DBRS Morningstar Takes Rating Actions on Wells Fargo Commercial Mortgage Trust 2016-C34

DBRS, Inc. (DBRS Morningstar) downgraded the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C34 (the Certificates) issued by Wells Fargo Commercial Mortgage Trust 2016-C34 as follows:

-- Class X-E to BB (low) (sf) from BB (high) (sf)
-- Class E to B (high) (sf) from BB (sf)
-- Class F to B (sf) from B (high) (sf)
-- Class X-FG to B (low) (sf) from B (sf)
-- Class G to CCC (sf) from B (low) (sf)

In addition, DBRS Morningstar confirmed the ratings on the following classes:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-3FL at AAA (sf)
-- Class A-3FX at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)

All trends are Stable, with the exception of Classes E, X-E, and F, which DBRS Morningstar changed to Negative from Stable to reflect DBRS Morningstar’s concerns with three of the top ten loans that are in special servicing. Class G does not carry a trend, and the Negative trend on Class X-FG was maintained.

At issuance, the collateral consisted of 68 fixed-rate loans secured by 92 commercial properties, for a total trust balance of approximately $702.8 million. As of the January 2020 remittance report, the trust balance was $680.1 million, representing a collateral reduction of 3.3% from issuance as a result of scheduled amortization, with all of the original loans remaining in the pool. Loans representing 85.5% of the pool are reporting YE2018 financials, with a weighted-average (WA) debt service coverage ratio (DSCR) and in-place debt yield of 1.36 times (x) and 8.9%, respectively. Thirteen of the largest 15 loans reported YE2018 financials, with a WA DSCR and WA debt yield of 1.57x and 10.0%, respectively.

The downgrades and trend changes are reflective DBRS Morningstar’s ongoing concerns with the specially serviced loans, three of which are among the top ten loans in the pool. As of the January 2020 remittance, there were 14 loans on the servicer’s watchlist, collectively representing 13.7% of the pool, as well as a total of four loans, representing 17.8% of the pool, in special servicing. The loans on the servicer’s watchlist are being monitored for a variety of reasons, including low DSCR, large tenant nonrenewal events and bankruptcies, delinquent payments, and fire damage.

The largest loan in the pool, Regent Portfolio (Prospectus ID#1, 10.1% of the pool), transferred to special servicing in June 2019. The loan, secured by a portfolio of medical office properties in New York, New Jersey, and Florida, has consistently recorded late payments since October 2017. A significant portion of the portfolio is leased directly to, or to affiliates, of the sponsor. The A note, which had a balance of $81.5 million at issuance, is split into pari passu pieces placed in the subject transaction and the SGCMS 2016-C5 transaction, which is not rated by DBRS Morningstar. There is also a mezzanine loan in place, which had a balance of $10.0 million at issuance, and is held outside of both trusts.

The loan was 121+ days delinquent as of the January 2020 reporting and the special servicer has not delivered an updated appraisal to date; however, an appraisal reduction amount (ARA) of $17.2 million has been applied to the subject trust, suggesting a significant value decline is anticipated. An official workout strategy is still to be determined, but the special servicer has reportedly engaged counsel and is dual tracking foreclosure along with alternative workout strategies. Given the consistent delinquency since issuance, with sponsor-controlled entities making up a significant portion of the tenant roster across the portfolio, and value decline implied by the ARA, DBRS Morningstar believes a moderate loss is likely at disposition for this loan.

The 200 Precision & 425 Privet Portfolio loan (Prospectus ID#6, 4.1% of the pool) consists of two properties, one occupied by two tenants, the other originally 100% occupied by a single tenant. The loan was initially being monitored in late 2017 because of the impending lease expiry for the second-largest tenant, which ultimately vacated the 200 Precision property at lease expiry in June 2018. In addition, the collateral’s largest remaining tenant, Teva Pharmaceuticals (Teva), which originally had a lease expiration date of January 2025, gave notice of its intent to exercise an early termination option and vacated the property in November 2019, leaving the 425 Pivet Road property fully vacant. These two tenants collectively occupied 74.5% of the collateral’s net rentable area and made up 82.3% of the total rental income.

The loan transferred to special servicing in November 2019 and the servicer is currently evaluating a workout strategy. DBRS Morningstar does note the $1.25 million lease termination fee paid by Teva is on hand, with a cash flow sweep in place that has built the total reserve amount to nearly $4.0 million as of the January 2020 reporting, which does provide significant capital for re-leasing the space. However, given the very low occupancy figure and the outstanding delinquency, as well as the significant capital investment that will be required outside of the reserve amount to stabilize the properties, DBRS Morningstar anticipates a significant loss at disposition.

The third top-ten loan in special servicing, Shoppes at Alafaya (Prospectus ID# 10, 3.0% of the pool), is secured by a retail property in Orlando, Florida, and was transferred to special servicing in October 2018. The property’s struggles began after the bankruptcy and departure of Toys “R” Us/Babies “R” Us, which previously represented 48.8% of the net rentable area. According to servicer commentary, a letter of intent was being negotiated for the vacant space; however, foreclosure was filed in September 2019 and the servicer is dual-tracking alternative workout strategies. DBRS Morningstar noted at issuance that the sponsors have had several previous litigation issues, including filing for bankruptcy following foreclosure. The special servicer’s updated appraisal as of December 2018 showed an estimated as-is value of $22.0 million, down from $28.7 million at issuance; however, should a replacement tenant be secured for the former Toys “R” Us space, the value would obviously improve significantly. DBRS Morningstar anticipates a moderate loss is likely for this loan at resolution.

Classes X-A, X-B, X-E, and X-FG 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 ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#1–Regent Portfolio (10.1% of the pool)
-- Prospectus ID#6–200 Precision & 425 Privet Portfolio loan (4.1% of the pool)
-- Prospectus ID#10–Shoppes at Alafaya (3.0% of the pool)
-- Prospectus ID#37–Wayne Place Apartments (0.7% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrs.com. The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrs.com. The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology, which can be found on www.dbrs.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on www.dbrs.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that 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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