DBRS Morningstar Confirms Ratings on All Classes of Wells Fargo Commercial Mortgage Trust 2015-LC22

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2015-LC22 issued by Wells Fargo Commercial Mortgage Trust 2015-LC22 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 BB (sf)
-- Class E at BB (low) (sf)
-- Class X-F at B (high) (sf)
-- Class F at B (sf)

All trends are Stable.

The rating confirmations and Stable trends reflect the overall stable performance of this transaction, bolstered by the improved overall outlook of loans, which posed concerns during the pandemic. Although there remain loans with challenges that will likely complicate refinance prospects in 2025, the pool as a whole benefits from an unrated class that insulates the rated classes from losses. In addition, DBRS Morningstar rates an additional $32.5 million of the bond stack below investment grade, providing a total cushion of $70.7 million for the BBB (low) (sf) rated Class D certificate.

As of the August 2023 remittance, 90 of the original 100 loans remain in the trust, with an aggregate balance of $763.8 million, representing a collateral reduction of 20.8% since issuance. The pool benefits from 20 loans that are fully defeased, representing 24.4% of the pool. Courtyard Memphis East Lenox (Prospectus ID#44) was liquidated from the trust in May 2023 with a realized loss of $3.2 million, above the loss estimate of $778,468 assumed by DBRS Morningstar at the last review. The source of the delta between our projected loss and the realized loss was an updated appraised value of $4.8 million made available in November 2022, compared with the March 2022 appraised value of $7.5 million, which was used in our liquidation scenario. Furthermore, Clearwater Collection (Prospectus ID#17), previously specially serviced, was paid off in full in November 2022. Previously, DBRS Morningstar analyzed this loan with a liquidation scenario, resulting in estimated losses of $4.9 million, thereby offsetting the undershoot in loss projections for Courtyard Memphis East Lenox. There are 17 loans, representing 23.5% of the pool, on the servicer’s watchlist primarily for declines in the collateral property’s occupancy rate and/or the loan’s debt service coverage ratio (DSCR).

Homewood Suites Austin (Prospectus ID#21, 1.3% of the current pool balance) is the sole loan in special servicing, secured by a 96-room limited-service hotel in Austin, Texas. The loan transferred to the special servicer in June 2020 because of imminent monetary default resulting from the pandemic. The special servicer executed a forbearance agreement, which included a 12-month deferral period of principal, interest, and replacement reserve payments in October 2021. The borrower was compliant and performed under the terms of the agreement; as of the August 2023 remittance, the loan is current and still with the special servicer. The borrower is currently in the process of establishing a cash management account, following which the loan will be returned to the master servicer. The most recent appraisal, dated December 2022, valued the property at $17.0 million, a relatively moderate 8.6% decline from its appraised value of $18.6 million at issuance.

The largest loan on the servicer’s watchlist is the Donald J. Trump-sponsored 40 Wall Street (Prospectus ID#1, 9.6% of the current pool balance), also the largest loan in the pool. It is secured by the leasehold interest in a 71-story, 1.2 million-square-foot (sf) office building at 40 Wall Street in Lower Manhattan, one block from the New York Stock Exchange building. The loan is on the watchlist because of occupancy and DSCR concerns. Most recently, the April 2023 rent roll reported an occupancy rate of 77.4% with an average rental rate of $40.39 per sf (psf) as well as approximately 6.3% of scheduled rollover risk in the upcoming 12 months. The occupancy rate has been declining year over year, with YE2022, YE2021, and issuance occupancy rates of 82.9%, 86.0%, and 97.8%, respectively.

The third-largest tenant, Duane Reade (formerly occupied 4.7% of the net rentable area (NRA)), vacated the premises at the March 2023 expiry date. In addition, Thornton Tomasetti (5.2% of the NRA, lease expires in January 2033), had previously publicly indicated its plans of relocating to another building in the vicinity, and per the company’s website, the official address is no longer listed as the subject. It is not clear if Thornton Tomasetti had a termination option available, but given its departure, the implied physical occupancy rate at the building is approximately 67.5%. Other large tenants remaining at the property include Green Ivy (7.4% of NRA, lease expires in November 2061) and Country Wide Insurance (4.6% of NRA, downsized approximately by 32,000 sf since 2022, lease expires in August 2036).

The trailing three months ended March 31, 2023, DSCR was 1.40x, compared with the YE2022, YE2021, and DBRS Morningstar DSCRs of 0.52x, 1.12x, and 1.53x, respectively. Despite the improvement in performance as compared with prior years, the DSCR remains well below the issuer’s figure, because of a combination of a drop in revenue with the decline in the occupancy rate, and increased expenses. The YE2022 operating expense ratio was 80%, with a management fee of $6.5 million included in the servicer’s analysis. Given management fees were capped at $1.0 million at issuance, DBRS Morningstar is questioning the servicer’s 2022 figure and has asked for clarification. The Q1 2023 management fee expense annualizes to $877,604, suggesting the reporting has come back in line with the historical expense for that line item. Revenue has increased in 2023, with the annualized effective gross income at $37.8 million, up from around $34.0 million in 2021 and 2022, but below issuance.

Reis reports that office properties in the Downtown submarket reported a Q2 2023 vacancy rate of 15.6% with an average effective rent of $48.75 psf and average asking rent of $61.39 psf, both above the property’s average rental rate of $40.39 psf. The submarket is weakening, with vacancy increasing; the YE2022, YE2021, and YE2020 vacancy rates were 14.3%, 11.4%, and 11.5%, respectively. Given the likelihood that leasing momentum will be slow and cash flows will remain below issuance expectations, DBRS Morningstar has analyzed this loan with a stressed loan-to-value ratio (LTV) and an elevated probability of default adjustment in the analysis for this review. This resulted in an expected loss that was almost 150% the pool’s average expected loss.

The transaction is concentrated by property type, with 26.6% of the loans in the pool backed by multifamily properties, followed by 24.6% and 21.2% secured by office and retail properties, respectively. In the analysis for this review, DBRS Morningstar stressed office loans to increase the expected loss amounts given the increased risks for the office sector in the current environment and the generally decreased investor appetite for this property type. As a result of these stressed scenarios, the office loans in the pool had a weighted-average (WA) expected loss that was approximately 165% greater than the WA pool expected loss.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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, X-E, and X-F 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 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.

DBRS Limited
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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 (August 23, 2023), https://www.dbrsmorningstar.com/research/419592

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

A description of how DBRS Morningstar analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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