Morningstar DBRS Confirms Credit Ratings on All Classes of Wells Fargo Commercial Mortgage Trust 2015-LC22, Changes Trends on Five Classes to Negative from Stable

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on the classes of Commercial Mortgage Pass-Through Certificates, Series 2015-LC22 issued by Wells Fargo Commercial Mortgage Trust 2015-LC22 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 (low) (sf)
-- Class C at A (low) (sf)
-- Class PEX at A (low) (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 D, E, F, X-E, and X-F to Negative from Stable. The trends on all remaining classes are Stable.

The credit rating confirmations reflect performance that remains in line with Morningstar DBRS' expectations as evidence by the pool's weighted-average (WA) debt service coverage ratio (DSCR) of 1.84 times (x) and a WA debt yield of 13.7% based on the most recent year-end financials. As of the August 2024 remittance, 89 of the original 100 loans remain in the trust, with an aggregate balance of $740.8 million, representing a collateral reduction of 23.1% since issuance. The pool benefits from 23 loans, representing 28.3% of the pool balance, that have been fully defeased.

The Negative trends assigned to Classes D, E, F, X-E, and X-F with this credit rating action represent Morningstar DBRS' concerns with increased maturity default risk as the pool enters its maturity year. Loans representing 98.0% of the pool are scheduled to mature in 2025. Although Morningstar DBRS expects the majority of the maturing loans to repay, nine loans representing 26.7% of the pool balance are at increased risk of default because of loan-level performance declines and/or increased tenant rollover risk at the pool. By loan balance, the majority of Morningstar DBRS' loans of concern are backed by office properties. Morningstar DBRS has a cautious outlook on this asset type as sustained upward pressure on vacancy rates in the broader office market may challenge landlords' efforts to backfill vacant space and, in certain instances, contribute to value declines, particularly for assets in noncore markets and/or with disadvantages in location, building quality, or amenities offered. Where applicable, Morningstar DBRS increased the probability of default (POD) penalties and, in certain cases, applied stressed loan-to-value ratios (LTVs) for office-backed loans and other loans exhibiting performance concerns. The WA expected losses (ELs) for these loans was more than 60% higher than the pool's WA EL. Should additional defaults occur, Morningstar DBRS' loss projections for the pool may increase. There is also increased propensity for interest shortfalls should the pool become concentrated with nonperforming loans. These factors also contributed to the Negative trends.

There are 12 loans, representing 16.2% of the pool, that are on the servicer's watchlist, nine of which are on the servicer's watchlist for performance-related concerns. The largest loan on the servicer's watchlist is the Donald J. Trump-sponsored 40 Wall Street (Prospectus ID#1, 9.5% of the current pool balance). It is secured by the leasehold interest in a 71-story, 1.2 million-square-foot (sf) office building at 40 Wall Street in Lower Manhattan, one block from the New York Stock Exchange building. The loan is pari passu, with accompanying notes secured in two other commercial mortgage-backed securities transactions, including one other transaction (COMM 2015-CCRE24) that is also rated by Morningstar DBRS. The loan had a brief stint with the special servicer after the borrower allegedly engaged in fraudulent activity, which is currently being appealed by the defendants. It was returned to the master servicer earlier this year and remains on the servicer's watchlist because of its declining DSCR, most recently reported at 0.78x as of March 2024.

The decline in cash flow is primarily attributable to declines in the property's occupancy. As of the March 2024 rent roll, the property was 74.6% occupied, down from 82.9% at YE2022 and 97.8% at issuance. In 2023, Duane Reade (formerly 6.8% of the net rentable area (NRA)), vacated its office space in March and its retail space in October. The tenant terminated its lease ahead of its March 2028 expiration date and, based on the prospectus, was responsible for an approximate $500,000 fee. According to subsequent leasing updates, there has been some leasing activity; however, newly executed rental rates appear to be below the Downtown submarket average reported by Reis. In addition, recently signed tenants were also granted a WA free rent period of eight months. Leases representing 7.8% of the NRA are scheduled to expire prior to loan maturity in July 2025, and Thornton Tomasetti (5.2% of the NRA; lease expiration in January 2033) has publicly indicated its plans of relocating to another building in the area. It is not clear if Thornton Tomasetti has a termination option available, but Morningstar DBRS expects its space is underutilized or dark.

Given the sustained decline in cash flow performance and increasing vacancy, Morningstar DBRS estimates that the collateral's value has declined from issuance, suggesting high refinance risk as the loan nears maturity. Other areas of concern include the borrower and guarantor's ongoing litigation and the loan's ground lease payment, which is scheduled to reset to fair market value in 2033, further elevating refinancing risk. Morningstar DBRS analyzed the loan with an elevated POD penalty and stressed LTV, resulting in an EL that is nearly double the pool average.

In addition, one loan, Homewood Suites Austin (Prospectus ID#21, 1.3% of the pool) is in special servicing. This loan transferred to the special servicer in June 2020 because of performance challenges stemming from the pandemic. The special servicer executed a forbearance agreement, which included a 12-month deferral period of principal, interest, and replacement reserve payments. The borrower was compliant and performed under the terms of the agreement; as of the August 2024 remittance, the loan is current but remains with the special servicer. An April 2024 appraisal valued the property at $16.5 million, down slightly from $17.0 million in December 2022 and $18.6 million at issuance. Morningstar DBRS' analysis for this loan included a stress to the LTV based on the most recent appraisal.

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 Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

Classes X-A, 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 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, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

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, 2024), https://dbrs.morningstar.com/research/438283
-- Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205

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