DBRS Morningstar Confirms Ratings on All Classes of Wells Fargo Commercial Mortgage Trust 2015-C28

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2015-C28 issued by Wells Fargo Commercial Mortgage Trust 2015-C28 as follows:

-- 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 (low) (sf)
-- Class C at A (low) (sf)
-- Class PEX at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class X-E at B (high) (sf)
-- Class E at B (sf)
-- Class F at CCC (sf)

All trends are Stable, with the exception of Class F as the rating assigned generally does not carry a trend in commercial mortgage-backed securities (CMBS) ratings. The rating confirmations reflect the overall stable performance of this transaction, which remains in line with DBRS Morningstar’s expectations since the last rating action.

The CCC (sf) rating on Class F reflects the increased credit risk posed to the trust from some of the office backed loans secured in the pool, as well as the only loan in special servicing, Washington Square (Prospectus ID#22, 1.3% of the current pool balance). To date, four loans have been liquidated from the trust with a cumulative realized loss of approximately $7.8 million. For this review, DBRS Morningstar maintained its liquidation of Washington Square with an implied loss of nearly $7.5 million, which would partially erode the balance of the nonrated Class G, with interest shortfalls continuing to accumulate.

The loan is secured by a student housing property whose performance had been declining prior to the pandemic because of a drop in enrollment at SUNY Schenectady County Community College. The loan failed to repay at its February 2020 maturity, but a loan modification was executed to extend the maturity to April 2023 after the borrower made an equity contribution to bring the loan current, pay lender expenses, and fund a newly formed operational shortfall reserve. Per the June 2023 remittance, the loan was categorized as a nonperforming matured balloon with a workout strategy of discounted payoff listed. According to the April 2022 appraisal, the property was valued at $9.6 million, which is above the December 2022 value of $9.4 million, but ultimately below the issuance value of $19.5 million. The terms of the loan modification included a conversion to interest-only (IO) payments for the remainder of the term and, upon loan maturity, a minimum payment of $9.6 million from the borrower to repay the loan, which is currently below the total loan balance of $13.2 million, but in line with the April 2022 appraised value of $9.6 million. The repayment amount is subject to the higher of net proceeds from a fully marked sale or the appraised value upon refinance. The loan is also equipped with a cooperation covenant where if the borrower fails to comply with a consensual foreclosure, receivership, or deed in lieu in the event of default, then the loan becomes a full-recourse liability. In its analysis for this review, DBRS Morningstar liquidated this loan from the trust with an implied loss of nearly $7.5 million, or a loss severity above 40.0%.

As of the June 2023 remittance, 83 of the original 99 loans remain in the trust, with an aggregate balance of $960.2 million, representing a collateral reduction of 17.6% since issuance. Thirteen loans, representing 8.4% of the pool, are fully defeased. Fifteen loans, representing 15.8% of the pool, are on the servicer’s watchlist, primarily for declines in occupancy and/or debt service coverage ratios (DSCRs), or deferred maintenance items. Approximately 27.0% of the loans in the pool are backed by office properties.

DBRS Morningstar has a cautious outlook on office given the anticipated upward pressure on vacancy rates in the broader market, challenging landlords’ efforts to backfill vacant space and, in certain instances, contributing to value declines, particularly for assets in noncore markets and/or with disadvantages in location, building quality, or amenities. Where applicable, DBRS Morningstar generally stressed these loans to increase the expected loss amounts given their proximity to maturity and generally increased risks for the office sector in the current environment, including loan-to-value (LTV) ratio adjustments to above 100% for five loans, including three loans in the top 15, 3 Beaver Valley Road (Prospectus ID#6, 4.3% of the current pool balance), 3800 Embassy Parkway (Prospectus ID#16, 1.8% of the current pool balance), and 3700 Buffalo Speedway (Prospectus ID#18, 1.7% of the current pool balance). All the adjusted office loans resulted in a weighted-average (WA) expected loss that was nearly double the WA pool expected loss.

The largest loan on the servicer’s watchlist, 3 Beaver Valley Road, is secured by a suburban office property totaling 264,503 square feet (sf) in Wilmington, Delaware. At issuance, the property was 94.9% occupied by two tenants, Farmers Insurance Exchange (Farmers; formerly occupied 80.1% of the net rentable area (NRA), lease expiry in December 2024) and Solenis LLC (Solenis; formerly occupied 14.8% of the NRA, lease expiry in January 2025). However, Solenis exercised its early termination option and vacated the premises in March 2020 and Farmers exercised its contraction option of approximately 53,000 sf (20.0% of the NRA) effective in January 2022. Farmers paid a $1.4 million fee in May 2021 to reduce its footprint at the property. The loan was added to the servicer’s watchlist in June 2022 following a decline in performance metrics because of the subject’s dropping occupancy rate.

Per the most recent servicer reporting, the YE2022 occupancy rate at the property was 60.0% with a DSCR of 0.82 times (x), compared with YE2021 figures of 80.1% and 1.36x, respectively, and issuance figures of 94.9% and 1.56x. According to the most recent servicer commentary, the master servicer approved a tenant lease occupying 23,000 sf effective January 2023 with a rent commencement date in July 2023, improving occupancy to an implied rate of roughly 70%. Given the rent abatement period of six months, however, financial improvement will likely not appear until 2024 reporting. Based on an online listing by Colliers, approximately 126,000 sf (47.9% of the NRA) is available for leasing at the subject. This surpasses the current vacancy at the property, signaling Farmers is downsizing further. According to Reis, office properties in the Non-CBD submarket of Wilmington reported a Q1 2023 vacancy rate of 21.5%, compared with a Q1 2022 vacancy rate of 19.2%. The loan has $8.2 million of funds currently held across all reserves, including $1.0 million held in tenant reserves and $7.1 million held in other reserves, which likely includes the lease termination fee paid by Farmers.

Given the softening submarket, year-over-year decline in occupancy and NCF, and the generally unfavorable conditions of the office market, DBRS Morningstar analyzed this loan with an elevated probability of default and applied a stressed LTV ratio, resulting in an expected loss more than 4x the pool’s WA expected loss.

ENVIRONMENTAL, SOCIAL, AND 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 (July 4, 2023) https://www.dbrsmorningstar.com/research/416784.

Classes X-A and X-E are 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 credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

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

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar Long-Term Obligation Rating Scale definition indicates that credit 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.

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

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology/North American CMBS Insight Model v 1.1.0.0 (March 16, 2023), https://www.dbrsmorningstar.com/research/410913

Rating North American CMBS Interest-Only Certificates (December 19, 2022), https://www.dbrsmorningstar.com/research/407577

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022), https://www.dbrsmorningstar.com/research/402646

North American Commercial Mortgage Servicer Rankings (September 8, 2022), https://www.dbrsmorningstar.com/research/402499

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

Legal Criteria for U.S. Structured Finance (December 7, 2022), https://www.dbrsmorningstar.com/research/407008

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.