-- Class D at BBB (low) (sf)

All trends are Stable, with the exception to Class F, which is assigned a rating does not typically carry a trend in commercial mortgaged-backed securities (CMBS) ratings. DBRS Morningstar also discontinued and withdrew the rating on Class X-F as the lowest referenced obligation, Class F, was downgraded to CCC (sf).

At the last rating action in November 2022, the trends on Classes E and X-E were changed to Stable from Negative because of the improved performance of some specially serviced loans that returned to the master servicer. The trends on Class F and X-F remained negative primarily because of sustained concerns regarding the largest specially serviced loan, One Monument Place (Prospectus ID#3, 4.5% of the pool balance), secured by an office property in Fairfax, Virginia. A forbearance agreement was previously executed to extend the loan maturity to April; however, the borrower has since requested an additional extension. In addition, the value of the property significantly declined with the January 2023 appraisal reporting at $23.6 million, compared with the issuance value of $60.0 million. Given the substantial value decline, this loan, along with three other specially serviced loans that reported stressed values, were analyzed with liquidation scenarios. Based on these results, the balance of the first-loss piece, Class G, would be eroded by approximately 80.0%, decreasing the credit support and the rating downgrades.

In terms of the pool composition, the trust primarily consists of loans secured by defeasance collateral, retail, and hotel properties, representing 32.3%, 23.0%, and 18.8% of the pool balance, respectively. The office concentration is quite small, representing about 10.0% of the pool balance. Considering the challenges that are impacting the office sector with low investor appetite and generally increased submarket vacancies, office loans and loans exhibiting increased risk from issuance were analyzed with stressed scenarios, resulting in a the weighted-average expected loss that was approximately 70% higher than the pool average.

As of the July 2023 remittance, 61 of the original 68 loans remain in the pool with a trust balance of $683.9 million, representing a collateral reduction of 17.6% since issuance. Twelve loans, representing 17.1% of the current pool balance, are on the servicer’s watchlist and are being monitored for low performance, tenant rollover risk, or deferred maintenance. Five loans, representing 13.5% of the current pool balance, are in special servicing, three of which have a history of delinquency.

The largest loan in special servicing, One Monument Place, is secured by a Class A office located in Fairfax. The loan has been in special servicing since April 2020 after the borrower failed to repay the loan at maturity, citing challenges arising from the Coronavirus Disease (COVID-19) pandemic. A forbearance agreement was executed in September 2021, the terms of which included a $5.0 million principal paydown, a loan extension to April 2023, and a conversion to interest-only (IO) payments. However, the loan was unable to be repaid, and an additional extension was requested. The January 2023 appraisal valued the property at $23.6 million, a decline from the April 2022 value of $26.1 million and well below the issuance value of $60.0 million.

Occupancy has been declining preciptuously since issuance with the April 2023 rent roll reporting an occupancy rate of 32.1%, compared with the issuance figure of 91.6%. As a result, the loan has been reporting a debt service coverage ratio (DSCR) well below breakeven, with the YE2022 figure at 0.04 times (x).

Given the sustained low performance, drastic decline in value, and the general challenges affecting the office sector, DBRS Morningstar analyzed the loan with a liquidation scenario, resulting in an implied loss approaching $15.3 million, or a loss severity in excess of 45.0%.

The second largest loan in special servicing, University of Delaware Hotel Portfolio (Prospectus ID #4, 4.4% of the pool balance), is secured by two adjacent hotels totaling 245 keys and located in close proximity to the main campus of the University of Delaware in Newark, Delaware. The loan was initially transferred to special servicing in April 2020 at the borrower’s request because of the challengies arising from the coronavirus pandemic. Relief cash management was set up as a result. The loan was returned to the master servicer but was being monitored on the watchlist for a low DSCR and an upcoming anticipated repayment date (ARD) of March 2022 (final maturity date is March 2025). Ultimately, the loan failed to repay at ARD and was transferred back to special servicing in January 2023 because of imminent monetary default. The borrower has requested for a second modification as well as permission to sell the Homewood Suites by Hilton Newark-Wilmington South hotel. The request, along with all potential workout options, are being evaluated by the special servicer. According to the May 2023 STR reporting, the occupancy rate, average daily rate, and revenue per available room (RevPAR) for the trailing 12-month period ended May 31, 2023, were reported at 68.3%, $153.53, and $104.59, respectively. This is an improvement over the YE2021 RevPAR of $57.28 but still below pre-pandemic levels with the YE2019 RevPAR at $115.64. As of the most recent financials, the YE2022 DSCR was reported to be 0.89x, up from YE2020 DSCR of -0.14x but still below the pre-pandemic levels with the YE2019 DSCR at 1.68x. Based on the March 2023 appraisal, the subject was valued at $41.5 million, a slight improvement from the March 2022 value of $40.7 million but below the issuance value of $49.0 million. Despite the value decline, the value is still sufficient to cover the outstanding loan balance of $30.3 million, resulting in a loan-to-value ratio of approximately 73.0%. For this review, DBRS Morningstar analyzed the loan with an elevated probability of default, resulting in an expected loss that was more than double 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/416784 (July 4, 2023).

Classes X-A, X-B, and X-E 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 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 credit rating assigned to Class B materially deviates from the credit 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 deviations is because of uncertain loan-level event risk given the concerns with the loans in special servicing, specifically One Monument Place.

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 credit rating process for this credit 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 credit 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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar Long-Term Obligation Rating Scale definition indicates that credit 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 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/North American CMBS Insight Model Version 1.1.0.0 (March 16, 2023), https://www.dbrsmorningstar.com/research/410913

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

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

-- 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

A description of how DBRS Morningstar analyzes 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].