DBRS Morningstar Changes Trends on Five Classes, Confirms Ratings on All Classes of WFCM 2017-RC1

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2017-RC1 issued by Wells Fargo Commercial Mortgage Trust 2017-RC1 as follows:

-- Class A-3 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 B at AA (sf)
-- Class X-B at A (high) (sf)
-- Class C at A (sf)
-- Class D at BB(sf)
-- Class X-D at BB (high)
-- Class E at CCC (sf)
-- Class F at C (sf)

DBRS Morningstar changed the trends on Classes B, C, D, X-B, and X-D to Stable from Negative with this review. All trends are now Stable with the exception of Classes E and F, which have ratings that do not carry trends.

The trend changes reflect the positive developments in the transaction, including loan payoffs from last review, representing a principal paydown of $84.8 million. In addition, DBRS Morningstar notes that a full payoff is being pursued in the workout strategy for the only loan in special servicing, Hyatt Place Portfolio (Prospectus ID#1; 10.3% of the pool) . Following unsuccessful forbearance and deed in lieu of foreclosure negotiations, a receiver was appointed by the court in January 2022. The subject property was marketed for sale in early 2022 with the servicer reporting an anticipated resolution date of June 2022. The September 2021 appraisal reported a value of $58.7 million, an improvement from the July 2020 value of $54.9 million that was available during last year’s review, and this updated value covers the outstanding loan balance of $52.6 million. Although the increased appraisal value and the servicer’s pursuit of a loan payoff are positive developments, a risk of loss to the trust remains when the $8.8 million of outstanding advances and fees that increase the loan exposure are considered. As such, DBRS Morningstar analyzed this loan with a liquidation scenario, which resulted in a loss severity of just above 10.0% compared to the prior year’s loss severity estimate of 35.0%.

According to the STR report dated December 2021, the portfolio's weighted-average occupancy rate, average daily rate, and revenue per available room (RevPAR) for the trailing three months ended March 31, 2020 (T-3), were 49.0%, $94.90, and $46.16, respectively, while RevPAR penetration was reported at 94.6%. As of the most recently provided financials, the subject reported a T-3 debt service coverage ratio (DSCR) of -0.31 times (x), compared with the YE2019 DSCR of 0.97x, YE2018 DSCR of 1.99x, and the DBRS Morningstar DSCR at issuance of 1.64x. The portfolio's performance had been declining since issuance, and the Coronavirus Disease (COVID-19) pandemic compounded the stress.

The rating confirmations reflect DBRS Morningstar’s view of the generally stable credit risk for the overall pool. As of the April 2022 remittance, 55 of the original 60 loans remain in the pool, representing an 18.4% collateral reduction since issuance. The pool benefits from five loans, representing 7.4% of the current pool balance, that are fully defeased. As of the April 2022 reporting, one loan, representing 10.3% of the current pool balance, is in special servicing and seven loans, representing 9.6% of the current pool balance, are on the servicer’s watchlist. These loans have been flagged for declining performance, deferred maintenance, or failure to submit financials.

DBRS Morningstar has continuing concerns about two loans in the top 15: Whitehall Corporate Center (Prospectus ID#12; 2.6% of the pool) and Peachtree Mall (Prospectus ID#14; 1.9% of the pool), secured by an office and a regional mall property, respectively. Both loans were analyzed with elevated probability of default (POD) figures.

Whitehall Corporate Center, secured by a Class A office building in Charlotte, North Carolina, has seen depressed occupancy since the largest tenant terminated its lease in 2019. The former second-largest tenant at the property, Homepointe Mortgage Inc. (20.1% of the NRA), vacated the subject following its lease expiration in December 2021. The property website currently lists approximately 27.0% of NRA as available for leasing, compared with the YE2020 occupancy rate of 75.9% and YE2019 occupancy rate of 97.3%. Given the subject’s continuing decline in occupancy and location in the softening Airport/Parkway submarket, which reported a Q1 2022 vacancy rate of 18.4%, DBRS Morningstar maintained the elevated POD from last year’s review.

Peachtree Mall is secured by a regional shopping mall in Columbus, Georgia, near the Georgia/Alabama state line. Built in 1975, the subject property is the only regional shopping center within a 60-mile radius and is owned and operated by Brookfield Properties. The loan is anchored by a non-collateral Dillard’s, with the largest collateral tenants including Macy's (26.0% of NRA, expiring September 2027) and JCPenney (15.4% of NRA, expiring November 2024). The two collateral anchors have announced several store closures in recent years but, according to a March 2022 publication in the Ledger-Enquirer, Macy’s recently announced that the collateral is one of the 37 locations to receive an upgrade to include a “Macy’s Backstage.”

As of the YE2021 rent roll, the property reported an occupancy rate of 93.1%, in line with historical occupancy. The loan reported a DSCR of 1.34x for the trailing nine-month period ended September 30, 2021 (T-9), compared with the YE2020 DSCR of 1.42x and DBRS Morningstar DSCR of 1.66x. The property’s declining DSCR can be attributed to a decrease in base rental revenue, with the T-9 figures reporting an 18.1% decrease from the YE2020 base rental revenue. According to Reis, retail properties in the Columbus market reported a Q1 2022 vacancy rate of 18.9%, in line with the pre-pandemic YE2019 vacancy reported at 18.8%. Given the tertiary location of the subject property, its general decline in revenue, and the uncertainty as to whether the property is considered a core part of Brookfield Property’s portfolio, DBRS Morningstar maintained the elevated POD from last review.

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, and X-D 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 Morningstar 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 the North American CMBS Surveillance Methodology (March 4, 2022), 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.

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.

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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