Morningstar DBRS Upgrades Credit Ratings on Three Classes of Wells Fargo Commercial Mortgage Trust 2016-C37

DBRS, Inc. (Morningstar DBRS) upgraded its credit ratings on three classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C37 issued by Wells Fargo Commercial Mortgage Trust 2016-C37 as follows:

-- Class B to AA (high) (sf) from AA (sf)
-- Class C to AA (low) (sf) from A (sf)
-- Class X-B to AAA (sf) from AA (high) (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-D at A (low) (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (sf)
-- Class X-EF at BBB (sf)
-- Class F at BBB (low) (sf)
-- Class X-G at BBB (low) (sf)
-- Class G at BB (high) (sf)
-- Class X-H at BB (low) (sf)
-- Class H at B (high) (sf)

Morningstar DBRS also changed the trends on Classes H and X-H to Negative from Stable. The trend on all remaining classes is Stable.

The credit rating upgrades for Classes B, C, and X-B reflect the positive pressure in Morningstar DBRS' North American CMBS Insight Model as the transaction continues to benefit from scheduled amortization, loan repayments, and defeasance. The credit rating confirmations reflect the overall stable performance of remaining loans within the transaction, which remains relatively in line with Morningstar DBRS' expectations since the last review. Overall, the pool continues to exhibit healthy credit metrics as evidenced by the healthy weighted-average (WA) debt service coverage ratio (DSCR) of 2.15 times (x). The transaction also benefits from the two largest loans in the pool, Hilton Hawaiian Village Waikiki Beach Resort (Prospectus ID# 1; 9.9% of the pool) and Potomac Mills (Prospectus ID#4; 6.8% of the pool), being shadow-rated as investment grade by Morningstar DBRS.

The Negative trend for Classes H and X-H reflects Morningstar DBRS' increased liquidated loss projections since the previous credit rating action, driven by a liquidation scenario for the pool's largest specially serviced loan. Since the prior credit rating action in July 2024, 10 loans, representing 15.4% of the pool, transferred to special servicing; however, nine of these loans are related loans that transferred for nonmonetary default stemming from ongoing litigation related to ownership and control of the sponsor's family-owned real estate business and have an expected workout strategy of a full payoff, according to the servicer.

Morningstar DBRS' analysis includes a liquidation scenario for 1140 Avenue of the Americas (Prospectus ID#6; 5.6% of the pool), which is backed by a 22-story 250,000-square-foot (sf) office building in Midtown Manhattan with a below breakeven DSCR. The loan transferred to special servicing in March 2025 because of monetary default in March 2025 and foreclosure is the expected resolution. Net cash flow (NCF) for the property has been declining year over year since issuance and DSCR has been below breakeven since YE2021 stemming from occupancy declines after a handful of tenants vacated. Given these factors, Morningstar DBRS applied a 70% haircut to the issuance appraisal value in the liquidation scenario, resulting in a projected loss severity of approximately 54.1%, or $16.2 million, significantly eroding the nonrated Class J certificate balance and reducing the cushion for the Class H certificate, supporting the Negative trend.

As of the June 2025 remittance, 56 of the original 63 loans remain in the pool. The initial pool balance of $750.51 million has been reduced by 29.1%, to $532.1 million. In addition, 15.8% of the pool is defeased. Five smaller loans, representing 4.8% of the pool in total, are on the servicer's watchlist because of declining occupancy and/or DSCR. The transaction benefits from a relatively low concentration of loans backed by office collateral, at 11.7%. The most represented property type is hotel, with 23.2% of the pool, followed by retail, with 20.5% of the pool.

All remaining loans in the pool are scheduled to mature within the next 18 months, and Morningstar DBRS expects the majority of the loans to repay at their respective upcoming maturity dates based on the performance of the underlying collateral. However, Morningstar DBRS identified a handful of loans that are not in special servicing but have exhibited increased default risk, including four loans (12.8% of the pool) in the top 15. For these loans, Morningstar DBRS increased the probability of default (POD) and/or applied stressed loan-to-value ratios (LTVs) to increase the expected loss (EL), as applicable, resulting in an EL that was nearly triple the pool average EL.

At issuance, Morningstar DBRS shadow-rated the Hilton Hawaiian Village loan and the Potomac Mills loan as investment grade. This assessment was supported by the loans' strong credit metrics, strong sponsorship strength, and historically stable performance. With this review, Morningstar DBRS confirms that the characteristics of these loans remain consistent with the investment-grade shadow rating.

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 credit 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 (May 16, 2025): https://dbrs.morningstar.com/research/454196

Classes X-A, X-B, X-D, X-EF, X-G, and X-H 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 credit ratings assigned to Classes C and H materially deviate from the credit ratings implied by the predictive model. Morningstar DBRS typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider a three-notch or more deviation from the credit rating stress(es) implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviations is uncertain loan-level event risk given the near term maturity dates for the underlying loans and the propensity for adverse selection as the pool winds down.

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.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-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.
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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 (April 9, 2025)/North American CMBS Insight Model v 1.3.0.0: https://dbrs.morningstar.com/research/451739

-- 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.