Morningstar DBRS Downgrades Three Classes of Wells Fargo Commercial Mortgage Trust 2016-C34

DBRS, Inc. (Morningstar DBRS) downgraded credit ratings on three classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C34 issued by Wells Fargo Commercial Mortgage Trust 2016-C34 as follows:

-- Class D to B (sf) from B (high) (sf)
-- Class E to C (sf) from CCC (sf)
-- Class F to C (sf) from CCC (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-3FL at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-3FX at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (low) (sf)
-- Class B at A (high) (sf)
-- Class C at BBB (high) (sf)
-- Class G at C (sf)

The trends on Classes B, C, D, and X-B were changed to Negative from Stable. Classes E, F, and G do not typically carry trends in commercial mortgage-backed securities (CMBS) credit ratings. All other classes have Stable trends.

The credit rating downgrades to Classes D, E and F reflect increased loss projections for the loans in special servicing, primarily driven by the largest loan in the pool, Regent Portfolio (Prospectus ID#1, 12.0% of the pool). As of the March 2024 remittance, five loans, representing 18.6% of the pool, are in special servicing—three of which Morningstar DBRS liquidated from the pool, resulting in a cumulative projected loss approaching $30 million, which would erode the entirety of the balances on the nonrated Class H, Class G, and would result in the partial loss to Class F. The resulting credit deterioration, in addition to a number of loans identified by Morningstar DBRS as being at increased risk of maturity default, has contributed to the Negative trends placed on Classes B, C, D, and X-B.

According to the March 2024 remittance, 62 of the original 68 loans remain in the pool, representing a 20.5% collateral reduction since issuance. Thirteen loans, representing 10.7% of the pool, have been fully defeased and 12 loans, representing 22.6% of the pool, are on the servicer’s watchlist. The pool is primarily concentrated in retail and lodging properties, which represent 29.5% and 17.8% of the pool respectively, with office properties making up 13.3% of the pool.

The largest loan in special servicing is secured by the Regent Portfolio, a portfolio of 13 buildings in New Jersey, New York, and Florida consisting of traditional office, medical office, and warehouse spaces. The loan sponsor is also the primary owner of the portfolio’s largest tenant, Sovereign Medical Services Inc. The loan transferred to special servicing in June 2019 and the borrower filed for bankruptcy in February 2020. In February 2022, a consensual bankruptcy was agreed upon, whereby the borrower was given six months to pay off the loan, with the option of a three-month extension. Following the initial six-month period, the borrower did not exercise the extension option and as of January 2023, the loan became real estate owned. Since the loan’s transfer to special servicing, three of the underlying properties have been sold at prices that, on average, fell to 46.9% lower than the respective issuance appraised values. Proceeds have reportedly been used to recover outstanding advances and pay past due debts. Updated appraised values for the remaining assets have not been provided, and the lack of updated financial reporting has made it difficult to determine current performance. Morningstar DBRS expects the disposition timeline for the remaining properties may be extended and proceeds are likely to fall short of the total loan exposure. In its analysis, Morningstar DBRS liquidated the loan, resulting in a projected loss severity approaching 35%.

The second-largest loan in special servicing, Nolitan Hotel (Prospectus ID#8, 3.8% of the pool), is secured by a 57-room, full-service boutique hotel in New York City. The loan transferred to special servicing in December 2020 for payment default. At the time of the last credit rating action, the special servicer was dual tracking the loan for foreclosure; however, the borrower has recently submitted a proposal for reinstatement. The lender and borrower are currently working through a preferred equity structure, according to servicer commentary. The most recent appraised value, dated December 2022, valued the subject at $36.8 million, which is slightly less than the issuance value of $39.5 million. According to the trailing 12 months ended October 31, 2023, STR, the hotel’s performance has not restabilized to pre- coronavirus pandemic levels. Despite this, the December 2022 appraised value suggests a low loan-to-value ratio of 57.2%, suggesting that the ultimate resolution may not result in a loss to the trust. However, given the history of default and underperformance, Morningstar DBRS maintained an elevated probability of default (POD) in its analysis, resulting in an expected loss (EL) that was more than 25% greater than the pool average.

Outside of the loans in special servicing, Morningstar DBRS identified eight loans, representing 28.7% of the deal balance, as being at increased risk of default, exacerbated by concentrated rollover, performance declines, and submarket pressures. Where applicable, Morningstar DBRS increased the POD penalties for these loans. The WA EL for these loans was more than 9% higher than the WA EL for the pool. Should additional loans default as they near maturity or should assets wallow in special servicing, Morningstar DBRS’ loss projections may increase.

ENVIRONMENTAL, SOCIAL, AND 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 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 and X-B are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO ratings mirror the lowest-rated applicable reference obligation tranches 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 were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

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.

DBRS, Inc.
22 West Washington Street
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://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

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