Morningstar DBRS Downgrades Credit Ratings on Seven Classes of Wells Fargo Commercial Mortgage Trust 2015-NXS2, Changes Trends on Three Classes to Negative

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on seven classes of the Commercial Mortgage Pass-Through Certificates, Series 2015-NXS2 issued by Wells Fargo Commercial Mortgage Trust 2015-NXS2 as follows:

-- Class B to A (low) (sf) from AA (low) (sf)
-- Class C to BBB (low) (sf) from A (low) (sf)
-- Class PEX to BBB (low) (sf) from A (low) (sf)
-- Class D to CCC (sf) from BBB (low) (sf)
-- Class E to C (sf) from B (sf)
-- Class F to C (sf) from CCC (sf)
-- Class X-E to C (sf) from B (high) (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)

Morningstar DBRS also changed the trends on Classes B, C, and PEX to Negative from Stable. Classes D, E, F, and X-E have credit ratings that do not carry a trend in commercial mortgage-backed securities (CMBS) credit ratings. The trends on all remaining classes are Stable.

The downgrades and Negative trends reflect Morningstar DBRS’ increased loss projections for loans in special servicing in addition to elevated credit risk for a number of large loans on the servicer’s watchlist. The pool has a 23.9% concentration of loans backed by office properties, including three loans in the top 15: Campbell Technology Park (Prospectus ID#2, 8.7% of the pool balance), Sea Harbor Office Center (Prospectus ID#6, 5.8% of the pool balance), and Colman Building (Prospectus ID#10, 3.3% of the pool balance), with the latter two in special servicing. Morningstar DBRS’ projected losses for all loans in special servicing exceeds $47.0 million as of this review. In addition, total interest shortfalls have increased to $3.7 million, up from $2.7 million at the time of the last rating action. Outside of the specially serviced loans, Morningstar DBRS also identified three loans, collectively representing 11.7% of the pool balance and including the largest loan in the pool (Campbell Technology Park), as exhibiting increased default risk, particularly with regard to the remaining pool’s near-term maturity. In the analysis for this review, Morningstar DBRS stressed these loans via a probability of default (POD) and/or loan-to-value ratio (LTV) adjustment to reflect the risk of maturity default. Morningstar DBRS’ projected liquidated losses, its expectation for additional defaults as the pool nears maturity, and increased propensity for interest shortfalls have contributed to the credit rating downgrades and trends.

As of the February 2024 remittance, 54 of the original 63 loans remain in the trust, with an aggregate balance of $686.2 million, representing a collateral reduction of 25.0% since issuance. There are 14 fully defeased loans, representing 22.5% of the current pool balance. There are nine loans with the special servicer, representing 22.5% of the current pool balance, as well as eight loans on the servicer’s watchlist representing 24.9% of the current pool balance. Since the last rating action, one loan that was previously in special servicing, Fairfield Inn & Suites Mt. Vernon (Prospectus ID#48), was liquidated from the trust in June 2023 with a $2.5 million loss to the trust, which is in line with Morningstar DBRS’ loss projection of $2.6 million at last review.

The largest loan in special servicing is the Sea Harbor Office Center, which is secured by a 359,514-square-foot (sf) suburban office building in Orlando, Florida. The loan originally transferred to the special servicer in January 2019 for nonmonetary default related to noncompliance with a cash management trigger. The largest tenant, Wyndham Hotels & Resorts (Wyndham) occupies 72.4% of net rentable area (NRA) on a lease through October 2025, down from 84.6% of NRA at issuance after having given back space in 2021. Media sources point to a potential relocation of the tenant, posing further uncertainty for Wyndham’s plans at the subject property. As per the most recent rent roll dated August 2023, the property was 94.0% occupied. Other notable large tenants at the subject include Visit Orlando (12.4% of the NRA, lease expiring in October 2024) and Optavise, LLC (6.2% of the NRA, lease expiring in December 2028). The special servicer has confirmed that Visit Orlando has extended its lease through October 2025. In total, 87.8% of the NRA is scheduled to roll over prior to loan maturity in June 2025.

As of the February 2024 remittance, the loan is paid through January 2024 and the workout strategy remains unclear. As per Reis, office properties in the South Orlando submarket reported a vacancy rate of 18.7% with an average effective rental rate of $19.52 per sf (psf) as of YE2023, compared with the property’s average rental rate of $21.73 psf. According to the February 2024 loan-level reserve report, the loan has $3.5 million across all reserves. Loan performance has deteriorated, with a 0.73 times (x) debt service coverage ratio (DSCR) for the trailing six months ended June 30, 2023, compared with 0.77x at YE2022 and 2.33x at YE2021. The drastic decline in net cash flow (NCF) is attributable to the increase in real estate taxes, which jumped 260% from YE2021 to YE2022. Given the drop-off in performance, concentrated near-term rollover risk, uncertainty surrounding the largest tenant at the subject, and softening submarket metrics, Morningstar DBRS’ analysis includes a liquidation scenario, based on a conservative stress to the appraised value at issuance, resulting in a projected loss severity approaching 20%.

The largest loan on the servicer’s watchlist is the Campbell Technology Park, which is secured by a four-building, 280,000-sf office complex in Campbell, California. The loan was added to the watchlist in February 2022 because of a low DSCR and declining occupancy figures. As of the October 2023 rent roll, the property was 50.3% occupied, down from 64.7% at YE2021 and well below the issuance occupancy rate of 93.4%. The drop in occupancy follows the downsizing and departure of several large tenants. Additionally, there is significant rollover risk in the near term, with nearly all remaining leases in place scheduled to expire prior to loan maturity in June 2025. Morningstar DBRS has requested an update from the borrower regarding renewal activity but did not receive a response as of the publication of this press release. Cash flow has also declined, with the DSCR dropping to 0.55x for the trailing nine months ended September 30, 2023, compared with 1.77x at YE2021 and the Morningstar DBRS DSCR of 1.67x at issuance. Although a cash trap event occurred in Q2 2023 following the drop in DSCR, there is currently no excess cash to trap. As per Reis, office properties in the Cupertino/Campbell/Los Gatos submarket reported a vacancy rate of 17.1% as of YE2023, with an average asking rent of $46.50 psf. Cushman & Wakefield lists 154,000 sf, or 55.0% of the NRA, as available for leasing with an average asking rental rate of $29.4 psf, significantly below submarket. There is $1.7 million in reserves as per the February 2024 loan level reserve report. Given the year-over-year decline in performance, significant rollover risk prior to maturity, and softening submarket metrics, Morningstar DBRS believes the property value has declined since issuance. To reflect this, this loan was analyzed with an elevated POD and LTV adjustment, resulting in an expected loss that was 220% above the pool’s weighted average expected loss.

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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (January 23, 2024) https://dbrs.morningstar.com/research/427030.

Classes X-A and X-E are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO credit 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 Morningstar DBRS.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 1, 2024; https://dbrs.morningstar.com/research/428798).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 rating process for this credit rating action.

Morningstar DBRS 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 Morningstar DBRS 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS’ outlooks and credit ratings are monitored.

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The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model v 1.2.0.0 (https://dbrs.morningstar.com/research/428797)

Rating North American CMBS Interest-Only Certificates (December 13, 2023; https://dbrs.morningstar.com/research/425261)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023; https://dbrs.morningstar.com/research/420982)

North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://dbrs.morningstar.com/research/419592)

Legal Criteria for U.S. Structured Finance (December 7, 2023; https://dbrs.morningstar.com/research/425081)

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279.

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