DBRS Morningstar Downgrades One Class and Changes Trend on Two Classes of Wells Fargo Commercial Mortgage Trust 2016-C34

DBRS Limited (DBRS Morningstar) downgraded one class of Commercial Mortgage Pass-Through Certificates, Series 2016-C34 issued by Wells Fargo Commercial Mortgage Trust 2016-C34 as follows:

-- Class G to C (sf) from CCC (sf)

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

-- 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)

DBRS Morningstar changed the trend on Classes B and X-B to Stable. Negative trends were maintained on Classes C and D. The trends on all remaining classes are Stable with the exception of Classes E, F, and G, which have ratings that do not carry trends. The Interest in Arrears designation remains on Classes E, F, and G. The Interest in Arrears designation was removed from Class D.

The rating confirmations and trend change on Class B are reflective of a smaller-than-expected loss amount for a top 10 loan that was recently liquidated. The transaction has seen an uptick in specially serviced loans in recent years, a factor that contributed to rating downgrades that DBRS Morningstar made to seven classes in February 2021. One of the loans driving those downgrades, 200 Precision & 425 Privet Portfolio (Prospectus ID#6), was liquidated in April 2022 at a loss to the trust of approximately $1.0 million, well below the loss of approximately $10.0 million estimated by DBRS Morningstar, based on the most recent appraisal obtained by the special servicer. The proceeds were reported at more than $28.0 million, well above the December 2020 value estimate of $22.3 million. In addition, Storage Solutions Self Storage Portfolio (Prospectus ID#9) was also liquidated from the pool in August 2021 and took a small loss of approximately $87,000, an outcome that was generally in line with DBRS Morningstar’s expectations. The losses for these loans were contained to the non-rated Class H.

The rating downgrade of Class G and Negative trends maintained on Classes C and D reflect DBRS Morningstar’s ongoing concerns about the largest loan in special servicing, Regent Portfolio (Prospectus ID #1, 11.1% of the pool), detailed below.

At issuance, the transaction consisted of 68 fixed-rates loans secured by 92 commercial and multifamily properties with an aggregate trust balance of $702.8 million. According to the May 2022 remittance, 63 loans remain in the pool and there has been a 15.6% collateral reduction to date. The pool benefits from three loans, representing 2.3% of the pool, that are fully defeased. Five loans, representing approximately 20.0% of the pool, are currently in special servicing, down from eight loans, or approximately 30.0% of the pool, in July 2021. Fifteen loans, representing approximately 20.0% of the pool, are on the servicer’s watchlist and four of them are in the top 15 loans.

The largest loan in special servicing, Regent Portfolio (Prospectus ID#1; 11.1% of the pool), was secured at issuance by 13 buildings in New Jersey, New York, and Florida. Space uses consisted of traditional office, medical office, and warehouse. The loan sponsor is also the primary owner of the portfolio’s largest tenant, Sovereign Medical Services Inc. The loan transferred to special servicing in June 2019 and the borrower filed for bankruptcy in February 2020, with the workout still ongoing. Since the loan’s transfer to special servicing, one medical office building property in Wayne, New Jersey, was sold with net proceeds of $11.3 million, approximately $2.6 million below the issuance value. That amount was used to recover outstanding servicer advances and to pay past due debt service payments. An updated appraisal has not been obtained to date, and it is not clear why the special servicer, LNR Partners, has not provided an updated value given the loan’s length of time in special servicing and its extended delinquency. However, given the sponsor’s financial difficulties, the lack of updated financial reporting available for the portfolio, and the general uncertainty surrounding the bankruptcy filing and ultimate resolution, DBRS Morningstar expects the as-is value has declined significantly and the trust will experience a significant loss with this loan.

The second-largest loan in special servicing, Nolitan Hotel (Prospectus ID#8; 3.7% of the pool), is secured by a 57-room, full-service boutique hotel in New York City. The loan transferred to special servicing in December 2020 because of payment default. The loan remains more than 90 days delinquent and the workout negotiations remain ongoing. Based on the January 2022 appraisal, the subject was valued at $30.2 million, down 24% from the issuance value of $39.5 million but still suggestive of a relatively healthy loan-to-value ratio of approximately 72%. Given these factors, DBRS Morningstar believes the ultimate resolution will result in a relatively minor loss to the trust and, given the extended period in special servicing, an elevated probability of default (POD) was applied to stress the loan in the analysis.

The third-largest loan in special servicing, Shoppes at Alafaya (Prospectus ID #10; 3.3% of the pool balance), is secured by a two-building, single-story, 120,723-sf shopping center in Orlando. The loan has been with the special servicer since October 2018 for delinquent payments. The former largest tenant, Toys “R” Us (49% of the net rentable area (NRA)), filed for bankruptcy and vacated in 2017 but, in 2019, the borrower approved a lease with Burlington to backfill the space on a lease through 2029, bringing the physical occupancy at the collateral to approximately 95%. The second-largest tenant is Dick’s Sporting Goods (41% of the NRA, lease expiry in January 2023). As of the May 2022 remittance, the loan is more than 90 days delinquent and the special servicer cites a workout strategy of foreclosure, but also notes ongoing discussions with the borrower regarding a loan modification. The reason for the extended delinquency remains unclear; DBRS Morningstar has previously noted that the loan sponsor and the special servicer have a litigious history and it is possible the delinquency could be a continuation of that relationship. Given the stabilized occupancy rate with two national tenants in place and the most recent appraisal report, dated October 2021, which valued the property at $26.5 million, down just slightly from the appraised value of $28.7 million at issuance, DBRS Morningstar does not expect a significant loss with this loan. However, given the extended delinquency and stay in special servicing, DBRS Morningstar analyzed the loan with an elevated POD to increase the expected loss.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929.

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 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.

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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577