Morningstar DBRS Confirms Credit Ratings on All Classes of Wells Fargo Commercial Mortgage Trust 2016-C34
CMBSDBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C34 issued by Wells Fargo Commercial Mortgage Trust 2016-C34 as follows:
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-3FL at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at A (high) (sf)
-- Class C at BBB (high) (sf)
-- Class D at B (sf)
-- Class E at C (sf)
-- Class F at C (sf)
-- Class G at C (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (low) (sf)
-- Class A-3FX at AAA (sf)
Morningstar DBRS maintained the Negative trends on Classes B, C, D, and X-B. Classes E, F, and G have credit ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) transactions. All other trends are Stable.
The credit rating confirmations and sustained Negative trends reflect Morningstar DBRS' continued expectations for the pool and minimal changes to the underlying transaction since the last credit rating action in April 2024. Morningstar DBRS' loss expectations have increased marginally with this review, driven by the largest loan in special servicing, Regent Portfolio (Prospectus ID#1, 11.2% of the pool). Morningstar DBRS continued to stress several other loans exhibiting signs of distress either because of increased rollover risk or declines in performance. These concerns were present at the time of the last credit rating action but have not materialized to date. Morningstar DBRS also recognizes that the vast majority of outstanding loans in the pool have an upcoming maturity date in the first half of 2026. Although many of those loans have not received an updated appraisal since issuance, Morningstar DBRS believes there is potential for value declines. This could complicate takeout financing efforts in 2026 for a select number of loans. This analysis resulted in an increased pool weighted-average expected loss, which continues to indicate elevated credit risk for Classes B, C, and D. In the event that any of the identified risks materialize as the loans approach maturity, Morningstar DBRS could downgrade the credit ratings, supporting the Negative trends.
Since the last credit rating action in April 2024, Cypress Medical Plaza (Prospectus ID#24) and 221 Glen Street Apartments (Prospectus ID#45) were liquidated from the trust with combined realized losses totaling $3.4 million, as compared with the Morningstar DBRS combined projected loss of approximately $5.4 million. As of the February 2025 remittance, 60 of the original 68 loans remained in the pool with a trust balance of $531.0 million, representing a collateral reduction of 24.3% since issuance. There are two loans, representing 15.0% of the pool balance, in special servicing (further discussed below) and 12 loans, representing 25.5% of the pool balance, on the servicer's watchlist. In addition, 15 loans, representing 12.7% of the current trust balance, have been fully defeased.
The largest loan in special servicing is secured by the Regent Portfolio, a portfolio of 13 buildings in New Jersey, New York, and Florida consisting of traditional office, medical office, and warehouse spaces. The loan sponsor is also the primary owner of the portfolio's largest tenant, Sovereign Medical Services Inc. The loan transferred to special servicing in June 2019 and became real estate owned as of January 2023. Since the loan's transfer to special servicing, five of the underlying properties have been sold at prices that, on average, were 37% lower than the respective issuance appraised values. An updated appraisal dated March 2024 valued the portfolio at $67.4 million; however, two of the properties were sold after the updated appraisal at an average 35.5% haircut to the issuance appraisal. Morningstar DBRS expects that the disposition timeline for the remaining properties may be extended and that proceeds are likely to fall short of the total loan exposure. In its analysis, Morningstar DBRS liquidated the loan based on a 40% haircut to the March 2024 appraisal, which took into account the sale prices of the two released assets in addition to outstanding advances and expected servicer expenses. The analysis resulted in a projected loss severity approaching 50%, or approximately $30 million.
The second-largest loan in special servicing, Nolitan Hotel (Prospectus ID#8, 3.9% of the pool), is secured by a 57-room, full-service boutique hotel in New York City. The loan transferred to special servicing in December 2020 for payment default. After an unsuccessful proposal for reinstatement, the loan has a receiver in place and is now scheduled for foreclosure in Q1 2025. The most recent appraised value, dated December 2022, valued the subject at $36.8 million, which is slightly less than the issuance appraised value of $39.5 million. According to an STR, Inc. report for the trailing 12 months ended May 2024, the hotel's performance has not restabilized to pre-pandemic levels. Despite this, the December 2022 appraised value suggests a low loan-to-value ratio of 57.2%. However, given the history of default and underperformance as well as the upcoming foreclosure, Morningstar DBRS liquidated the loan in its analysis, applying a 20% haircut to the December 2022 value while also accounting for outstanding advances and expected servicer expenses. The analysis suggested a loss severity approaching 20%, or approximately $4.0 million.
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 and X-B 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 (December 13, 2024), https://dbrs.morningstar.com/research/444617.
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. 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.
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 and North American CMBS Insight Model Version 1.2.0.0 (December 13, 2024), https://dbrs.morningstar.com/research/444616
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- Legal Criteria for U.S. Structured Finance (December 3, 2024), https://dbrs.morningstar.com/research/444064
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283
For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.
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