Morningstar DBRS Confirms All Credit Ratings on Wells Fargo Commercial Mortgage Trust 2018-C43

DBRS, Inc. (Morningstar DBRS) confirmed all credit ratings on the classes of Commercial Mortgage Pass-Through Certificates, Series 2018-C43 issued by Wells Fargo Commercial Mortgage Trust 2018-C43 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 (sf)
-- Class C at A (low) (sf)
-- Class X-D at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

Morningstar DBRS changed the trends on Classes X-D, D, E, and F to Negative from Stable. The trends on all remaining classes are Stable.

The credit rating confirmations reflect the stable performance of the transaction, which remains in line with Morningstar DBRS' expectations. Overall, the pool continues to exhibit healthy credit metrics, as evidenced by the weighted-average (WA) debt service coverage ratio (DSCR) of 2.22 times (x) based on the most recent financial reporting available. In addition, the transaction continues to benefit from increased credit support to the bonds as a result of scheduled amortization, loan repayments, and defeasance. Although the majority of loans in the pool continue to exhibit healthy credit metrics, there is a meaningful concentration of loans collateralized by office properties, which represent 32.6% of the current pool balance. The Negative trends carried by the Class D, E, and F certificates reflect loan-specific concerns primarily related to the Southpoint Office Center (Prospectus ID#4: 5.5% of the pool) and 35 Waterview Boulevard (Prospectus ID#9: 3.2% of the pool), which are secured by office properties in secondary markets that are exhibiting increased credit risks, as outlined below.

As of the September 2024 reporting, 56 of the original 63 loans remain in the pool with an aggregate principal balance of $617.8 million, representing a collateral reduction of 14.5% since issuance. Eleven loans, representing 12.5% of the pool, are secured by collateral that has been defeased. Nine loans, representing 16.5% of the pool, are being monitored on the servicer's watchlist; however, only four of those loans, representing 12.3% of the pool, are being monitored for performance related reasons. In its analysis for this review, Morningstar DBRS analyzed six loans (16.8% of the pool) that exhibited declines in performance since issuance with stressed loan-to-value ratios (LTVs) and/or elevated probabilities of default (PODs), resulting in a WA expected loss (EL) almost 2.5x the pool average.

Southpoint Office Center is secured by a 366,808-square-foot (sf), Class A suburban office property in Bloomington, Minnesota. The loan was placed on the watchlist in May 2021 for low occupancy and DSCR following the departure of the property's former largest tenant, Wells Fargo, in October 2020 (18.2% of the net rentable area (NRA) at the time). As a result, the occupancy rate fell to 65.8% at YE2021 from 91.5% at issuance and was most recently reported at 71.5% as of Q2 2024. While there has been moderate leasing momentum in the last year and tenancy is rather granular outside of the largest tenant, United Bank (11.4% of the NRA), 21 tenants, representing 48.6% of the NRA, have lease expirations prior to loan maturity in February 2028. According to the September 2024 reporting, the borrower had access to only $0.2 million of held leasing reserves to help with re-leasing efforts and the loan is exhibiting a weak DSCR of 1.17x as of Q2 2024, limiting the cash trap structure originally contemplated at issuance. According to Reis, the Southwest/Northeast Scott County submarket reported a Q2 2024 vacancy rate of 23.1%, which had increased from 20.5% in Q2 2023 and 17.6% in Q2 2022. Given the depressed performance, soft market conditions, and heightened rollover risk prior to loan maturity, Morningstar DBRS analyzed the loan with an elevated POD penalty and stressed LTV, resulting in an EL that was more than 3x the pool average.

35 Waterview Boulevard is secured by a 172,498-sf, Class A suburban office property in Parsippany, New Jersey. The loan was placed on the watchlist in March 2023 for a low DSCR as a result of increased vacancy. While the occupancy rate has improved to 81.7% as of Q2 2024 from 72.0% at YE2023, the space was re-leased at lower rates and occupancy is still well below the issuance rate of 95.7%. The borrower leased space to two tenants, representing 13.1% of NRA, during H1 2024 at an average rental rate of $21.60 psf, below the property's in-place rental rate of $26.50 psf. Rollover is limited to 6.3% during the next 12 months, however, the largest tenant, Sun Chemical Management (38.3% of NRA, lease expiry in December 2029), has a one-time termination option in December 2024. While the tenant initially indicated that it planned to exercise the option, loan documents indicate the tenant would have needed to pay half the termination fee by YE2023 and move out of the state of New Jersey, neither of which have materialized. As a result, the servicer did not initiate a cash flow sweep with only $0.5 million held in leasing reserves to help with re-leasing efforts. Excluding Sun Chemical Management's potential departure, coverage has hovered around breakeven for the last couple of years, reported most recently at 1.11x as of Q2 2024, despite the improved occupancy. As of Q2 2024, the Parsippany/Troy Hills submarket reported a vacancy rate of 28.6%, an average asking rental rate of $25.70 psf, and an average effective rental rate of $21.10. Given the decline in performance and uncertainty surrounding the Sun Chemical Management termination option, Morningstar DBRS analyzed the loan with an elevated POD penalty and stressed LTV, resulting in an EL that was almost 3x the pool average.

At issuance, Morningstar DBRS shadow-rated two loans as investment grade, Moffett Towers II - Building 2 (Prospectus ID#1; 8.5% of the pool) and Apple Campus 3 (Prospectus ID#7; 4.9% of the pool). Morningstar DBRS confirmed that the performance of these loans remains consistent with investment-grade loan characteristics with this review.

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 credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

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
-- 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
--Morningstar DBRS Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702

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