DBRS Morningstar Confirms Credit Ratings on All Classes of Wells Fargo Commercial Mortgage Trust 2016-LC25

DBRS, Inc. (DBRS Morningstar) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates issued by Wells Fargo Commercial Mortgage Trust 2016-LC25:

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

All trends are Stable with the exception of Class G, which has a rating that does not typically carry a trend in commercial mortgage-backed securities (CMBS) ratings.

The credit rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations. Servicer-reported performance metrics for the majority of the loans in the pool have been strong, evidenced by the pool’s weighted-average (WA) debt service coverage ratio (DSCR) of 1.62 times (x). Since the last rating action in November 2022, one loan liquidated from the pool with a better-than-expected recovery, and another loan, representing 3.7% of the pool balance, returned to the master servicer from the special servicer as a corrected loan.

The pool is concentrated by property type with retail and office representing 29.3% and 26.7% of the pool balance, respectively. While there are ongoing concerns surrounding the increasing vacancy rates for the office sector at large, loans in the pool secured by office properties have reported healthy performance metrics demonstrated by the WA DSCR of 2.14x, resulting in a WA expected loss that is in line with the pool expected loss. In the analysis for this review, DBRS Morningstar applied additional stresses to eight loans, representing 20.6% of the pool, that were identified as exhibiting increased credit risks and/or performance declines since issuance.

As of the September 2023 remittance, 75 of the original 80 loans remain in the pool, with an aggregate principal balance of $802.8 million, representing a collateral reduction of 15.9% since issuance. Nine loans, representing 10.4% of the current pool balance, are fully defeased. There are currently no delinquent or specially serviced loans and 10 loans, representing 13.5% of the pool balance, are being monitored on the servicer’s watchlist. Six loans, representing 16.1% of the current pool balance, have received a forbearance or modification since issuance.

The largest loan on the servicer’s watchlist, The Shops at Somerset Square (Prospectus ID#7, 3.7% of the pool), is secured by an unanchored retail property in Glastonbury, Connecticut. The loan is sponsored by Brookfield Property Partners and had transferred to special servicing in August 2020 for payment default caused by operating shortfalls stemming from the Coronavirus Disease (COVID-19). It was returned to the master servicer in January 2023 as a corrected loan and remains current. As of June 2023, occupancy and DSCR were 68.5% and 1.65x compared with 72% and 1.21x at YE2022, 76.9% and 2.59x as of March 2020, and 89% and 1.39x at issuance. DBRS Morningstar notes that the five largest tenants, representing 25.5% of the net rentable area (NRA) combined, including Talbots (7.4% of the NRA) and Jos. A. Bank (4.4% of the NRA), all have 2023 lease expirations. The property was reappraised for $17.8 million in August 2022, reflecting a -57.6% variance from the issuance appraised value of $42 million, and a current loan-to-value ratio (LTV) of 168%. Given the occupancy and value decline since issuance, in its analysis, DBRS Morningstar increased the probability of default (PD) penalty and LTV for this loan, resulting in an expected loss that is more than 2.5 times greater than the pool average.

The second-largest loan on the watchlist is 101 Hudson (Prospectus ID#16, 2.1% of the pool), secured by a 1.3 million-square-foot (sf), Class A office property on the waterfront in Jersey City, New Jersey. The loan has been monitored on the servicer’s watchlist because of declines in occupancy following the departure of the property’s former second-largest tenant, National Union Fire Insurance (formerly 20.2% of NRA), which vacated in 2018. Occupancy has hovered in the mid-70.0% range since then, and as of March 2023, the property reported an occupancy rate of 73.0%. Despite the sustained low occupancy, the loan’s DSCR was reported at 2.35x as of YE2022, below the DBRS Morningstar DSCR of 2.88x. The asset was acquired by The Birch Group in October 2022 at a purchase price of $346.0 million, representing an LTV of 72.3%. Although DBRS Morningstar remains concerned about the broader office market and declines in occupancy, the collateral’s implied LTV partially offsets the increased credit risk since issuance. DBRS Morningstar applied an elevated PD adjustment and LTV ratio in its analysis, resulting in an expected loss that was slightly higher than the pool average.

At issuance, DBRS Morningstar assigned an investment-grade shadow rating to the largest loan in the pool, 9 West 57th Street (Prospectus ID#1, 7.5% of the pool), which is secured by an office tower in Midtown Manhattan. With this review, DBRS Morningstar maintains 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 at https://www.dbrsmorningstar.com/research/416784 (July 4, 2023).

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 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, Inc.
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Chicago, IL 60602 USA
Tel. +1 312 332-3429

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)

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