Morningstar DBRS Downgrades Credit Ratings on Four Classes of Wells Fargo Commercial Mortgage Trust 2016-NXS6

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on four classes of Commercial Mortgage Pass-Through Certificates, Series 2016-NXS6 issued by Wells Fargo Commercial Mortgage Trust 2016-NXS6 as follows:

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

Classes E, F, G, and X-E no longer carry a trend given the CCC (sf) or lower credit rating. All other trends remain Stable.

The credit rating downgrades are reflective of Morningstar DBRS’ increased loss projections for the pool, driven by the implied losses for two loans in special servicing, representing 6.4% of the current pool balance as well as a high concentration of loans exhibiting declines in performance since the last credit rating action. In its analysis for this review, Morningstar DBRS liquidated the two loans in special servicing, resulting in a cumulative projected loss of $24.5 million, which would fully erode the nonrated Class H balance and result in a partial write-down of the Class G balance. Additionally, Morningstar DBRS’ ratings are constrained by the expectation of accruing interest shortfalls prior to repayment, which has also contributed to Morningstar DBRS’ downgrades. Interest shortfalls currently total $2.5 million, up from a total interest shortfall amount of $1.5 million at the time of the last rating action. Unpaid interest continues to accrue month-over-month, driven by special servicing fees and appraisal subordinate entitlement reduction from the largest loan in special servicing. Morningstar DBRS has limited tolerance up to six remittance cycles for BB and B rating categories.

Since DBRS Morningstar’s last rating action, two loans have been fully defeased, bringing the total pool defeasance to eight loans, representing 9.2% of the pool. As of the March 2024 remittance, 46 of the original 50 loans remain in the pool, representing a collateral reduction of 21.4% since issuance. The pool is well diversified by property type, with the four largest concentrations being retail (24.8% of the pool), mixed-use (20.0%), multifamily (18.2%), and office properties (17.9%). All but four of the outstanding loans are scheduled to mature in 2026. Excluding one loan in special servicing, the office loans in the pool are generally performing in line with issuance expectations with a weighted-average (WA) YE2022 debt service coverage ratio (DSCR) of 2.07 times (x).

The largest loan in special servicing, Cassa Times Square (Prospectus ID#6; 5.7% of the pool), is secured by a mixed-use property consisting of an 86-key boutique hotel along with 8,827 square feet (sf) of retail space in Manhattan, New York. The loan transferred to special servicing in May 2020 and has been delinquent since February 2020. A receiver was appointed in March 2022 to manage property operations. According to the servicer’s most recent update, the property was underperforming relative to the competitive set based on the occupancy, average daily rate, and revenue per available room penetration rates of 93.4%, 95.8%, and 94.1%, respectively, for the trailing 12 months ended November 2023. The special servicer is pursuing foreclosure while also exploring a potential note sale. The property was re-appraised in August 2023 at a value of $30.0 million, a nominal decrease from the December 2022 appraised value of $30.2 million, but well below the issuance appraised value of $68.9 million. Morningstar DBRS’ analysis included a liquidation scenario based on a stress to the most recent appraised value resulting in a projected loss severity exceeding 65%.

Outside of loans in special servicing, Morningstar DBRS identified five loans representing 18.5% of the pool balance as exhibiting increased risk of default given performance declines. Where applicable, Morningstar DBRS increased the probability of default (POD) penalties, and/or applied stressed loan-to-value ratios for these loans. The WA expected loss for these loans was twice the WA pool expected loss.

The largest loan of concern not in special servicing is Peachtree Mall (Prospectus ID#13; 2.7% of the pool), which is secured by a 532,202-sf portion of a larger 822,443-sf regional mall in Columbus, Georgia. The loan sponsored by Brookfield Property Group is being monitored on the servicer’s watchlist for low DSCR, which was reported at 1.26x as of the Q3 2023 financials, compared with 1.41x in YE2022 and the Morningstar DBRS-derived figure of 1.68x at issuance. In addition, cash flows have declined over the past few years. The annualized net cash flow (NCF) for the trailing nine-month (T-9) period ended September 30, 2023, was $6.3 million, down from $7.1 million for the YE2022 period. The two largest tenants are Macy’s (26.0% of the net rentable area (NRA) with a lease through September 2027) and JC Penney (15.0% of the NRA, with a lease through November 2024). Dillard’s is also an anchor tenant but does not serve as collateral. A tenant sales report was not provided as of the date of this press release. Rollover risk is concentrated with leases representing 30% NRA scheduled to roll in the next 12 to 18 months. Given the increased risk associated with the upcoming tenant rollover, including the upcoming lease expiration for an anchor tenant, declining performance and dated property condition, Morningstar DBRS analyzed this loan with a stressed POD, resulting in an expected loss that is more than double the WA pool 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 (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

Classes X-A, X-B, X-D, and X-E 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 Morningstar DBRS.

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

The principal methodology is the 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 credit ratings assigned to Class E materially deviate from the ratings implied by the predictive model. Morningstar DBRS typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider a three-notch or more deviation from the credit rating stresses implied by the predictive model to be a significant factor in evaluating the credit ratings. The material deviation is warranted given the structural transaction features and/or provisions in other relevant methodologies outweigh the quantitative model output. Morningstar DBRS has limited tolerance up to six remittance cycles for BB and B rating categories.

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.

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.

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://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

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria, (September 22, 2023),
https://dbrs.morningstar.com/research/420982/dbrs-morningstar-north-american-commercial-real-estate-property-analysis-criteria

North American Commercial Mortgage Servicer Rankings, (August 23, 2023),
https://dbrs.morningstar.com/research/419592/north-american-commercial-mortgage-servicer-rankings

Rating North American CMBS Interest-Only Certificates, (December 13, 2023),
https://dbrs.morningstar.com/research/425261/rating-north-american-cmbs-interest-only-certificates

Legal Criteria for U.S. Structured Finance, (December 7, 2023),
https://dbrs.morningstar.com/research/425081/legal-criteria-for-us-structured-finance

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].