Morningstar DBRS Changes Trends on Three Classes of Wells Fargo Commercial Mortgage Trust 2018-C47 to Negative, Confirms Credit Ratings on All Classes

DBRS Limited (Morningstar DBRS) confirmed the credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2018-C47 issued by Wells Fargo Commercial Mortgage Trust 2018-C47 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 (sf)
-- Class X-B at A (high) (sf)
-- Class C at A (sf)
-- Class X-D at A (sf)
-- Class D at A (low) (sf)
-- Class E-RR at BBB (sf)
-- Class F-RR at BBB (low) (sf)
-- Class G-RR at BB (sf)
-- Class H-RR at B (high) (sf)

Morningstar DBRS changed the trends on Classes FRR, GRR, and HRR to Negative from Stable. All other trends are Stable.

The Negative trends are reflective of Morningstar DBRS' concerns regarding the loans collateralized by office properties, which collectively represent 16.3% of the current pool balance. 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 seven of the 10 office loans that have exhibited weakening performance year over year coupled with high rollover risk. Those seven loans have a weighted-average (WA) expected loss (EL) that is more than double the pool's WA EL. Should the performance of these loans deteriorate further and lead to default, those classes with Negative trends may be subject to further credit rating downgrades.

One of the office loans of concern is the Meridian at North (2.8% of the pool balance), which is secured by an office complex comprising two adjacent buildings in Indianapolis' central business district. As of the March 2024 rent roll, the subject is fully leased to seven tenants. The largest tenant at the property, Hall Render (31.0% of the net rentable area (NRA), lease expires in March 2031), uses the subject as its headquarters. However, approximately 6.2% of its NRA is currently dark and an additional 4.1% of its NRA is subleased. Furthermore, leases totaling approximately 51.1% of the NRA are scheduled to roll over in the next 12 months, including the leases of the second-largest and third-largest tenants, Cantene Management Company (Cantene; 26.6% of the NRA, lease expires in January 2025) and Indiana Department of Child Services (IDCS; 24.5% of the NRA, leases expire in May 2025 and May 2026). When queried about the intentions of these tenants at lease expiry, the servicer notified Morningstar DBRS that Cantene will be vacating and IDCS has expressed the intention to extend its lease. As per the most recent financials, the loan reported a debt service coverage ratio (DSCR) of 1.90 times (x) in YE2023. Given the concentrated upcoming rollover at the subject, Morningstar DBRS applied elevated loan-to-value ratio and probability of default (POD) adjustments to the loan, resulting in an EL that is more than double the pool's WA EL.

The credit rating confirmations are reflective of the overall steady performance of the non-specially serviced and identified office loans in the pool, all of which continue to perform in line with Morningstar DBRS' expectations since issuance as evidenced by a WA DSCR of 1.89x and WA debt yield of 11.4% in YE2023.

As of the July 2024 remittance, 71 of the original 74 loans remained in the trust, with an aggregate balance of $887.1 million, representing a collateral reduction of 6.8% since issuance. The pool benefits from 11 fully defeased loans, , representing 11.2% of the current pool balance. Fifteen loans, representing 18.2% of the pool balance, are on the servicer's watchlist being monitored primarily for performance concerns, deferred maintenance items, and the occurrence of trigger events while three loans, representing 5.0% of the current pool balance, are with the special servicer. With this review, Morningstar DBRS analyzed two of the three specially serviced loans with liquidation scenarios, resulting in total implied losses approaching $2.2 million, which is well contained in the unrated Class JRR.

The largest loan in special servicing is the Holiday Inn Fidi (Prospectus ID#6; 3.9% of the pool balance), which is secured by a limited-service hotel located in the financial district of downtown Manhattan, New York. The loan transferred to the special servicer in May 2020 because of monetary default. Amid foreclosure negotiations, the borrower filed for bankruptcy protection in November 2022, thereby halting the process. While in bankruptcy, the borrower entered into an agreement with New York City Health and Hospitals Corporation in January 2023 to operate the hotel as a migrant family shelter through April 2024. This agreement has recently been renewed until April 2025, as per the special servicer's commentary. While the city had paid a premium average daily rate (ADR) of $190 from March 2023 to April 2024, this has been reduced to $175 for the April 2024 to April 2025 period as per the special servicer's commentary. This is still higher than the property's reported ADR of $170.40 for YE2022 when it functioned as a traditional hotel.

The property was reappraised in May 2024 at $190.0 million, which represents a 29.3% increase from the August 2021 appraised value of $146.9 million, but ultimately a 18.5% decline from the issuance appraised value of $233.0 million. The most recent appraised value is reflective of the subject continuing to operate as a migrant shelter. Following the conclusion of the contract with the city, the hotel will undergo an $11.0 million brand-mandated property improvement plan renovation and then continue operations as a Holiday Inn (or similar flag). The most recent appraisal value is above the whole loan balance of $137.0 million (inclusive of the $50 million B note, which is held in a private placement real estate investment trust). Despite these recent developments, Morningstar DBRS does not view the borrower's strategy for shifting operations at the property as sufficiently mitigating the asset's underperformance and delayed workout proceedings. As such, Morningstar DBRS' analysis includes an elevated POD adjustment for the loan, resulting in an EL that is approximately 75.0% higher than the overall pool's EL.

At issuance, Morningstar DBRS also assigned investment-grade shadow ratings to 2747 Park Boulevard (Prospectus ID#8; 2.9% of the pool balance), Aventura Mall (Prospectus ID#2; 5.6% of the pool balance), and Christiana Mall (Prospectus ID#3; 5.6% of the pool balance). With this review, Morningstar DBRS confirms the performance of these loans remains in line with the investment-grade shadow ratings.

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/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, 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 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.

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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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 (July 17, 2023).

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