DBRS Morningstar Withdraws Two Classes, Confirms All Other Classes of Wells Fargo Commercial Mortgage Trust 2016-C34

DBRS Limited (DBRS Morningstar) confirmed the ratings on the 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-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 (low) (sf)
-- Class B at A (high) (sf)
-- Class C at BBB (high) (sf)
-- Class D at B (high) (sf)
-- Class E at CCC (sf)
-- Class F at CCC (sf)
-- Class G at CCC (sf)

DBRS Morningstar withdrew the ratings on Classes X-E and X-FG as they reference Classes E, F, and G, which carry a CCC (sf) rating. The trends on all classes are Stable with the exception of Classes B, C, D, and X-B, which have Negative trends. The ratings on Classes E, F, and G do not carry trends.

The rating confirmations and continued Negative trends are reflective of the elevated risks to the trust since issuance, which are generally concentrated in two of six specially serviced top 10 loans in this transaction. The liquidation scenario for both of these loans and two additional loans was maintained during this review. Since the transaction’s last review in February 2021, the outlook for the liquidated loans has not deteriorated further; however, DBRS Morningstar does recognize the persistent elevated risk profile of those liquidated loans, the loans remaining in special servicing, and the significant number of loans placed on the servicer’s watchlist for performance-related issues.

These loans include the largest loan in the pool, Regent Portfolio (Prospectus ID#1; 10.3% of the pool balance), which is primarily secured by a portfolio of medical office properties in New York and Florida. The loan transferred to special servicing in June 2019 for payment default and, as of the June 2021 remit, is two months past its May 2021 maturity date. According to the servicer, no loan extension has been granted at this time; however, the asset manager is currently discussing a forbearance with modified terms to include a quick path to title upon an event of default. The portfolio is primarily owned by Dr. John Hajjar, a medical doctor as well as the primary owner of the portfolio’s largest tenant, Sovereign Medical Services Inc. (SMS). At issuance, SMS was 70.0% owned and controlled by Dr. Hajjar, and SMS guarantees the leases of all its affiliates. As of the May 2021 rent roll, the reported occupancy rate for the portfolio was 73.0%, a slight decline from the 78.5% in March 2020 and significantly lower than the 90.0% reported at issuance.

Since the loan’s transfer to special servicing, one of the medical office building properties located in Wayne, New Jersey, was sold. The net proceeds of $11.3 million from the sale compare with the property’s issuance appraised value of $13.9 million and funds were used to recover outstanding servicer advances and to pay past due debt service payments. An updated appraisal has not been obtained to date, but, given the difference between the sale proceeds and the issuance valuation of the Wayne property, the as-is value of the portfolio is likely well below the issuance figure. The increased risks with the outstanding defaults and long-term stint in special servicing suggest the prospects for a resolution without a significant loss to the trust are unlikely. A loss severity in excess of 25.0% was assumed as part of this review.

The other large specially serviced loan liquidated in this analysis is the 200 Precision and 425 Privet Portfolio (Prospectus ID#6; 4.2% of the pool balance), which is real estate owned as of January 2021 and is secured by two mixed-use properties in Horsham, Pennsylvania. This loan transferred to special servicing in November 2019 following the loss of a major tenant, Teva Pharmaceuticals, which previously occupied 48.7% of the portfolio’s combined net rentable area (NRA), as the tenant exercised its early termination option. In addition, the collateral had lost its second-largest tenant, Optium Finisar (25.8% of the portfolio NRA), in 2018 and occupancy has been depressed since, with the servicer reporting an occupancy rate of 51.3% at April 2021. Based on the December 2020 appraisal, the collateral was valued at $21.3 million, which is a 45.5% decline from the issuance value of $39.1 million. DBRS Morningstar’s analysis assumed a loss severity in excess of 40.0%, based on the December 2020 appraisal figure.

Since the transaction was last reviewed in February 2021, one additional loan, Storage Solutions Self Storage Portfolio (Prospectus ID#9; 3.3% of the pool balance), has transferred to special servicing because of a maturity default. The loan is secured by a portfolio of four self-storage properties in Maine totaling 1,925 units, of which 70.0% are not climate controlled. The borrower is currently seeking a maturity extension to September 2021, in line with the anticipated sale closing date of the portfolio. The subject portfolio is under contract to be sold as part of a larger portfolio of more than 40 properties with an allocated price point well in excess of the trust amount. Notably, the loan is sponsored by two individuals, one of whom is Robert Morgan, who has been indicted for conspiracy to commit wire fraud and bank fraud in connection with a wide-ranging mortgage fraud scheme. Although Robert Morgan has been indicted, it is DBRS Morningstar’s understanding that he has no direct oversight in the operations of the subject portfolio. This loan was not liquidated from the pool; however, DBRS Morningstar does recognize some increased risk but expects a positive resolution in the near to medium term with the anticipated sale.

In addition to the above-mentioned loans, two loans in special servicing are secured by hotel properties that were negatively affected by the Coronavirus Disease (COVID-19) pandemic. With the June 2021 remittance, loans representing 30.2% of the pool balance are in special servicing. There is also a high concentration of loans backed by mixed-use and retail properties in the transaction, representing 31.9% and 30.7% of the pool balance, respectively.

According to the June 2021 remit, one loan is fully defeased, representing 0.7% of the pool balance, and 23 loans are on the servicer’s watchlist, representing 31.4% of the pool balance. The watchlisted loans are being monitored for various reasons; primarily for low debt-service coverage ratios, low occupancy rates, and servicing trigger events.

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 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 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 the underlying loans, including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance related data.
For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.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.

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.

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@dbrsmorningstar.com.

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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