Morningstar DBRS Downgrades Credit Ratings on Six Classes of Wells Fargo Commercial Mortgage Trust 2015-C31, Changes Trends on Six Classes to Negative

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on six classes of Commercial Mortgage Pass-Through Certificates, Series 2015-C31 issued by Wells Fargo Commercial Mortgage Trust 2015-C31 as follows:

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

In addition, Morningstar DBRS confirmed the following credit ratings:

-- 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 (low) (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (sf)

Morningstar DBRS changed the trends on Classes B, C, D, X-B, X-D, and PEX to Negative from Stable. Classes A-3, A-4, A-SB, A-S, and X-A continue to carry Stable trends. There are no trends for Classes E and F, which are assigned credit ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS).

The credit rating downgrades on Classes D, E, F, and X-D reflect Morningstar DBRS' increased loss projections for the loans in special servicing. Since the last credit rating action, two loans have transferred to special servicing, and there are currently three specially serviced loans, representing 15.1% of the pool balance. Morningstar DBRS' analysis included liquidation scenarios for all three specially serviced loans, resulting in total implied losses of approximately $63.0 million, an increase from Morningstar DBRS' projected losses of approximately $22.0 million from only one specially serviced loan, Sheraton Lincoln Harbor Hotel (Prospectus ID#2, 7.1% of the current pool balance), at the time of the last credit rating action. The current implied losses are projected to fully erode the unrated Class G certificate, the Class F certificate, and approximately 20% of the Class E certificate, further reducing credit enhancement to the junior bonds. The primary contributors to the increase in Morningstar DBRS' projected losses are the liquidation scenarios for the recently transferred CityPlace I (Prospectus ID#3, 5.4% of the current pool balance) and Patrick Henry Mall (Prospectus ID#7, 2.7% of the current pool balance) loans.

The credit rating downgrades and Negative trends on Classes B, C, X-B, and PEX are reflective of increased pool expected losses in addition to Morningstar DBRS' concerns regarding increased default risk as the pool nears its maturity year. Nearly all of the remaining loans in the transaction are scheduled to mature by YE2025. In a wind-down scenario, Morningstar DBRS expects that the majority of non-specially serviced loans will successfully repay at maturity. However, Morningstar DBRS has identified 13 loans, representing 17.5% of the pool balance, that exhibit increased default risk given weak credit metrics and/or upcoming rollover risk. Morningstar DBRS expects that some of these loans will default as they near their respective maturity dates. To account for the increased risk, Morningstar DBRS used stressed loan-to-value ratios (LTVs) and/or elevated probabilities of default (PODs) for these loans to increase the expected loss (EL) as applicable. The resulting weighted-average (WA) expected loss for the pool increased by approximately 200 basis points with this review. Should performance of these loans deteriorate further or additional defaults occur, those classes with Negative trends may be subject to further credit rating downgrades.

The credit ratings for the remaining Classes A-3, A-4, A-SB, A-S, and X-A were confirmed at AAA (sf), reflective of the otherwise overall steady performance of the remaining loans in the pool and Morningstar DBRS' expectation that these classes are sufficiently insulated from losses and will be recovered from loans expected to pay at maturity, based on their most recent year-end WA debt service coverage ratio above 2.0 times and WA debt yield above 15.0%. Specifically, for the subsenior Class A-S, while half of the outstanding bond balance is expected to be repaid by maturing loans, the recovery of this class is ultimately reliant on principal received from specially serviced loans and loans Morningstar DBRS deems are at high risk of default. Morningstar DBRS' analysis suggests there will be sufficient principal to repay the remaining balance of this bond in a conservative liquidation scenario.

As of the May 2024 remittance, 90 of the original 102 loans remain in the trust, with an aggregate balance of $837.7 million, representing a collateral reduction of 15.2% since issuance. There are 25 fully defeased loans, representing 25.8% of the current pool balance. There are 12 loans on the servicer's watchlist, representing 8.9% of the pool balance, that are being monitored primarily for performance-related concerns and deferred maintenance items. Excluding defeased loans, the pool is most concentrated by retail, lodging, and office properties, which represent 24.7%, 16.8%, and 11.9% of the pool balance, respectively. Morningstar DBRS has a cautious outlook on the office asset type given the anticipated upward pressure on vacancy rates in the broader office market, challenging landlords' efforts to backfill vacant space, and, in certain instances, contributing to value declines, particularly for assets in noncore markets and/or with disadvantages in location, building quality, or amenities offered. Morningstar DBRS' analysis includes an additional stress for select office loans exhibiting weakened performance, which resulted in a WA EL that is more than 50% higher than the pool's average EL.

The largest loan in special servicing is the Sheraton Lincoln Harbor Hotel, which is secured by a 358-room, full-service hotel in Weehawken, New Jersey. The loan has a noncontrolling pari passu piece in the CSAIL 2016-C5 transaction, which is also rated by Morningstar DBRS. The loan transferred to the special servicer in January 2021 for payment default and the special servicer is pursuing foreclosure. Property operations have improved since the receiver took possession; however, the properties' increased expense ratio has kept cash flows quite low. An appraisal dated July 2023 valued the property at $80.5 million, a marginal improvement over the August 2022 value of $79.5 million, but a 37.1% decline from the issuance value of $128.0 million. In its analysis for this review, Morningstar DBRS liquidated the loan from the trust based on a haircut to the most recent appraised value, resulting in an implied loss just over 40%.

The second-largest specially serviced loan is the largest contributor to Morningstar DBRS' liquidated loss projections. CityPlace I is secured by a 39-story, Class A office property totaling 884,366 square feet (sf) of space, located in downtown Hartford, Connecticut. Occupancy has declined significantly following the downsizing of the former largest tenant, UnitedHealthcare Services Inc (UHC), which formerly occupied 377,624 sf, or 42.7% of the net rentable area (NRA). UHC extended its lease, previously scheduled to expire in July 2023, for an additional five years to July 2028, on only 57,628 sf, or 6.6% of the NRA. This reduction has brought the occupancy down to 47.0%, compared with the YE2022 occupancy rate of 85.8%. The loan subsequently transferred to the special servicer in October 2023 for imminent payment default after the borrower indicated that it would no longer be funding operating shortfalls. As per the May 2024 remittance, the loan remains current. Morningstar DBRS expects that occupancy is likely to decline even further given tenants' additional downsizing options and the aggregate rollover risk of 6.4% prior to loan maturity in September 2025. UHC's downsizing also triggered the activation of a cash management account, which had a current balance of $1.2 million as of May 2024. There is also approximately $4.9 million in replacement, tenant, and other reserve accounts.

As per Reis, office properties in Hartford CBD reported an average vacancy rate of 24.3% with an average asking rental rate of $22.78 per square foot (psf) as of Q1 2024, relatively in line with the average rental rate of $22.01 psf at the subject. While there is no updated appraisal, Morningstar DBRS believes that value has deteriorated from issuance given the challenged office landscape, soft submarket fundamentals, and increased vacancy at the subject. Morningstar DBRS' analysis, which includes a liquidation scenario based on a significant haircut to the issuance appraised value, is indicative of a loss severity in excess of 75.0%.

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 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, and X-D 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. 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 Limited
DBRS Tower, 181 University Avenue, Suite 700
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 version 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 (April 15, 2024), https://dbrs.morningstar.com/research/431205

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 (July 17, 2023).

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