Morningstar DBRS Confirms Credit Ratings on All Classes of Wells Fargo Commercial Mortgage Trust 2016-C37

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2016-C37 issued by Wells Fargo Commercial Mortgage Trust 2016-C37 as follows:

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

All trends are Stable.

The credit rating confirmations reflect the stable performance of the transaction. Overall, the pool continues to exhibit healthy credit metrics, as evidenced by the weighted-average (WA) debt service coverage ratio (DSCR) of 2.16 times (x), based on the most recent financial reporting available. The transaction continues to benefit from increased credit support to the bonds as a result of scheduled amortization, loan repayments, and defeasance, further supporting the credit rating confirmations and Stable trends assigned with this review. In addition, the two largest loans in the pool, Hilton Hawaiian Village Waikiki Beach Resort (Prospectus ID#1; 9.6% of the pool) and Potomac Mills (Prospectus ID#4; 6.7% of the pool) are shadow-rated as investment grade by Morningstar DBRS.

According to the June 2024 remittance, 57 of the original 63 loans remain within the transaction with a trust balance of $544.9 million, reflecting a collateral reduction of 27.4% since issuance. In addition, 10 loans, representing approximately 14.0% of the pool, have fully defeased. There are no loans in special servicing; however, four loans, representing 8.1% of the pool, are on the servicer's watchlist. The transaction is generally well distributed by property type, with loans representing 23.0%, 21.0%, and 15.5% of the pool collateralized by lodging, retail, and multifamily properties, respectively. In addition, three loans are secured by office properties, which represent 11.6% of the pool. Operating performance at these office properties is generally trending below issuance expectations, as evidenced by the historical occupancy rate and cash flow trends demonstrated over the last few reporting periods. Morningstar DBRS applied stressed loan-to-value (LTV) ratios, and where applicable, increased the probability of default (PoD) penalties for these loans, resulting in expected losses that were between 2.0x and 4.0x greater than the pool average.

The largest loan on the servicer's watchlist, 1140 Avenue of the Americas (Prospectus ID#6; 5.5% of the pool), is secured by a 247,183-square foot (sf) Class A office building in Midtown Manhattan. The loan was added to the servicer's watchlist in October 2020 for a low debt service coverage ratio (DSCR) after three tenants that formerly occupied 30,784 sf (12.7% of net rentable area (NRA)) vacated prior to their lease expirations. Subsequently, four additional tenants vacated the property in November 2021, pushing the occupancy rate down to a low of 66.1%. Although the borrower has successfully executed a lease extension for the largest tenant, City National Bank (14.4% of NRA) through 2033, the low occupancy rate has significantly affected cash flows. According to the December 2023 rent roll, the property was 77.1% occupied, compared with 71.0% at YE2022. Three tenants, representing approximately 14.0% of the NRA have scheduled lease expirations within the next 12 months; however, there has been positive leasing momentum at the property, with SecurityScorecard, Inc. and 1140 Office Suites LLC signing leases for 10,000 sf and 25,500 sf with commencement dates in June 2023 and December 2023, respectively. In addition, two tenants, Liberty RE Properties LLC and Edgewood Partners Insurance Center took possession of their expansion space during the first quarter of 2023.

Per the YE2023 financial reporting, the property generated $1.0 million of net cash flow (NCF) - 59.8% and 88.5% lower than the prior year and issuance, respectively. The loan's DSCR has been below breakeven since 2021. Morningstar DBRS expects operating performance to trend upward over the subsequent few reporting periods as rent abatements tied to the new leases burn off; however, any recovery in cash flow, is likely to be moderate. According to Reis, office properties in the Grand Central submarket reported a Q1 2024 vacancy rate of 12.8%, relatively in line with the prior year. Overall, the tenant roster is relatively granular with no single tenant (except for City National Bank and 1140 Office Suites LLC) accounting for more than 10.0% of the NRA. No updated appraisal has been provided since issuance, when the property was valued at $180.0 million; however, given the low occupancy rate and general challenges for office properties in today's environment, Morningstar DBRS expects that the collateral's as-is value has likely declined significantly, elevating the credit risk to the trust. As such, Morningstar DBRS analyzed the loan with an elevated PoD penalty and stressed LTV ratio, resulting in an expected loss that was approximately four times the pool average.

The 80 Park Plaza loan (Prospectus ID#13; 3.5% of the pool), is collateralized by a 960,689 sf Class A office property located in Newark, New Jersey, the property comprises two buildings: the largest is a 26-story, 739,495 sf structure known as the Tower Building, and the smallest is a three-story, 36,340 sf building known as the Plaza Building. The office buildings were built to suit in 1979 to serve as the corporate headquarters for Public Services Enterprise Group (PSEG), which is an investment-grade Fortune 500 energy company. According to the March 2024 rent roll, the property was 87.6% occupied as PSEG relinquished a portion of its space in 2018, which remains vacant. An additional 265,000 sf across nine floors is currently listed for sublease, suggesting PSEG is actively reducing its footprint at the property; however, given the tenant has no termination options for the remainder of its space, operating performance is expected to remain stable through lease expiry in September 2030 (approximately four years post loan maturity). According to Reis, office properties in the Newark submarket reported a Q1 2024 vacancy rate of 18.2% with an average asking rental rate of $27.12 psf, compared with PSEG's in-place base rental rate of $17.57 psf. Should the vacant space at the property be successfully leased, the sponsor may be able to benefit from additional upside in cash flow. Based on the YE2023 financial reporting, the property generated $12.7 million of NCF (a DSCR of 1.58x), in line with the prior years' reporting. Given the submarket's soft fundamentals and the current subleasing activity at the property, Morningstar DBRS analyzed the loan with an elevated PoD penalty and stressed LTV, resulting in an expected loss that was approximately two times the pool average.

At issuance, Morningstar DBRS shadow-rated the Hilton Hawaiian Village loan and the Potomac Mills loan as investment grade. This assessment was supported by the loans' strong credit metrics, strong sponsorship strength, and historically stable performance. With this review, Morningstar DBRS confirms that the characteristics of these loans remain consistent with the investment-grade shadow rating.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS  
There were no Environmental, Social, or 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 at (January 23, 2024; https://dbrs.morningstar.com/research/427030)

Classes X-A, X-B, X-D, X-EF, X-G, and X-H 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 info-DBRS@morningstar.com.

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
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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 (June 28, 2024), https://dbrs.morningstar.com/research/435294

-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024), https://dbrs.morningstar.com/research/435293)

-- 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.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.