DBRS Morningstar Confirms Ratings on All Classes of Wells Fargo Commercial Mortgage Trust 2017-RC1

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2017-RC1 issued by Wells Fargo Commercial Mortgage Trust 2017-RC1 as follows:

-- Class A-3 at AAA (sf)
-- Class A-4 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 X-B at A (high) (sf)
-- Class C at A (sf)
-- Class X-D at BB (high) (sf)
-- Class D at BB (sf)
-- Class E at CCC (sf)
-- Class F at C (sf)

All trends are Stable.

The rating confirmations reflect transaction performance that remains in line with DBRS Morningstar’s expectations at the last rating action. Since the last rating action, Hyatt Place Portfolio (Prospectus ID#1), the only loan in special servicing at the time, was liquidated from the trust and incurred a realized loss of $10.9 million, contained to the unrated Class G certificate. The recovery of $41.3 million at liquidation was slightly better than DBRS Morningstar anticipated. There are no other loans in special servicing, but DBRS Morningstar remains concerned with a number of loans backed by office properties, the most concerning of which are described in greater detail below.

As of the September 2023 remittance, 53 of the original 60 loans remain in the trust, with an aggregate balance of $442.0 million reflecting a collateral reduction of 29.3% since issuance. Seven loans, representing 15.1% of the current pool balance have fully defeased. There are currently no specially serviced loans, and only four loans, representing 5.7% of the current pool balance, are on the servicer’s watchlist. The pool is concentrated by property type with retail and office backed properties, representing 32.0% and 19.0% of the pool, respectively. Among these, one of the top 10 remaining loans Peachtree Mall (Prospectus ID#14, 2.1% of the pool), which is secured by an 822,433 square-foot (sf) regional mall in Columbus, Georgia, has seen decreases in operating performance over the past few reporting periods that have remained consistently below issuance expectations. Given the secondary location of the subject, the fluidity of the retail landscape, and the shifting consumer preferences, DBRS Morningstar maintains a negative outlook on this loan.

Most of the pool’s office loans continue to perform in line with issuance expectations; however, the office sector has been challenged of late, given the low investor appetite for that property type and high vacancy rates in many submarkets as a result of the shift in workplace dynamics. DBRS Morningstar identified two office-backed loans, representing 4.1% of the pool, as exhibiting increased risk from issuance and thus analyzed with a stressed scenario in the analysis. The resulting weighted average expected loss for these loans was approximately double or triple the pool average. These loans are highlighted below.

The largest loan on the servicer’s watchlist is secured by Whitehall Corporate Center VI (Prospectus ID #12, 2.9% of the pool), a 116,855-sf office center in Charlotte, North Carolina. The collateral consists of approximately 860,000 sf of office properties in six different buildings. The loan was added to the watchlist in March 2023 for a low debt service coverage ratio (DSCR). The decline in DSCR followed the lease termination of Advantage Sales (previously 21.4% of the net rentable area (NRA)) in September 2020 and the departure of Home Point (previously 20.1% of the NRA) at lease expiry in December 2021. While the borrower was successful in backfilling 12.3% of the NRA, the current occupancy of 76.0% as of the March 2023 rent roll represents a significant net decline when compared with 90.7% at issuance. In addition, leases representing approximately 28% of the NRA are scheduled to expire in the next 12 months. The top three tenants at the property are Direct Chassis Link (20.2% of the NRA, lease expiry in May 2027), ABX Converting Acquisition, LLC (12.3% of the NRA, lease expiry in December 2025), and C.H. Robinson Worldwide, Inc. (10.2% of the NRA, lease expiry in March, 2024). According to the most recent financial reporting, the YE2022 net cash flow (NCF) was $862,953 with a DSCR of 0.91 times (x) compared to $1.2 million and 1.26x in YE2021. Without significant leasing activity in the near term, DBRS Morningstar expects cash flow and DSCR to decline further given the concentrated upcoming rollover. According to Reis, the Airport/Parkway submarket of Charlotte reported a YE2022 average rental rate of $24.5 and vacancy of 21.6%. In its analysis, DBRS Morningstar stressed the loan-to-value ratio (LTV), resulting in an expected loss more than double the deal average.

Another loan of concern is Haverstick Office Park (Prospectus ID #35, 1.2% of the pool), which is secured by an 80,696-sf office property in the North/Carmel submarket of Indianapolis. The loan was added to the watchlist in October 2022 for low DSCR, caused by the property’s declining occupancy. Since 2020, property cash flow has declined approximately 14.2% on average every year. As a result, DSCR has dropped to 1.06x from 1.11x at YE2021 at 1.48x at YE2020. The subject was 90.1% occupied at issuance. Occupancy fell to 79% at YE2021, though it has ticked up to 88.0% as of June 2023. According to the most recent servicer commentary, the borrower was able to sign a new lease with USP Indianapolis for 4.3% of the NRA. The lease, scheduled to expire in November 2029, was in rent abatement until September 2023. In total, two new leases, representing 15.3% of the NRA, were signed in 2023, one of which had an average rental rate of $19.26 per sf. The borrower has reportedly invested $400,000 in recent capital expenditures in an effort to attract new tenants; however, leases representing 23.7% of the NRA are scheduled to expire in the next 12 months. According to the Q2 2023 Reis report on the North/Carmel submarket of Indianapolis, the submarket vacancy was 18.5%, and Reis forecasts submarket vacancy will remain around 20.0% over the next five years. DBRS Morningstar expects that revenue may improve slightly in the short term as free rent periods burn off, but barring significant leasing or renewal activity, cash flow and DSCR are likely to continue trending downward. As a result of these property and submarket concerns, DBRS Morningstar stressed the loan’s LTV in its analysis, yielding an expected loss over triple the deal 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 (July 4, 2023) https://www.dbrsmorningstar.com/research/416784

Classes X-A, X-B, and X-D 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 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.

DBRS Limited
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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 (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 (August 23, 2023; https://www.dbrsmorningstar.com/research/419592)

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].