DBRS Morningstar Confirms All Classes of Wells Fargo Commercial Mortgage Trust 2018-C45

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-C45 issued by Wells Fargo Commercial Mortgage Trust 2018-C45 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 (high) (sf)
-- Class X-B at AA (low) (sf)
-- Class C at A (high) (sf)
-- Class X-D at A (low) (sf)
-- Class D at BBB (high) (sf)
-- Class E-RR at BBB (sf)
-- Class F-RR at BBB (low) (sf)
-- Class G-RR at BB (sf)
-- Class H-RR at B (high) (sf)

All trends are Stable. The credit rating confirmations reflect the overall stable performance of the transaction as evidenced by the pool’s healthy weighted-average (WA) debt service coverage ratio (DSCR) of nearly 2.0 times (x) based on the most recent year-end financials available. Although the overall performance metrics remain healthy, select loans are showing increased risks from issuance, including two specially serviced office loans. The pool has incurred minimal losses to date, and the first-loss Class J-RR (not rated by DBRS Morningstar) had a remaining balance of $26.3 million as of the September 2023 remittance. In total, DBRS Morningstar rates $17.3 million of the bond stack below investment grade, providing a total cushion of $43.6 million for the BBB (low) (sf) rated Class F-RR certificate. The transaction’s structure does include some skinny classes at the bottom of the capital stack, however, a factor that could increase the likelihood of class downgrades should DBRS Morningstar’s liquidated loss projections increase over the scenario considered with this review, as further detailed below.

As of the September 2023 remittance, 45 of the original 49 loans remain in the trust, with an aggregate balance of $611.7 million, representing a collateral reduction of 7.1% since issuance. There are six loans that are fully defeased, representing 5.6% of the pool. Seven loans, representing 14.5% of the pool, are on the servicer’s watchlist, and two loans are in special servicing, representing 7.8% of the pool. A previously specially serviced loan, Keyway Apartments (Prospectus ID#37), was liquidated from the trust in June 2023 with a cumulative loss of approximately $50,000, below DBRS Morningstar’s projected liquidation loss of $102,700 at last review.

Excluding defeasance, the transaction is most concentrated by retail and office properties, which represent 34.6% and 18.6% of the current pool balance, respectively. 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. DBRS Morningstar identified three office loans that were analyzed with stressed loan-to-value ratios (LTV) and elevated probability of default assumptions given credit concerns identified with this review. The resulting expected losses for these loans averaged over 500 basis points above the pool’s weighted-average expected loss. For the two loans in special servicing, liquidation scenarios were not considered as both are expected to return to the master servicer in the near to moderate term. Both were analyzed with stressed scenarios given increased risks from issuance and/or the uncertainty surrounding the final workout scenarios.

The largest loan in special servicing is Parkway Center (Prospectus ID#3, 6.7% of the current pool balance), which is secured by six Class B office buildings totaling 588,913 square feet (sf) in Pittsburgh. The 10-year loan paid interest-only (IO) for the first three years and now amortizes on a 30-year schedule. The loan transferred to the special servicer in November 2022 due to imminent default as the subject faced a decline in occupancy rate and consequently, a decline in cash flows. Most recently, the occupancy rate was reported at 64.2% as per the March 2023 rent roll, compared with the YE2022 and YE2021 occupancy rates of 58.4% and 79.6%, respectively. The DSCRs in YE2022 and YE2021 were reported at 1.16x and 1.51x, respectively. Cash management was triggered with lease defaults for two tenants, Alorica (formerly occupied 6.5% of the NRA, lease expiry in October 2023), and McKesson Corporation (formerly occupied 8.4% of the NRA, lease expired in December 2022). The loan is current, with debt service payments being made from the trapped cash and the servicer reporting a total of $5.3 million in reserves as of September 2023.

According to the servicer commentary as of September 2023, a loan modification agreement is being finalized that will require an equity infusion in exchange for a modification of the loan terms. Although it is encouraging that the sponsor appears to be committed to the property and loan, the low in-place occupancy rate and the additional scheduled rollover of just under 20% of the NRA through the next year are indicative of significantly increased risks for this loan from issuance. According to Reis, office properties in the Greater Pittsburgh submarket reported a vacancy rate of 22.1% with an asking rental rate of $25.61 per square foot (psf) in Q2 2023, compared with the subject’s average rental rate of $15.23 psf. Reis is forecasting vacancy rates will increase over the next several years, with the 2024 and 2025 vacancy rates projected at 23.9% and 23.4%, respectively. The servicer has not yet obtained an updated appraisal, but DBRS Morningstar notes that given the collateral’s suburban location within a softening submarket, increased in-place vacancy levels, and moderate rollover risk in the next 12 months, the value has likely declined significantly from issuance. As such, this loan was analyzed with a stressed value estimate and an elevated probability of default adjustment, resulting in an expected loss that was approximately four times than the pool’s WA expected loss.

At issuance, DBRS Morningstar shadow-rated 181 Fremont Street (Prospectus ID#10; 3.3% of the pool balance) as investment grade. The loan is secured by the borrower’s fee interest in a 436,332-sf Class A office building in San Francisco. The debt in this transaction represents a pari passu portion of the $250.0 million whole loan, with another pari passu portion also held in the WFCM 2018-C44 transaction, which is also rated by DBRS Morningstar. The property was completed in early 2018, and the collateral space was delivered to the sole occupant, Meta Platforms, Inc. (Meta), formerly Facebook Inc., with a lease expiration in 2031. The lease includes two five-year extensions with no early termination rights. In January 2023, Meta announced efforts to sublease the entirety of the property, which was noted to be available as of June 2023. While DBRS Morningstar does not expect the net cash flow to be affected in the near term given that Meta’s rent obligation extends beyond the loan’s maturity, the property’s dark status represents an elevated risk for the loan from issuance, particularly given the challenges for office properties in the San Francisco market amid the post-pandemic demand shifts. As such, the shadow rating was removed with this review and a stressed value was considered, increasing the expected loss in the analysis.

The CoolSprings Galleria loan (Prospectus ID#11; 3.0% of the trust balance), was also shadow-rated investment grade at issuance. With this review, DBRS Morningstar confirms that the loan’s performance remains consistent with the investment-grade rating.

ENVIRONMENTAL, SOCIAL, AND 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 (July 4, 2023) https://www.dbrsmorningstar.com/research/416784.

Classes X-A, X-B, and X-D 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 the 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/North American CMBS Insight Model v 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

DBRS Morningstar North American Commercial Real Estate Property Analysis (September 22, 2023), https://www.dbrsmorningstar.com/research/420984

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 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].