Morningstar DBRS Confirms Credit Ratings on All Classes of Wells Fargo Commercial Mortgage Trust 2015-SG1; Changes Trends on Three Classes to Negative from Stable

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2015-SG1 issued by Wells Fargo Commercial Mortgage Trust 2015-SG1 as follows:

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

Morningstar DBRS changed the trends on Classes D, E, and X-E to Negative from Stable. All other classes carry Stable trends with the exception of Class F, which has a credit rating that does not typically carry a trend in commercial mortgage-backed securities (CMBS) credit ratings.

The credit rating confirmations reflect the overall stable performance of the underlying collateral, as exhibited by a healthy weighted-average (WA) debt service coverage ratio (DSCR) of 1.99 times (x) based on the most recent financial reporting available. Twelve loans, representing 11.8% of the pool, have been fully defeased. Excluding defeased loans, the three largest property-type concentrations are retail (31.8% of the pool), lodging (20.9% of the pool), and office (18.2% of the pool). As the pool enters its maturity year in 2025, Morningstar DBRS has an overall positive outlook for the refinance prospects for most of the underlying loans. However, the Negative trends on Classes D, E and X-E reflect challenges for the pool, including three loans (14.1% of the pool) in special servicing and eight loans (representing 11.8% of the pool) that Morningstar DBRS has identified as being at increased risk of maturity default given recent performance challenges, weakening submarket fundamentals, and unfavorable lending conditions for certain property types. For the loans with elevated refinance risk, Morningstar DBRS applied an elevated probability of default penalty and/or loan-to-value ratio, resulting in a WA expected loss for these loans that is 1.3x the WA expected loss for the pool. Should these or other loans default, or should performance for specially serviced loans deteriorate further, Morningstar DBRS' projected losses for the pool may increase, and Classes with Negative trends may be subject to credit rating downgrades.

As of the May 2024 remittance, 66 of the original 72 loans remain in the pool with an aggregate principal balance of $596.1 million, representing a collateral reduction of 16.8% since issuance as a result of loan repayment, scheduled loan amortization, and the liquidation of four loans. Pool losses to date have totaled $6.6 million, eroding the first-loss Class G certificate by 21.2%. Nine loans representing 13.8% of the pool are on the servicer's watchlist for declining performance metrics, upcoming rollover, and/or deferred maintenance. There are five loans representing 22.0% of the pool in special servicing. Morningstar DBRS liquidated three of the five loans in special servicing resulting in a total implied loss of $22.1 million that would be contained in the unrated Class G.

Since the last review, Patrick Henry Mall (Prospectus ID#1, 9.7% of the pool) transferred to special servicing because of the bankruptcy of the guarantor. Another specially serviced loan, Bella at Baton Rouge (Prospectus ID#19, 1.6% of the pool), has been real estate owned since June 2022, with marketing efforts to sell the property under way. Based on the January 2024 appraisal, the property was valued at $5.9 million, down more than 40% from the September 2020 value of $9.5 million. Based on the appraised value, Morningstar DBRS analyzed a liquidation scenario for this loan from the trust, resulting in a projected loss of nearly $7.9 million or an implied loss severity in excess of 80.0%. Other specially serviced loans including Boca Park Marketplace (Prospectus ID#2, 6.9% of the pool) and Columbus Hotel Portfolio (Prospectus ID#26, 1.0% of the pool) are expected to be returned to the master servicer in the near to moderate term, according to servicer commentary. Boca Park Marketplace has been kept current with some moderate performance improvements, the borrower is working with tenants that were paying cotenancy deficient rates triggered by the departure of Haggen Food & Pharmacy and Fry's Electronics in 2015 and 2016, respectively. The servicer noted that the dark space would likely be backfilled by Q2 2024.

The largest loan in special servicing, Patrick Henry Mall, is secured by the fee-simple interest in one anchor box and the in line retail space of a mid-tier regional mall in Newport News, Virginia. The trust debt of $57.8 million represents the A1 and A2 notes, with the pari passu A3 note securitized in WFCM 2015-C31 deal, also rated by Morningstar DBRS. The loan transferred to special servicing in January 2024 following the bankruptcy of the mall's owner and operator Pennsylvania Real Estate Investment Trust (PREIT) in December 2023. In April 2024, PREIT has reportedly emerged from bankruptcy through rounds of corporate restructuring and consolidation. As of a result of this reorganization, PREIT would now be privately held. The lender is working with the borrower to determine a workout strategy. As of the December 2023 rent roll, the property was 96.2% occupied. The largest collateral tenants include JCPenney (19.7% of the net rentable area (NRA); expiring May 2025) and Dick's Sporting Goods (11.6% of the NRA; expiring January 2027). The noncollateral anchor tenants include Macy's and Dillard's. A tenant sales report was not provided as of the date of this press release. Rollover risk is concentrated with leases representing 24.9% of the NRA scheduled to expire prior to the loan maturity in June 2025. As of the YE2023 financials, the loan reported a net cash flow of $7.6 million (a DSCR of 1.32x), down from $8.4 million (a DSCR of 1.46x) at YE2022, $9.0 million (a DSCR of 1.56x) at YE2021, and the Issuer's underwritten figure of $9.5 million (a DSCR of 1.66x). Given the increased risk associated with the upcoming tenant rollover, including the upcoming lease expiration for an anchor tenant, declining performance and likely value decline since issuance, Morningstar DBRS liquidated this loan from the pool after applying a 50% haircut to the issuance appraised value, resulting in an implied loss of $8.3 million, with a loss severity of nearly 15%.

The Doubletree DFW loan (Prospectus ID#6, 2.8% of the pool) is secured by a 282-key hotel in Irving, Texas. The loan transferred to special servicing in March 2024 because of a nonmonetary default. The hotel was affected by damage sustained during a severe cold snap in 2021, and as a result several rooms at the hotel went offline and cash flows have remained severely depressed since. The loan remains current as of the May 2024 remittance, and the special servicer continues to work with the borrower to determine a workout strategy. However, the loan's DSCR has fallen precipitously alongside occupancy, with the YE2023 financials reporting a figure of 0.02x, compared with YE2022 figure of 0.16x, and significantly less than the Issuer's DSCR of 1.80x. As per the April 2024 STR report, the subject reported a trailing-12-month occupancy rate of 64.9%, average daily rate of $132.38, and revenue per available room (RevPAR) of $85.89, underperforming its competitive set with a RevPAR penetration of 77.5%. Given the sustained low cash flows and special servicing status of the loan, Morningstar DBRS analyzed a liquidation scenario, resulting in a loss severity in excess of 35%.

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 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 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 rating assigned to Class D materially deviates from the rating 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 rating would consider a three-notch or more deviation from the credit rating stress(es) implied by the predictive model to be a significant factor in evaluating the credit rating. The rationale for the material deviation is uncertain loan-level event risk. Despite the negative pressure indicated by the predictive model, the overall performance of the pool remains in line with Morningstar DBRS' expectations since the last review. Moreover, two of the three loans in special servicing are expected to be returned to the master servicer during the near term, most notably the second-largest loan in the pool, Boca Park Marketplace.

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 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 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 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 https://dbrs.morningstar.com or contact us at [email protected].