Morningstar DBRS Downgrades Credit Ratings on Four Classes of Wells Fargo Commercial Mortgage Trust 2015-LC20, Changes Trend on Three Classes to Negative

DBRS, Inc. (Morningstar DBRS) downgraded its credit ratings on four classes of Commercial Mortgage Pass-Through Certificates, Series 2015-LC20 issued by Wells Fargo Commercial Mortgage Trust 2015-LC20 as follows:
 
-- Class D to BB (sf) from BBB (low) (sf)
-- Class E to CCC (sf) from B (high) (sf)
-- Class X-E to CCC (sf) from BB (low) (sf)
-- Class F to C (sf) from CCC (sf)
 
In addition, Morningstar DBRS confirmed the following credit ratings:
 
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 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 X-B at A (sf)
-- Class C at A (low) (sf)
-- Class PEX at A (low) (sf)

Morningstar DBRS changed the trend on Classes C, D and X-B to Negative from Stable. All other trends are Stable with the exception of Classes E and F, which have credit ratings that do not typically carry trends in commercial mortgage backed securities (CMBS) credit ratings.

The credit ratings downgrades on Classes D, E, F and X-E reflect Morningstar DBRS' increased loss projections for the loans in special servicing stemming as majority of the loans have reported value declines and two additional loans transferred to special servicing since Morningstar DBRS' last review of the transaction. In addition, one loan, Masonic Building (Prospectus ID#39), was liquidated from the pool in June 2024 at a realized loss of $6.9 million to the trust, bringing the total loss to the trust to $9.2 million which is contained to the unrated Class G certificate. As of the July 2024 remittance, there are six loans in special servicing representing 14.5% of the pool, five of which were analyzed with a liquidation scenario, resulting in total implied losses of nearly $35.0 million, which would fully erode the nonrated Class G and nearly the entirety of Class F certificate, thereby supporting the credit rating downgrades.

The Negative trends on Classes C and D reflect Morningstar DBRS' concerns with increased maturity default risk as the pool enters its maturity year. Nearly all the outstanding loans are scheduled to mature in the next 12 to 18 months. While Morningstar DBRS expects the majority of these loans will repay at maturity, five loans, representing 7.6% of the pool, have been identified as exhibiting increased maturity default risk given weak credit metrics and decreased tenant demand, which have likely eroded property values. Morningstar DBRS stressed these loans with an elevated probability of default (POD) penalty and/or loan-to-value ratio (LTV) to reflect the risk, resulting in a weighted-average (WA) expected loss (EL) that was over two times the pool average. In addition, interest shortfalls have also been increasing each remittance period, totaling $2.2 million as of the July 2024 remittance, up from $1.3 million at the time of last review, with interest accruing to Class E.

As of the July 2024 remittance, 60 of the original 68 loans remain in the pool with a trust balance of $667.6 million, representing a collateral reduction of 19.5% since issuance. Fourteen loans representing 33.8% of the pool balance are fully defeased. The pool is relatively well diversified by property type with loans backed by retail, lodging, and office properties making up 23.5%, 17.4%, and 11.4% of the pool respectively. There are 13 loans, representing 27.1% of the pool, currently on the servicer's watchlist, and as noted above, six loans, representing 14.5% of the pool, are in special servicing.

The largest contributor to Morningstar DBRS' liquidated losses is One Monument Place (Prospectus ID#3, 5.0% of the pool), a 222,477 square foot (sf) Class A office property in Fairfax, Virginia. Occupancy at the subject has dropped significantly with the April 2024 rent roll reporting an occupancy rate of 43.1%. The Fair Oaks submarket remains soft with Reis reporting a Q1 2024 vacancy rate of 28.9% and is expected to remain elevated over the next few years. Based on the March 2024 appraisal, the property was valued at $22.0 million, which is a slight improvement from the September 2023 value of $20.6 million but is a considerable decline from the issuance value of $60.0 million and is well under the whole loan balance of $37.9 million.

The loan was granted several maturity extensions and was converted to interest-only (IO) with the borrower contributing $5.0 million in principal paydown in exchange. The most recent extension granted will push the maturity to April 2025. Despite these extensions which is likely to provide time for the borrower to improve occupancy, the property has failed to stabilize. Given the low appraisal value and soft submarket, Morningstar DBRS analyzed this loan in a liquidation scenario, resulting in an implied loss approaching $17.00 million and a severity in excess of 50.0%.

The second largest loan in special servicing, University of Delaware Hotel Portfolio (Prospectus ID #4, 4.4% of the pool balance), is secured by two adjacent hotels totaling 245 keys and located in close proximity to the main campus of the University of Delaware in Newark, Delaware. The loan failed to repay at its anticipated repayment date (ARD) in March 2022 and transferred to special servicing in January 2023 for imminent monetary default. The servicer is pursing foreclosure and is working towards appointing a receiver. Performance of the collateral has suffered since the onset of the pandemic with the debt service coverage ratio (DSCR) reporting below break-even for the last several years. According to the trailing 12-month period (T-12) ended May 31, 2024 STR report, the weighted average (WA) occupancy rate, average daily rate, and revenue per available room (RevPAR) was reported at 68.4%, $153.99, and $105.33, respectively. This is generally inline with the T-12 ended March 31, 2023 RevPAR of $106.22 but still below pre-pandemic levels with the YE2019 RevPAR at $115.64.

Based on the November 2023 appraisal, the subject was valued at $40.4 million, a slight decline from the March 2023 value of $41.5 million but below the issuance value of $49.0 million. The franchise agreements at both of the properties were scheduled to expire in 2022 and 2023 but based on the property websites, it appears the flags were maintained. Given the portfolio's lackluster performance, value decline, and the likelihood that equity would need to be contributed to the properties to maintain brand standards, , Morningstar DBRS analyzed this loan based on a stressed haircut to the November 2023 appraised value, resulting in an implied loss over $3.5 million and a loss severity in excess of 10.0%.

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 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 at (January 23, 2024; https://dbrs.morningstar.com/research/427030).

Classes X-A, X-B, 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 B materially deviates from the credit 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. As a majority of the remaining loans are scheduled to mature in 2024 and 2025 and as loans begin to pay off, Morningstar DBRS considers adverse selection as the challenged loans will remain in the pool, supporting the material deviations.

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, Inc.
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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/legal-criteria-for-us-structured-finance)

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