DBRS Morningstar Downgrades Seven Classes of Wells Fargo Commercial Mortgage Trust 2015-C27

DBRS, Inc. (DBRS Morningstar) downgraded the ratings of the Commercial Mortgage Pass-Through Certificates, Series 2015-C27 issued by Wells Fargo Commercial Mortgage Trust 2015-C27 as follows:

-- Class C to BBB (high) (sf) from A (low) (sf)
-- Class PEX to BBB (high) (sf) from A (low) (sf)
-- Class X-B to BB (sf) from BBB (low) (sf)
-- Class D to BB (low) (sf) from BB (high) (sf)
-- Class X-E to B (low) (sf) from B (high) (sf)
-- Class E to CCC (sf) from B (sf)
-- Class F to C (sf) from CCC (sf)

DBRS Morningstar changed the trends on Classes C and PEX to Negative from Stable. Classes X-B, D, and X-E continue to have Negative trends. Classes E and F have ratings that do not carry trends, and DBRS Morningstar designated these classes as having Interest in Arrears.

In addition, DBRS Morningstar confirmed the ratings on the remaining classes as follows:

-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (sf)

All of the confirmed classes have Stable trends.

DBRS Morningstar discontinued its rating on Class X-F, a notional class that references Class F which has been downgraded to C (sf).

The rating downgrades and Negative trends reflect the increased risk of loss to the trust, primarily attributed to the largest specially serviced loan, Westfield Palm Desert Mall (Prospectus ID#1, 7.0% of the trust balance). The loan has been in special servicing since July 2020 and was last paid in April 2020. In March 2021, the special servicer reported a September 2020 appraised value of $65.9 million, down by 68.9% from the issuance value of $212.0 million and indicative of an as-is loan-to-value (LTV) on the pari passu senior note balance of approximately 190.0%. Based on the updated value and the likelihood that the loan will be liquidated by the special servicer, DBRS Morningstar expects a loss severity in excess of 60.0%, the primary driver for the rating downgrades as previously outlined.

The interest-only (IO) pari passu loan had a total issuance balance of $125.0 million, with the other piece held in the MSBAM 2015-C21 transaction (also DBRS Morningstar rated). The loan is secured by a 572,724-square-foot (sf) portion of a 977,888-sf regional mall in Palm Desert, California. Since the loan’s transfer to special servicing, the servicer has been in discussions with the sponsor regarding a potential workout, with lender remedies also being tracked as a resolution strategy. The servicer noted that the loan is structured with a sponsor guaranty that would cover the difference between the outstanding loan balance and the foreclosure proceeds. Although the guaranty is noteworthy, the servicer noted the work remains ongoing to determine the feasibility of enforcing the guaranty. DBRS Morningstar did not give any credit to the guaranty in the analysis for this review.

The sharp value decline for the mall is generally the product of previous cash flow declines that preceded the onset of the Coronavirus Disease (COVID-19) pandemic; however, the mall’s tertiary location and related limitations in attracting replacement tenants to backfill existing vacancies were also significant contributors to the loss in value since the subject loan was made in 2015. The mall’s active anchors are Macy’s and JCPenney, with a dark Sears that was closed in early 2020. None of the anchor boxes are collateral for the subject loan. The largest collateral tenants include Dick’s Sporting Goods, Tristone Cinemas, and Barnes & Noble. As of March 2020, the subject reported a debt service coverage ratio (DSCR) of 1.58 times (x), a decline compared with the YE2019 and YE2018 DSCR figures of 1.97x and 2.26x, respectively.

At issuance, the subject trust consisted of 95 loans secured by 124 commercial and multifamily properties, with a total trust balance of $1.05 billion. As of the April 2021 remittance report, 84 loans were secured by 112 commercial and multifamily properties remaining in the trust with a total trust balance of $896.6 million, representing a 14.4% collateral reduction since issuance. The trust realized a $949,467 loss in June 2019 following the liquidation of the Country Club Apartments loan (Prospectus ID#53), and the overall loss amount has been accruing because of the reimbursement of nonrecoverable advances related to the Peoria Multifamily Portfolio loan (Prospectus ID#78, 0.3% of the trust balance).

As of April 2021, 10 loans, representing 10.9% of the trust balance, were fully defeased. The pool is relatively granular, as the 15 largest loans represent 51.4% of the trust balance. Near-term loan maturity risk is minimal, as there is only one loan, Watson & Taylor Self Storage (Prospectus ID#71, 0.3% of the trust balance), that has a loan maturity date prior to December 2024. As previously mentioned, the pool is concentrated by property type, with retail and hospitality properties representing 46.4% of the trust balance. These loans displayed sufficient leverage ratios at issuance with retail exhibiting a weighted-average (WA) LTV ratio of 65.8% and the lodging exhibiting a WA LTV of 66.5%. Six loans, representing 8.9% of the trust balance, have sponsorship with negative credit events prior to issuance. DBRS Morningstar increased the probability of default for the loans with sponsorship concerns.

As of the April 2021 remittance report, six loans are in special servicing, totaling 10.7% of the trust balance. The largest of the specially serviced loans is the Westfield Palm Desert loan, with 7.0% of the trust balance, and the remaining five specially serviced loans are relatively small. An additional 30 loans, totaling 34.7% of the trust balance, are on the servicer’s watchlist. DBRS Morningstar is closely monitoring the 312 Elm (Prospectus ID#3, 4.9% of the trust balance) and 312 Plum (Prospectus ID#17, 1.9% of the trust balance) watchlisted loans because they are secured by Class A office buildings in downtown Cincinnati that have had significant occupancy rate declines since issuance. Both properties were less than 65.0% occupied as of June 2020, and one of the properties is facing a significant lease expiry in the next 18 months. The sponsor simultaneously acquired the two similar properties in 2015, and both properties have lost their primary tenants since issuance.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Classes X-A, X-B, X-E, and X-F are 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.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

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

The principal methodology is North American CMBS Surveillance Methodology (March 26, 2021), which can be found on dbrsmorningstar.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 dbrsmorningstar.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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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