DBRS Morningstar Downgrades Two Classes and Discontinues One Class of Wells Fargo Commercial Mortgage Trust 2016-NXS6

DBRS, Inc (DBRS Morningstar) downgraded its ratings on two classes of Commercial Mortgage Pass-Through Certificates, Series 2016-NXS6 issued by Wells Fargo Commercial Mortgage Trust 2016-NXS6 as follows:

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

DBRS Morningstar confirmed its ratings on the remaining classes as follows:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class X-B at AA (low) (sf)
-- Class C at A (high) (sf)
-- Class X-D at BBB (high) (sf)
-- Class D at BBB (sf)
-- Class X-E at BBB (low) (sf)
-- Class E at BB (high) (sf)

DBRS Morningstar discontinued its rating on Class X-FG as it references a class with a CCC (sf) rating. In addition, DBRS Morningstar changed the trends on Classes E and X-E to Negative from Stable. The trends on all other classes remain Stable with the exception of Class G, which has a rating that does not carry a trend.

The downgrades and Negative trends reflect the elevated risk profile of two loans in the top 10, which have been adversely affected by the ongoing Coronavirus Disease (COVID-19) pandemic. In addition, the pool has a high concentration of loans backed by retail properties, representing 27.1% of the pool balance. As retail properties have been particularly hard hit amid the coronavirus pandemic, this concentration is noteworthy.

As of the September 2021 remittance, 48 of the original 50 loans remain in the pool, and there has been collateral reduction of 5.2% since issuance. Additionally, three loans, representing 1.7% of the current pool balance, are fully defeased. Twelve loans, representing 35.8% of the current trust balance, are on the servicer’s watchlist. The servicer is monitoring these loans for a variety of reasons, including low debt service coverage ratio (DSCR) and occupancy issues; however, the primary reason for the increase of loans on the servicer’s watchlist is the coronavirus-driven stress for retail and hospitality properties as loans on the servicers watchlist secured by those property types are generally reporting a low DSCR.

Per the September 2021 remittance, there were two loans in special servicing, totaling 8.9% of the trust balance. The loan of primary concern is Cassa Times Square Mixed-Use (Prospectus ID #6, 4.8% of the pool balance), which is secured by a mixed-use property consisting of an 86-key boutique hotel along with 8,827 square feet (sf) of retail space. The loan transferred to special servicing in May 2020 for imminent default and currently remains delinquent. While the property maintained stable performance prior to the pandemic with an occupancy rate above 90%, the hotel’s average daily rate (ADR) had been declining over the past few years, decreasing to $175.88 in 2019 from $208.67 in 2017. Furthermore, the property’s two retail tenants have vacated the property since the onset of the pandemic. An updated appraisal completed in February 2021 reported a property value of $31 million, a 55% decline compared with the issuance appraisal value of $68.9 million. Given the sharp value decline and the challenges facing the property amid the pandemic, DBRS Morningstar analyzed the loan with a loss severity in excess of 30.0%.

The second-largest loan in special servicing, Plaza Mexico (Prospectus ID#7; 4.18% of the pool balance), is secured by a 404,064-sf open-air, grocery-anchored shopping centre in Lynwood, California. The loan transferred to special servicing in October 2020 for payment default, and, since its transfer, the borrower filed for bankruptcy protection in April 2021. In addition, the loan matured in July 2021 complicating the workout process. Despite its recent maturity default, the loan has maintained stable performance to date, and, as of the June 2021 rent roll, the property was 89.6% occupied, a slight decline compared with the Q2 2020 and year-end (YE) 2019 occupancy rates of 91.4% and 94%, respectively. Prior to the pandemic, the YE2019 net cash flow was similar to issuance levels and with a 1.90 times (x) DSCR. An updated appraisal completed in October 2020 valued the property at $170.0 million, a 7.0% decrease from the issuance appraisal of $184.0 million. The updated appraisal reflects a loan-to-value ratio (LTV) of 62.4%. Given the sponsor concerns and maturity default, DBRS Morningstar increased its probability of default on the loan in its analysis, increasing the expected loss on the loan.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Classes X-A, X-B, X-D, and X-E 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 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 DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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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