Morningstar DBRS Upgrades One Class and Confirms Credit Ratings on All Other Classes of Wells Fargo Commercial Mortgage Trust 2015-NXS1, Changes Trends on Two Classes to Negative from Stable

DBRS Limited (Morningstar DBRS) upgraded the credit rating on one class of Commercial Mortgage Pass-Through Certificates, Series 2015-NXS1 issued by Wells Fargo Commercial Mortgage Trust 2015-NXS1 as follows:

-- Class X-B to A (high) (sf) from A (sf)

The credit rating upgrade on Class X-B is reflective of the bond's interest stream stability given the position of its reference class in the waterfall, with the bond's lowest-rated reference class, Class C, rated A (sf). The credit rating upgrade is warranted based on the rationale as outlined in the "Rating North American CMBS Interest-Only Certificates" methodology, which notes that, for multiple-tranche interest-only certificates, Morningstar DBRS' credit rating will typically mirror the lowest-rated Applicable Reference Obligation, possibly adjusted upward by one notch.

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class PEX at A (sf)
-- Class D at BBB (low) (sf)
-- Class X-E at BB (sf)
-- Class E at BB (low) (sf)
-- Class X-F at B (high) (sf)
-- Class F at B (sf)

Morningstar DBRS changed the trends on Classes F and X-F to Negative from Stable. The trends on the remaining classes are Stable.

The Negative trends reflect Morningstar DBRS' concerns with several loans that have exhibited increased risk of default as a result of performance declines, increased tenant rollover risk, and/or general market concerns as a majority of the remaining loans are scheduled to mature by Q2 2025. Morningstar DBRS identified nine loans, representing 21.8% of the pool, facing elevated refinance risk, including the third-largest loan in the pool, Eastgate Two Phases VIII-X (Prospectus ID#5, 5.9% of the pool). For these loans, Morningstar DBRS applied stressed loan-to-value ratios (LTVs) and/or elevated probability of defaults (PODs) to increase the expected loss at the loan level as applicable. These adjusted loans had a weighted-average (WA) expected loss (EL) that was approximately 50.0% higher than the pool's WA figure.

Cumulative interest shortfalls total approximately $156,000, with Classes E and F being shorted as of the June 2024 remittance. The shortfalls incurred to Classes E and F were because of $135,000 of interest on advances that was reported following the liquidation of the 9990 Richmond Avenue loan (Prospectus ID#17, previously 2.7% of the pool) in June 2024. The loan was liquidated with a loss of $16.2 million (loss severity of 83.2%), which was in line with Morningstar DBRS' expectations at its last review. The loss was contained to the nonrated Class G Certificates, eroding approximately 35.2% of the class balance.

The credit rating confirmations and Stable trends reflect the overall stable performance of the transaction since Morningstar DBRS' last review. The transaction has benefitted from significant principal paydown of 34.3% since issuance as well as an additional 12 loans, representing 14.1% of the pool, that are fully defeased. Based on the YE2023 financials, the remaining 42 non-defeased loans reported a healthy WA debt service coverage ratio (DSCR) of 1.89 times (x). Ten loans, representing 17.8% of the pool, are on the servicer's watchlist for various reasons including low DSCR, low occupancy, and outstanding deferred maintenance items, and three loans, representing 10.1% of the pool, are currently in special servicing. For this review, Morningstar DBRS analyzed the 760 & 800 Westchester Avenue (Prospectus ID#7, 5.2% of the pool) and Canyon Falls (Prospectus ID#29, 1.4% of the pool) loans with liquidation scenarios. Loss severities for both loans were in excess of 30.0%, which would result in losses contained to the nonrated Class G Certificate.

By property type, the pool is most concentrated by loans secured by office properties (40.9% of the pool), followed by retail (23.3% of the pool), and lodging (8.7% of the pool). Although the office sector has been challenged given low investor appetite for the property type and increasing vacancy rates in the sector, the majority of office properties in the transaction maintained healthy credit metrics since Morningstar DBRS' last review as the WA DSCR increased year over year from 2.09x to 2.23x, per the YE2023 financials. The three largest loans in the pool are all secured by office properties that have reported cash flow growth since issuance and continue to remain 100% occupied. The largest loan in the pool, Stanford Research Park (Prospectus ID#3, 8.0% of the pool), is secured by a Class A office property in Palo Alto, California, which is 100% occupied by law firm Cooley LLP on a lease through January 2030. The second and third-largest loans, Eastgate One Phases I-VII & XII (Prospectus ID#2, 7.3% of the pool) and Eastgate Two Phases VIII-X (Prospectus ID#5, 5.9% of the pool), are both secured by portions of a Class B office complex in San Diego. While both properties continue to report 100% occupancy, rollover risk is the main concern as both loans are scheduled to mature in April 2025. According to the September 2023 rent roll, tenants representing 35.4% of NRA are scheduled to roll by YE2025 at the Eastgate One Phases I-VII & XII property, and, at the Eastgate Two Phases VIII-X property, all tenants are signed to leases set to expire by 2026, including the largest tenant, ServiceNow Inc. (83.7% of NRA, lease expires January 2026). As a result, for this review, Morningstar DBRS analyzed both loans with increased LTVs and elevated PODs, resulting in an expected loss approximately 90.0% greater than the pool's WA EL for Eastgate One Phases I-VII & XII and an expected loss over 200.0% greater than the pool's WA EL for Eastgate Two Phases VIII-X.

The largest loan in special servicing, 760 & 800 Westchester Avenue, is secured by two Class A office properties in Rye Brook, New York. The loan is pari passu with the COMM 2015-PC1 (Morningstar DBRS rated) and COMM 2015-DC1 transactions. The loan was recently transferred to special servicing in April 2024 for imminent monetary default and, according to the most recent servicer commentary, both the lender and the borrower have signed a pre-negotiation letter while discussions are underway.

As of the March 2024 rent roll, the combined properties were 87.3% occupied compared with 86.5% in YE2022 and 90.0% at issuance. The 760 Westchester Avenue office totals 64,584 sf (11.5% of the NRA) and is 100% occupied by Sonic Healthcare USA Inc. (Sonic Healthcare), on a lease expiring in October 2031. After Sonic Healthcare, the rent roll is granular with no tenant in the 800 Westchester Avenue building comprising more than 4.5% of the NRA. Additionally, leases comprising 17.4% of the NRA are scheduled to expire in the next 12 months. According to a Q1 2024 report from Reis, the Harrison/Rye/East office submarket reported vacancy at 26.1%, which is expected to remain elevated in the near term. As of the YE2023 financials, the loan reported an NCF and DSCR of $6.6 million and 1.06x, respectively, which represent increases from the YE2022 figures of $5.8 million and 0.93x, but below the Morningstar DBRS NCF of $7.0 million. Given the loan's poor historical operating performance at a relatively stable occupancy, concerns regarding upcoming rollover in a soft submarket, as well as unfavorable lending conditions as the loan approaches scheduled maturity in November 2024, Morningstar DBRS liquidated the loan by applying a haircut to the $151.0 million issuance appraised value, resulting in an implied loss severity of approximately 30%.

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, X-B, X-E, and 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.

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.

Rating North American CMBS Interest-Only Certificates (December 13, 2023; https://dbrs.morningstar.com/research/425261)

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)

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/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].