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

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

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

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

-- Class A-3 at AAA (sf)
-- 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 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)

With this review, DBRS Morningstar has changed the trend on Classes X-H and H to Stable from Negative. All other trends are Stable.

The rating upgrades and confirmations and the trend changes are primarily reflective of the increased credit enhancements as a result of the payoffs of two of the largest loans in the pool since DBRS Morningstar’s last review. The Quantum Park (Prospectus ID#2) and Walmart Shadow Anchored Portfolio (Prospectus ID#3) loans represented a combined 12.2% of the trust balance at issuance and repaid in October and September 2021, respectively. As of the December 2021 remittance, 59 of the original 63 loans remain in the pool, with a collateral reduction of 19.9% as a result of loan paydown and scheduled amortization. There were 17 loans, representing 41.7% of the pool, that are being monitored on the servicer’s watchlist, with no loans in special servicing. Additionally, there were four loans representing 6.5% of the pool that were defeased. DBRS Morningstar also notes that the pool has a significant concentration of retail and hospitality properties, representing 28.4% and 22.7% of the current pool balance, respectively.

The largest loan on the servicer’s watchlist remains Hilton Hawaiian Village (Prospectus ID#1, 8.7% of the pool) which is secured by a 2,860-key full-service hotel, with roughly 1,000 square feet (sf) of ocean frontage on Waikiki Beach, in Honolulu, Hawaii. The loan was added to the servicer’s watchlist in December 2020 after steep declines in operational performance, linked to a drop in occupancy and caused primarily by travel restrictions related to the Coronavirus Disease (COVID-19) pandemic. The hotel remained closed between April and December 2020. Performance at year-end (YE) 2020 was weak, as expected, with a debt service coverage ratio (DSCR) of -0.26 times (x), far below the 2019 figure of 2.7x. The sponsor (Park Hotels & Resorts Inc.) reported strong Q3 performance during an earnings call, announcing that occupancy had averaged above 75% for the period. That occupancy figure is still below prepandemic occupancy rates, which historically averaged over 90%. The trailing 12 months ended June 2021 showed nominal improvement in cash flows with a DSCR of -0.18x, and DBRS Morningstar still believes the strong rebound beginning in July 2021, as well as strong historical performance, suggests the property is well positioned for a quick recovery.

The second-largest loan on the servicer’s watchlist is 1140 Avenue of the Americas (Prospectus ID#6, 4.9% of the pool), secured by a 247,183-sf Class A office building in Midtown Manhattan. The loan was added to the servicer’s watchlist in October 2020 and is being monitored for a low DSCR resulting from declining occupancy after three tenants totaling 30,784 sf (12.7% of net rentable area (NRA)) vacated prior to their lease expirations in 2020. While the borrower successfully executed a lease extension of the largest tenant, City National Bank (14.4% of NRA), through 2033, 2021 has seen further occupancy declines as four additional tenants representing 33.9% of NRA had lease expirations and vacated. According to the November 2021 rent roll, occupancy had fallen to 66.1%. Further rollover risk exists in the second-largest tenant, Waterfall Asset Management (10.5% of NRA), that has an upcoming lease expiration in August 2022. The servicer reported a YE2020 DSCR of 1.04x when occupancy stood at 84.3% compared with the issuer’s 2.16x DSCR and 90.8% occupancy. The servicer also reported a trailing six months ended June 2021 DSCR of 0.56x (when occupancy was still 80.7%), but when the vacancies that occurred in the latter half of the year are reflected in the cash flows, DBRS Morningstar expects DSCR to decline even further. In its analysis, DBRS Morningstar increased the probability of default to account for the increased risk.

At issuance, DBRS Morningstar shadow-rated three loans, Hilton Hawaiian Village, Quantum Park, and Potomac Mills (Prospectus ID#4, 6.0% of the pool), as investment grade. This assessment was supported by the loans’ strong credit metrics, strong sponsorship strength, and historically stable collateral performance. With this review, DBRS Morningstar confirms that the characteristics of these loans remain consistent with the investment-grade shadow rating.

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-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 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 – Hilton Hawaiian Village (8.7% of the pool)
-- Prospectus ID#6 –1140 Avenue of the Americas (4.9% of the pool)

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 the 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.
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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