Morningstar DBRS Downgrades Credit Ratings on Eight Classes of Wells Fargo Commercial Mortgage Trust 2018-C44

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on eight classes of Commercial Mortgage Pass-Through Certificates, Series 2018-C44 issued by Wells Fargo Commercial Mortgage Trust 2018-C44 as follows:

-- Class A-S to AA (sf) from AAA (sf)
-- Class X-B to A (high) (sf) from AA (high) (sf)
-- Class B to A (sf) from AA (sf)
-- Class C to BBB (sf) from A (sf)
-- Class X-D to BB (high) (sf) from BBB (high) (sf)
-- Class D to BB (sf) from BBB (sf)
-- Class E-RR to B (high) (sf) from BB (high) (sf)
-- Class F-RR to CCC (sf) from B (sf)

Morningstar DBRS confirmed credit ratings on the following classes:

-- 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 X-A at AAA (sf)
-- Class G-RR to CCC (sf)

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

Morningstar DBRS previously downgraded its credit ratings for Classes E-RR, F-RR, and G-RR in April 2024 to reflect the increased loss projections for the four loans in special servicing at that time, with analyzed liquidation scenarios suggesting realized losses would reduce the unrated Class H-RR certificate by approximately 70%. The challenged outlook for the largest specially serviced loan at the time of that review, Dulaney Center (Prospectus ID#4, 6.2% of the current pool balance), as well as performance and/or expected value declines for several other distressed office assets, were the primary considerations in the trend changes to Negative for Classes B, C, D, X-B, and X-D, as part of the April 2024 review.

The credit rating downgrades with this review reflect the increased liquidated loss projections and reduced credit support resulting from updated property valuations and further performance declines for the loans in special servicing. There has been relatively minimal paydown or defeasance since this transaction closed in 2018, a factor that increases the overall impact of the reduced credit support at the bottom of the capital stack in the analysis. Morningstar DBRS' credit rating downgrades are also reflective of the concentration of distressed office assets, which currently comprise 28.6% of the pool balance. Morningstar DBRS applied stressed loan-to-value ratios (LTVs) and probability of default (PD) assumptions to seven office and mixed-use loans (23.0% of the pool), including the Dulaney Center loan in the analysis for this review. Those loans were generally exhibiting elevated credit risks that are expected to continue through the loan maturities in 2028. The weighted average (WA) expected loss (EL) for those loans exceed the pool average by approximately 20%.

The credit rating confirmations for the most senior classes in the waterfall reflect an otherwise healthy pool of loans as exhibited by a WA debt service coverage ratio (DSCR) of 1.67 times (x) and the overall stable performance of the retail loans in the pool, which represent approximately 25.0% of the pool and include the largest loan in the pool, Village at Leesburg (Prospectus ID#1, 9.0% of the current pool balance). In addition, the $197.6 million combined certificate balance below the Class A-SB certificate provides significant cushion against realized losses for the most senior classes.

As of the March 2025 remittance, 42 of the original 44 loans remained in the pool with an aggregate principal balance of $715.9 million, representing a collateral reduction of 6.6% since issuance. Specially serviced and watchlisted loans represent 8.6% and 23.5% of the pool balance, respectively. Loans on the servicer's watchlist are primarily being monitored for low debt service coverage ratios (DSCR) and deferred maintenance. In addition, four loans, representing 5.5% of the pool balance have defeased.

The largest contributors to the increased liquidated loss projections are Prince and Spring Street Portfolio (Prospectus ID#9, 4.2% of the current pool balance) and 1442 Lexington Avenue (Prospectus ID#25, 2.8% of the current pool balance) secured by multifamily properties in New York City. Both loans transferred to special servicing for payment default in 2020 amid pandemic hardships and increased expenses. Although both loans continue to exhibit occupancy rates above 80% as of the most recent reporting, the in-place cash flows have not been sufficient to cover debt service since 2019. The trust took title to the 1442 Lexington Avenue property in December 2024; Morningstar DBRS' liquidation scenario for that loan, based on a 35.0% haircut to the September 2024 appraised value, resulted in a full loss to the trust. The relatively conservative haircut reflects the severity of the performance decline as compared with the issuance expectations for the property.

The Prince and Spring Street Portfolio loan is in foreclosure, and litigation remains ongoing, according to the servicer. The property was appraised in November 2024 for $50.7 million, unchanged from the July 2023 appraised value but below the issuance appraised value of $66.0 million. Morningstar DBRS applied a 20% haircut to the November 2024 value for that loan, resulting in a 38% loss severity. Total projected losses for both assets increased from $13.9 million at the previous credit rating action to $22.9 million with this review. The lower appraisal haircut as compared with the 1442 Lexington Avenue loan reflects the overall better recent performance trends for the Prince and Spring Street properties by comparison.

The other specially serviced loan, 3200 North First Street (Prospectus ID#15, 2.8% of the current pool balance), is secured by an 85,017-sf two-story flex/research and development property in San Jose, California, and transferred to special servicing in November 2023 for imminent monetary default after the property's sole tenant, NextEV NIO, vacated as expected in September 2023. The space is currently being marketed for lease; however, the servicer has indicated there has been no leasing activity or prospective tenants, likely the result of a drop in demand for office space in the suburban submarket in which the property is located. The loan is currently delinquent and due for the August 2024 debt service payment. According to recent servicer commentary, counsel has been engaged, and the sale of the property is underway. The North San Jose/Milpitas submarket of San Jose reported a Q4 2024 average vacancy rate for flex/research properties of 10.5%, according to Reis, an increase from 9.5% a year prior. The property was appraised in December 2024 at $20.6 million, notably below the issuance-derived dark value of $30.3 million and slightly above the $19.8 million loan balance. Morningstar DBRS analyzed the loan with a liquidation scenario by applying a conservative 40% haircut to the December 2024 appraised value, resulting in a loss severity of 48% and a total loss of $9.5 million. The conservative haircut reflects Morningstar DBRS' expectation that the as-is value will likely further decline over the resolution period, and that overall investor demand for the property is likely to be limited should the trust ultimately take title and liquidate the loan.

The Dulaney Center loan is secured by two suburban Class A office buildings totaling 316,348 square feet (sf) in Towson, Maryland, about 7.5 miles north of the Baltimore central business district. The loan was in special servicing for a year beginning in October 2023 following the borrower's request for a loan modification. The loan remained current throughout the time in special servicing and ultimately transferred back to the master servicer without a loan modification. The loan remains on the servicer's watchlist for low occupancy and a low DSCR. According to the September 2024 rent roll, the property was 69.3% occupied, a modest increase from 66.9% at YE2023 but a significant decline from the issuance figure of 90.0% as a result of four larger tenant departures in 2021 and 2022. Reis reports Q4 2024 average asking rental and vacancy rates for the Towson/Timonium/Hunt Valley submarket of $24.1 per square foot (psf) and 18.2%, respectively, compared with the Q4 2023 figures of $23.8 per square foot (psf) and 19.1%, and the subject's $28.2 psf and 30.7%. The current tenant roster is granular with the largest tenant, Pessin Katz Law P.A., occupying just 9.2% of the net rentable area (NRA). Eight tenants, representing 11.7% of NRA have leases that recently expired or are scheduled to expire in the next 12 months. The annualized September 30, 2024, financials net cash flow (NCF) of $2.8 million (reflecting a DSCR of 0.95x) is in line with the YE2023 and YE2022 NCF but remains below the $4.4 million Morningstar DBRS NCF. Given the lack of performance improvements since the prior credit rating action, Morningstar DBRS applied a stressed 120.0% LTV and a 35.0% PD adjustment in its analysis, resulting in an expected loss that was more than 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 at https://dbrs.morningstar.com/research/437781 (August 13, 2024).

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 (February 28, 2025): https://dbrs.morningstar.com/research/448963.

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 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 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.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to our Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of our website.

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.

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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 (December 13, 2024)/North American CMBS Insight Model v 1.2.0.0: 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

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.