DBRS Morningstar Confirms Credit Ratings on All Classes of Wells Fargo Commercial Mortgage Trust 2015-NXS3

DBRS Limited (DBRS Morningstar) confirmed all classes of Commercial Mortgage Pass-Through Certificates, Series 2015-NXS3 issued by Wells Fargo Commercial Mortgage Trust 2015-NXS3 as follows:

-- Class A-3 at AAA (sf)
-- 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 (sf)
-- Class C at A (sf)
-- Class PEX at A (sf)
-- Class D at BBB (low) (sf)
-- Class X-D at BBB (low) (sf)
-- Class X-E at BB (sf)
-- Class E at BB (low) (sf)
-- Class X-FG at BB (low) (sf)
-- Class F at B (high) (sf)

All trends are Stable.

The credit ratings confirmations reflect DBRS Morningstar’s stable outlook for this transaction, which remains relatively unchanged since the last credit rating action. Overall, the pool continues to exhibit healthy credit metrics, as evidenced by the weighted average (WA) debt service coverage ratio (DSCR), which was well in excess of 2.0 times (x) for the pool, based on the YE2022 financial reporting. The transaction also benefits from seven years of amortization since issuance, as well as some defeasance, loan repayments, and one shadow-rated investment-grade loan, as further described below.

Per the September 2023 reporting, 48 of the original 56 loans remain in the pool with an aggregate principal balance of $519.6 million, representing a collateral reduction of 36.2% since issuance as a result of scheduled loan amortization and loan repayment. Eight loans, representing 9.9% of the pool, have been fully defeased. No loans are delinquent or in special servicing. Eight loans, representing 21.3% of the pool, are on the servicer’s watchlist; however, only six of these loans, representing 12.2% of the pool, are being monitored for credit-related reasons.

The largest loan on the watchlist, Yosemite Resorts (Prospectus ID#3, 11.1% of the pool) is currently being monitored for deferred maintenance. Collateral for the loan is secured by two full-service hotels totaling 536 keys, less than 10 miles from the Arch Rock entrance of Yosemite National Park. While the loan previously spent time in special servicing for payment default, stemming from the impact of the Coronavirus Disease (COVID-19), a loan modification was executed, with deferrals scheduled to be repaid by June 2023, and the loan was returned to the master servicer in April 2022. The smaller of the hotels, the Cedar Lodge, experienced a fire in 2021 that heavily damaged the majority of units. According to the servicer, however, an insurance loss draft reserve was established for repairs, which were ongoing and nearly complete as of June 2023. Despite the business interruptions, the subject reported net cash flow (NCF) of $8.4 million (a DSCR of 1.54x) at YE2022 and $7.9 million (a DSCR of 1.51x) at YE2021. While both figures are below the Issuer’s underwritten NCF of $10.8 million (2.07x), driven by loss in revenue and increased expenses, the revenue per available room (RevPAR) figure for the trailing 12 month ended June 30, 2023, was reported at $114, above pre-pandemic and issuance, which hovered around $99.

The pool is concentrated by property type, with loans backed by retail, lodging and office, or mixed-use properties (with large office components) representing 38.1%, 21.3%, and 18.3% of the pool, respectively. In general, the office sector has been challenged, given the low investor appetite for the property type and high vacancy rates in many submarkets. However, of the nine loans secured by office or mixed-use properties, only three loans exhibited performance that suggested increased credit risk since issuance, including 11 Madison Avenue (Prospectus ID#6, 6.7% of the pool), 722 12th Street NW (Prospectus ID#14, 2.9% of the pool), and 100 East Walton (Prospectus ID#21, 1.8% of the pool). In its analysis for this review, DBRS Morningstar applied stressed loan-to-value ratios (LTV) or increased probability of default (POD) assumptions for these three loans, resulting in a WA expected loss (EL) that was nearly double the pool average.

With this review, DBRS Morningstar also removed the investment-grade shadow rating for 11 Madison Avenue. The loan is secured by fee, leasehold, and reversionary interest in a Class A, 29-story, 2.3 million-square-foot (sf) office tower in Manhattan’s Midtown South submarket. In March 2023, DBRS Morningstar placed all classes of MAD 2015-11MD (the lead securitization) Under Review with Negative Implications following the announcement that the collateral property’s largest tenant, Credit Suisse AG (Credit Suisse), would be acquired by UBS AG (UBS). DBRS Morningstar noted that these events could negatively affect the credit for the subject transaction given the uncertainty with regard to the tenant’s lease, which represents approximately half of the collateral property’s NRA. Subsequently, DBRS Morningstar maintained the Under Review with Negative Implications status on June 21, 2023, and again on September 19, 2023, for the same reasons. For more information on this loan, please see the press released titled “DBRS Morningstar Maintains Under Review with Negative Implications Status on MAD 2015-11MD Mortgage Trust” (https://www.dbrsmorningstar.com/research/420822).

Another loan of concern is 722 12th Street NW, which is secured by a 34,577-sf office property in the CBD of Washington, D.C. The loan was added to the servicer’s watchlist in November 2021 for a low DSCR, driven by increased vacancy. According to the June 2023 rent roll, the property was 78.3% occupied by two tenants; however, the second largest tenant, Stantec Consulting Services, Inc. (30.0% of the NRA, lease expired in June 2023) has reportedly vacated the entirety of its space, leaving only Americans for Tax Reform (48.4% of the NRA, lease expiry in March 2034). According to the servicer, the borrower has been marketing the vacant space and currently is in the process of securing a letter of intent with a prospective tenant that would occupy 4,767 sf or 13.8% of the NRA. Currently, LoopNet is marketing three suites representing 47.0% of the NRA, with asking rates of $53.00 per square foot (psf), compared with Stantec’s rental rate of $72.13. According to Ries, as of Q2 2023, office properties in the East End submarket reported an average asking rent of $62.54, an average effective rental rate of $51.08, and an average vacancy rate of 15.4%. According to the trailing six months (T-6) financials ended June 30, 2023, the subject reported an annualized NCF of $1.0 million (a DSCR of 1.07x); however, given the increased vacancy, coverage is expected to fall well below breakeven without meaningful leasing momentum. As such, DBRS Morningstar stressed its LTV assumption for this review, resulting in an expected loss over three times the deal average.

At issuance, DBRS Morningstar shadow-rated The Parking Spot LAX (Prospectus ID#14, 2.2% of the pool) as investment grade. With this review, DBRS Morningstar confirmed that the performance of this loan remains consistent with investment-grade loan characteristics.

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-D, X-E, and X-FG 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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
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 22, 2023; https://www.dbrsmorningstar.com/research/420982)

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].