DBRS Morningstar Confirms Credit Ratings on All Classes of Wells Fargo Commercial Mortgage Trust 2018-C43

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-C43, issued by Wells Fargo Commercial Mortgage Trust 2018-C43 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 (sf)
-- Class C at A (low) (sf)
-- Class X-D at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

All trends are Stable.

The credit rating confirmations reflect the pool’s overall performance since the last rating action in November 2022, as evidenced by the pools weighted-average (WA) debt service coverage ratio (DSCR) of nearly 2.50 times (x) based on the most recent year-end financials available, above the WA DBRS Term DSCR for the pool of 1.69x derived at issuance. In addition, there’s a concentration of loans that are secured by defeased collateral, two loans are shadow-rated investment grade, while no loans are delinquent or in special servicing.

As of the September 2023 reporting, 57 of the original 63 loans remain in the trust with an aggregate principal balance of $638.4 million, representing a collateral reduction of 11.6% since issuance. The pool benefits from nine loans that are fully defeased, representing 11.3% of the pool. Five loans, representing 11.1% of the pool, are on the servicer’s watchlist, being monitored for low DSCRs, increased vacancy, and/or deferred maintenance.

Excluding defeasance, the pool is concentrated by property type, with loans secured by office collateral comprising 32.0% of the pool. In general, the office sector has been challenged, 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. While the majority of office loans in the transaction continue to perform as expected, DBRS Morningstar identified three office loans exhibiting declines in performance. In its analysis for this review, DBRS Morningstar adjusted these loans with stressed loan-to-value (LTV) ratios or increased probability of default (POD) assumptions, resulting in a WA expected loss (EL) for those loans that was nearly triple the pool’s WA figure.

The largest of these loans, which is also the largest loan on the servicer’s watchlist, is Southpoint Office Center (Prospectus ID#4, 5.5% of the pool), secured by a 366,808 square foot (sf), Class A office property in Bloomington, Minnesota. The loan is on the watchlist for a low DSCR as a result of a decline in occupancy, primarily stemming from the departure of the property’s former largest tenant, Wells Fargo, in October 2020 (18.2% of the net rentable area (NRA) at the time). As a result, occupancy fell from 91.5% at issuance to 65.8% as of YE2021 and was most recently reported at 68.2% as of Q2 2023.

While tenancy is rather granular outside of the largest tenant, United Bank (11.4% of the NRA), there are 22 tenants, representing 48.6% of the NRA, with lease expirations prior to loan maturity in February 2028. According to the September 2023 reporting, the borrower had access to only $0.9 million held leasing reserves to help with re-leasing efforts and a below breakeven cash flow, most recently reported at 0.66 times (x) as of YE2022, making the cash trap structure originally contemplated at issuance ineffective. According to Reis, office properties in the Southwest/Northeast Scott County submarket reported an average vacancy rate of 20.5% as of Q2 2023, increasing from 17.6% in Q2 2022. While the sponsor, Felton Properties Inc., contributed $12.7 million (27.1% of the financing costs) toward the acquisition of the property, indicating they have a vested interest in the property, they did default on another office loan prior to the subject securitization and will likely need to inject a significant amount of capital to stabilize the property given current market conditions. As a result, DBRS Morningstar analyzed the loan with an elevated POD penalty and a stressed LTV for this review, resulting in an EL in excess of 3.5x the pool WA average.

The second-largest loan on the watchlist is 35 Waterview Boulevard (Prospectus ID#9, 3.2% of the pool), which is secured by a 172,498 sf, Class A suburban office in Parsippany, New Jersey. The loan is on the watchlist as a result of increased vacancy, which has trended higher each year since issuance. As of the June 2023 rent roll, the property reported an occupancy of 75.9%, up from 75.5% in December 2022 and down from 95.7% at issuance. Most recently, the property lost three tenants upon their respective lease expirations between November 2022 and February 2023, collectively representing 13.5% of the NRA. In addition, there are two tenants, representing 7.6% of the NRA, with scheduled lease expirations during the next 12 months, and the largest tenant, Sun Chemical Management LLC (Sun Chemical; 38.3% of the NRA, with a lease expiring December 2029), has a termination option in 2024. There has been some recent leasing traction, as the borrower signed two tenants (7.8% of the NRA), improving occupancy to an implied rate of 75.9%, with three more prospective tenants in discussions; however, if Sun Chemical elects to vacate, the loan’s credit risk profile could change drastically. The Parsippany/Troy Hills submarket is extremely soft, reporting an average vacancy rate of 29.2% in Q2 2023, the same rate reported in Q2 2022, per Reis. While there is a termination fee associated with the Sun Chemical lease and the loan was structured with a cash flow sweep should the DSCR fall below 1.30x, performance has undoubtedly declined since issuance. Given the decline in performance and the soft market conditions, the loan was analyzed with a stressed LTV assumption resulting in an expected loss that was approximately 1.5x the the pool WA average.

At issuance, DBRS Morningstar shadow-rated two loans as investment grade, Moffett Towers II – Building 2 (Prospectus ID#1, 8.3% of the pool) and Apple Campus 3 (Prospectus ID#7, 4.7% of the pool). These properties are both secured by Class A office properties in Sunnyvale, California, fully leased to Amazon.com, Inc. and Apple, Inc., signed to long-term leases through April 2028 and February 2031, respectively, with no termination options and built-in extension options. DBRS Morningstar confirmed that the performance of these loans remains consistent with investment-grade loan characteristics with this review.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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.

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 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].