DBRS Morningstar Confirms Ratings on All Classes of Wells Fargo Commercial Mortgage Trust 2016-NXS6, Changes Trends to Stable from Negative on Three Classes

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-NXS6 issued by Wells Fargo Commercial Mortgage Trust 2016-NXS6:

-- 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)
-- Class F at B (high) (sf)
-- Class G at CCC (sf)

With this review, DBRS Morningstar changed the trends on Classes E, X-E, and F to Stable from Negative. The trends on all other classes are Stable, with the exception of Class G, which has a rating that does not typically carry a trend for commercial mortgage-backed securities (CMBS) ratings. In addition, DBRS Morningstar placed the Interest in Arrears designation on Class G.

At DBRS Morningstar’s last review of the transaction, the Negative trends reflected DBRS Morningstar’s concerns with the specially serviced loans in the pool and the lasting effects of the Coronavirus Disease (COVID-19) pandemic on the loans backed by retail properties, which represent the largest property type concentration in the pool at 29.3% as of June 2022. As further detailed below, the trend changes with this review reflect the recent improvements in the outlook for the specially serviced loans in the pool, as well as the positive developments for the loans that are on the servicer’s watchlist.

The rating confirmations reflect the overall stable performance of the underlying collateral, which remains generally unchanged to improved since DBRS Morningstar’s last review. As of the June 2022 remittance, 47 of the original 50 loans remain in the pool, representing a collateral reduction of 15.6% since issuance. Three loans have been paid in full, including the former second-largest loan in the pool, Novo Nordisk (Prospectus ID#2), which repaid in November 2021. Four loans, representing 1.9% of the current pool balance, are fully defeased. Nine loans, representing 15.4% of the current pool 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 concerns with occupancy. These loans are predominantly secured by retail and hospitality properties, which were affected by the pandemic; however, according to the June 2022 reporting, most of these properties have exhibited material progress in the last year, with increases in cash flow and occupancy rates.

Per the June 2022 reporting, three loans are currently in special servicing, totalling 11.7% of the current trust balance. Of these loans, DBRS Morningstar believes the most pivotal is the Cassa Times Square mixed-use loan (Prospectus ID #6, 5.4% of the current 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 in Manhattan, New York. The loan transferred to special servicing in May 2020 for imminent default and is currently over 121 days delinquent. A receiver has been appointed as of March 2022 and is working to establish control of all property cash flows. According to the servicer, the receiver and property manager are currently rebranding the asset after not being able to work out an agreement with the brand’s owner.

As of February 2022, the property was re-appraised at $32.4 million, which is an increase from the February 2021 value of $31.0 million, but well below the issuance value of $68.9 million, with the appraiser citing concerns regarding the lasting effects of the pandemic on travel and leisure industries. The 2022 value suggests a deficit from the trust exposure of approximately $7.0 million, and as such, the resulting loss amount in DBRS Morningstar’s liquidation scenario was relatively small. Given recent developments that have suggested tourist traffic to New York City and room revenues have ticked closer to pre-pandemic levels, DBRS Morningstar believes the overall risks for this loan have slightly declined since last review, providing support for the rating confirmations and change in trends for three classes as previously outlined.

The second-largest loan in special servicing, Plaza Mexico (Prospectus ID#7, 4.7% of the current pool balance) is secured by a 404,064-sf open-air, grocery-anchored shopping centre in Lynwood, California. The loan is pari passu, secured within a $106.0 million whole loan, with the subject loan balance currently totalling $30.0 million. 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. According to recent news reports, the collateral property has been acquired by the Sterling Organization for $163.6 million, which suggests a full payoff of the whole loan. The property was re-appraised in October 2021 at $161.0 million, a decrease from the October 2020 value of $170.0 million and the issuance value of $184.0 million.

The White Marsh Portfolio loan (Prospectus ID#19, 1.7% of the current pool balance) is secured by two office buildings in Marsh and Nottingham, Maryland, and was transferred to special servicing in January 2022 because of imminent monetary default as a result of performance declines caused by occupancy losses. As of March 2022, the property was 76% occupied, in line with the issuance figure of 73.6%, and according to the servicer, the borrower is working on leasing vacant spaces. According to the June 2022 servicer update, the borrower was able to bring the loan current as of May 2022, and the loan is expected to transfer back to the master servicer after three consecutive payments have been made on time.

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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loan 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.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is 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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