Morningstar DBRS Confirms Credit Ratings; Changes Trends on Six Classes of Wells Fargo Commercial Mortgage Trust 2016-C33

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C33 issued by Wells Fargo Commercial Mortgage Trust 2016-C33 as follows:

-- 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 X-A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class X-B at A (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class X-D at BBB (low) (sf)
-- Class X-E at BB (sf)
-- Class E at BB (low) (sf)
-- Class X-F at B (sf)
-- Class F at B (low) (sf)

Morningstar DBRS changed the trends on Class X-D, Class D, Class X-E, Class E, Class X-F, and Class F to Negative from Stable. The trends on all remaining classes remain Stable.

The trend changes reflect Morningstar DBRS’ increased loss projections, primarily driven by the loans in special servicing, one of which reported an updated appraisal for the collateral property since the prior rating action, indicating further value decline. In the analysis for this review, Morningstar DBRS liquidated two of the three loans in special servicing, with cumulative projected losses totalling $12.2 million. Those losses would erode the non-rated Class G balance by approximately 40.0%, significantly reducing credit support to the lowest rated principal bonds in the transaction, supporting the Negative trends for those classes. The increased risks for the pool also include a sizeable concentration of loans secured by office properties, which represent 26.7% of the pool balance, including the largest loan on the servicer’s watchlist, Brier Creek Corporate Center I & II (Prospectus ID#7; 3.8% of the pool), details of which are outlined below. Morningstar DBRS notes that a select number of those loans could see reduced commitment from the respective borrowers and/or face difficulty securing replacement financing as performance declines from issuance and softening market conditions have likely eroded property values. These factors further support the Negative trends assigned with this review.

As of the March 2024 remittance, 67 of the original 79 loans remain in the pool, with a trust balance of $521.8 million, representing collateral reduction of 26.7% since issuance. To date, the trust has incurred less than $1.0 million of losses, which have been contained to the nonrated Class G certificate. Five loans, representing 7.0% of the pool balance, are on the servicer’s watchlist and three loans, representing 5.9% of the pool balance are in special servicing. In addition, 15 loans, representing 18.5% of the pool balance, are fully defeased.

The largest loan in special servicing, Omni Office Centre (Prospectus ID#10; representing 2.7% of the pool) is secured by two suburban Class B office buildings totalling 294,090 square feet (sf) in the Detroit suburb of Southfield, Michigan. The loan transferred to the special servicer in August 2022 for imminent default. The former largest tenant, Blue Cross Blue Shield (BCBS), which previously occupied approximately 40.0% of the net rentable area (NRA), vacated the property in January 2020, ahead of its June 2022 lease expiration date, but continued paying rent through the remainder of the lease term. BCBS’ departure triggered a cash flow sweep; however, according to the servicer, funds were insufficient to cover the July 2022 payment and the loan defaulted at that time. The borrower was no longer willing to contribute additional capital toward the property and subsequently transitioned the asset to the lender. A receiver was appointed by the court in October 2023. According to an asset status report (ASR), dated February 2024, the property was 17.6% occupied, down from 81.0% at issuance. Given the steep decline in occupancy, net cash flow (NCF) and the debt service coverage ratio (DSCR) have remained negative over the last few reporting periods. A June 2023 appraisal valued the property at $8.1 million, lower than the October 2022 value of $9.5 million and a drastic 66.3% decline from the issuance appraised value of $24.0 million. In the analysis for this review, Morningstar DBRS maintained a conservative approach and applied a haircut to the most recent appraisal value, resulting in a loss severity in excess of 70.0%.

The smallest loan in special servicing, Holiday Inn Express & Suites Columbia (Prospectus ID#30; 1.3% of the pool), is secured by a 73-room hotel located in Columbia, Tennessee. The loan transferred to the special servicer in May 2020 for imminent monetary default and the collateral has been real estate owned since May 2021. The lender has successfully executed an updated franchise agreement with InterContinental Hotels Group and has engaged a property management company to assist with stabilizing operations. The most recent servicer commentary notes that a property sale is expected to take place during the second quarter of 2024. A November 2023 appraisal valued the property at $9.0 million, slightly higher than the September 2022 appraisal value of $8.9 million but considerably lower than the issuance appraised value of $12.3 million. Morningstar DBRS’ analysis includes a liquidation scenario based on a conservative stress to the most recent appraised value, resulting in a projected loss severity slightly below 30.0%.

Brier Creek Corporate Center I & II, is secured by two Class B office buildings totalling 180,995 sf in Raleigh Park, North Carolina. The loan is being monitored for low occupancy and DSCR, following the departure of the two former largest tenants, Stock Building Supply (SBS) and UCB Biosciences (UCB), in 2020 and 2021, respectively. Those tenants cumulatively occupied 75.0% of the NRA. The loan was structured with a cash flow sweep in the event either SBS or UCB failed to extend their leases at least 12 months prior to the expiration date; however it is unlikely any meaningful cash was swept considering the loan has been reporting negative net cash flows since 2021.

Per a September 2023 rent roll, Brier Creek 1 (90,488 sf) was 12.8% occupied and Brier Creek II (90,467) was 63.2% occupied, reflecting a blended occupancy rate of 37.9%. The top three tenants are Attindas Hygiene Partners (12.8% of combined NRA, lease expiring in March 2026), OnRamp Access (6.6% of NRA, lease expiring in January 2025), and ProKidney (4.3% of NRA, lease expiring in July 2027). The servicer noted that the borrower continues to market the property and despite cash flow strains, remains committed to the asset. According to Reis, office properties located in the Research Triangle Park submarket reported a Q4 2023 vacancy rate of 21.9%, compared with the Q4 2022 vacancy rate of 19.7%. Given the continued concerns with performance trends, lack of leasing activity, and the soft submarket, Morningstar DBRS expects a considerable decline in value for these assets. In the analysis for this review, Morningstar DBRS analyzed the loan with an elevated probability of default penalty and stressed loan-to-value ratio, resulting in an expected loss that was almost four times the pool average.

One loan, 225 Liberty Street (Prospectus ID#3, 7.8% of the pool) is shadow-rated investment grade by Morningstar DBRS. The trust loan represents a portion of a $900 million whole loan secured by a 2.4 million sf office property located in the Downtown West submarket of Manhattan. The subject $40.5 million Note A-1F is part of the senior loan amount of $459 million, with the remainder of the whole loan in a subordinate B note securitized in the 225 Liberty Street Trust 2016-225L single asset single borrower (SASB) transaction, which is also rated by Morningstar DBRS. Notably, Morningstar DBRS placed all classes of the SASB transaction Under Review with Negative Implications in January 2024 as part of a larger rating action to address concerns with office property types. For further information on that rating action, please see the press release dated January 9, 2024 on the Morningstar DBRS website. The loan is sponsored by Brookfield Financial Properties, L.P. and benefits from the collateral property’s stable occupancy rate since issuance, which has generally hovered between 90% and 95%. The in-place cash flows have declined, however, due to increased expenses from issuance. As the analysis for the Under Review action for the SASB transaction remains ongoing, the shadow rating for the subject debt was maintained with this review; however, Morningstar DBRS notes the results of that analysis, including any changes to the cap rate, Morningstar DBRS Net Cash Flow, or other inputs considered as part of the LTV sizing, could affect the shadow rating going forward.

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 at (January 23, 2024); https://dbrs.morningstar.com/research/427030.

Class X-A, Class X-B, Class X-D, Class X-E, and Class X-F 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 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 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.

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 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)

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].