Morningstar DBRS Confirms All Credit Ratings of Wells Fargo Commercial Mortgage Trust 2017-RC1

DBRS Limited (Morningstar DBRS) confirmed the credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2017-RC1 issued by Wells Fargo Commercial Mortgage Trust 2017-RC1 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 BB (high) (sf)
-- Class D at BB (sf)
-- Class E at CCC (sf)
-- Class F at C (sf)

There are no trends on Classes E and F, which have credit ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) ratings. All other classes carry Stable trends.

The credit rating confirmations reflect minimal changes to Morningstar DBRS' expectations of loss and ongoing performance since the last credit rating action. There are currently no delinquent loans nor any loans in special servicing. Since issuance, one loan has been liquidated from the pool. Hyatt Place Portfolio, previously the largest loan, was disposed in November 2022 and incurred a realized trust loss of $10.3 million. Although this loss was contained to the unrated Class G certificate, it resulted in a deterioration of credit support, particularly to the junior bonds in the capital stack. The most recently reported financials suggest the performance of the remaining pool has been stable, however, there are loans that Morningstar DBRS continues to monitor as discussed in detail below.

As of the August 2024 remittance, 53 of the original 60 loans remain in the pool with an aggregate principal balance of $436.2 million, representing a collateral reduction of 30.2% since issuance as a result of loan repayments and liquidations. Eight loans, representing 15.9% of the pool, are fully defeased. By property type, when excluding defeased loans, the pool is most concentrated by loans secured by retail and office properties, representing 31.3% and 19.0% of the pool balance, respectively. Where applicable, Morningstar DBRS increased the probability of default penalties, and, in certain cases, applied stressed loan-to-value ratios (LTVs) for loans exhibiting performance concerns. Two of the primary contributors to Morningstar DBRS' expected pool loss are the Palms of Carrollwood (Prospectus ID#11; 4.3% of the pool) and Whitehall Corporate Center VI (Prospectus ID #12; 2.9% of the pool).

Palms of Carrollwood is secured by an anchored retail center in Tampa The loan was added to the servicer's watchlist in November 2023 for declining occupancy as well as bankruptcy of the largest tenant, Sam Ash (14.2% of the net rentable area (NRA)). The Sam Ash location at the subject property has since closed, but the borrower is reportedly planning to renovate the space in an effort to re-lease it. Based on the June 2024 rent roll, and accounting for the departure of Sam Ash, Morningstar DBRS expects current the in-place occupancy rate has declined to approximately 45%, with an additional 12.9% of the NRA scheduled to roll over the next 12 months. Offsetting some of this concern are future leases, totalling 16.8% of the NRA, that are scheduled to commence in the near term. Morningstar DBRS expects cash flow to fluctuate over the near to medium term with these shifts in occupancy. According to the financials for the trailing six months ended June 30, 2024, the subject reported a debt service coverage ratio (DSCR) of 1.45 times (x) compared with the YE2022 DSCR of 2.21x. Morningstar DBRS' analysis of this loan included an elevated probability of default (POD) to account for the declining tenancy with an expected loss that was approximately double the deal average.

Whitehall Corporate Center VI is secured by a 116,855-square foot office center in Charlotte, North Carolina. Cash flow has declined because of the lease termination of Advantage Sales (previously 21.4% of the NRA) in September 2020 and the departure of Home Point (previously 20.1% of the NRA) at lease expiry in December 2021. According to the March 2024 rent roll, the subject was 73.3% occupied compared with 90.7% at issuance. Leases representing an additional 12.8% of the NRA are scheduled to expire in the next 12 months, not including the second-largest tenant, ABX Converting Acquisition, LLC (12.3% of the NRA), which has a lease expiry in December 2025. The loan reported a YE2023 DSCR of 1.14x, up from the YE2022 DSCR of 0.91x. According to a Reis report, the Airport/Parkway submarket of Charlotte reported a Q2 2024 vacancy rate of 26.7%, a notable increase from the Q2 2021 vacancy rate of 19.8%. At the last review, Morningstar DBRS noted its concern about concentrated rollover as leases representing 28% of the NRA were scheduled to expire. Occupancy has stayed relatively flat since Morningstar DBRSs' last credit rating action, indicating some tenant retention. Morningstar DBRS expects cash flow will not improve without significant leasing momentum, which may be challenging given the availability at the subject and increasing submarket vacancy. To reflect the increased default risk, Morningstar DBRS stressed the LTV and elevated the POD ,resulting in an expected loss nearly triple the pool average.

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

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. 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.

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, 2024), https://dbrs.morningstar.com/research/438283

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.