Morningstar DBRS Downgrades Credit Ratings on Five Classes of Wells Fargo Commercial Mortgage Trust 2015-C27

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on five classes of Commercial Mortgage Pass-Through Certificates, Series 2015-C27 issued by Wells Fargo Commercial Mortgage Trust 2015-C27 as follows:

-- Class C to BB (high) (sf) from BBB (sf)
-- Class PEX to BB (high) (sf) from BBB (sf)
-- Class D to C (sf) from B (low) (sf)
-- Class X-B to C (sf) from B (sf)
-- Class E to C (sf) from CCC (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A-4 at AAA (sf)
-- Class A-5 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 F at C (sf)

Morningstar DBRS changed the trends on Classes C and PEX to Negative from Stable. All other classes carry Stable trends, with the exception of Classes D, E, F, and X-B, which have credit ratings that typically do not carry a trend in Commercial Mortgage-Backed Securities (CMBS) transactions.

The credit rating downgrades reflect Morningstar DBRS' increased liquidated loss projections for the loans in special servicing, which collectively represent 22.3% of the pool balance. With this review, Morningstar DBRS considered liquidation scenarios for four of the five specially serviced loans, which include the largest and third-largest loans in the pool, resulting in total implied losses exceeding $86.0 million. Those losses would completely erode the nonrated Class G, as well as the balance of rated Classes F and E, and approximately 40.0% of the balance of Class D, significantly reducing credit support for the transaction as a whole. Morningstar DBRS did not liquidate the Holiday Inn-Cherry Creek loan (Prospectus ID#16; 2.3% of the pool) that transferred to special servicing during the pandemic, as the loan's performance has surpassed issuance expectations, reporting a DSCR of 2.31 times (x) as of September 2023, and is expected to be returned to the Master Servicer.

The Negative trends reflect Morningstar DBRS' concerns with several nonspecially serviced loans that have exhibited increased risk of default given performance challenges, property type, and/or general market concerns, as the majority of the remaining loans are scheduled to mature within the next 12 months. For these loans, Morningstar DBRS used stressed loan-to-value ratios (LTVs) and/or elevated probability of defaults (PODs) to increase the expected loss at the loan level as applicable. The credit rating confirmations and Stable trends reflect the otherwise overall stable performance of the nonspecially serviced loans in the pool, which Morningstar DBRS generally expects to repay at maturity based on the most recent year-end (YE) weighted-average debt service coverage ratio (DSCR) that is above 1.80x.

As of the April 2024 remittance, 71 of the original 95 loans remain in the pool, with a trust balance of $719.9 million, representing a collateral reduction of 31.3% since issuance, as a result of loan amortization, loan repayments, and loan liquidations. Since Morningstar DBRS' last review, the Fairfield Inn & Suites-Cincinnati loan (Prospectus ID#49), was liquidated from the trust at a realized loss of approximately $2.2 million, in line with Morningstar DBRS' expectation. Nineteen loans, representing 14.7% of the pool, are fully defeased, and 11 loans, representing 16.4% of the pool balance, are on the servicer's watchlist, which are predominantly being monitored for a low DSCR, occupancy, and/or deferred maintenance.

The largest specially serviced loan is secured by a 572,724-square-foot (sf) portion of the 977,888-sf Westfield Palm Desert regional mall in Palm Desert, California. The pari passu $125.0 million interest-only (IO) whole loan transferred to special servicing in August 2020 because of payment default. A receiver was appointed in October 2021, shortly after which the property was rebranded as The Shops at Palm Desert. The special servicer began pursuing foreclosure shortly thereafter; however, in November 2023, Pacific Retail Capital Partners (PRCP) acquired the property and assumed the existing debt. The company specializes in repositioning malls through value-add strategies and reportedly plans to redevelop portions of the property to include green space, multifamily housing, and entertainment offerings. In conjunction with the assumption, the loan was modified to include, among other things, a two-year maturity extension through March 2027 with two one-year extension options available. As of April 2024 reporting, the loan was reported late and is expected to return to the master servicer as a corrected loan after a period of monitoring; however, the loan will remain in a cash sweep period through the extended maturity, with all excess cash flow held in reserve.

The property's occupancy rate has improved to 85.4% as of November 2023; however, occupancy has historically shown volatility, falling as low as 77.0% in December 2021 and well below 95.9% at issuance. During 2023, the receiver was able to renew Dick's Sporting Goods (4.7% of the net rentable area (NRA); expiration in January 2029) to a five-year term. According to the servicer-reported financials, the annualized net cash flow (NCF) for the year-to-date period (YTD) ended September 30, 2023, was $5.3 million (a DSCR of 1.63x), a decline from the YE2022 and YE2021 figures of $8.3 million (a DSCR of 1.70x) and $6.6 million (a DSCR of 1.80x), respectively. Per the January 2023 financial package, total in-line sales for 2022 were $386 per square foot (psf), a 25.3% drop from the previous year.

Morningstar DBRS expects performance of the asset to continue showing some volatility during the near-term as PRCP works toward executing on its business plan, while managing upcoming tenant rollover. During the next 12 months, more than 30 tenants representing approximately 11.0% of the NRA, have scheduled lease expirations, the largest of which are F21RED (2.2% of NRA) and H&M (2.2% of NRA), which have lease expirations in January 2025. While no sales price has been provided, an updated appraisal dated June 2023 valued the property at $57.4 million, a decline from the June 2022 value of $68.8 million, showing volatility in tandem with fluctuations in occupancy over the past few years, but a significant decline from the issuance appraised value of $212.0 million. Morningstar DBRS' analysis, which includes a liquidation scenario based on a stress to the most recent appraisal, is indicative of a loss severity in excess of 75.0%.

The 312 Elm and 312 Plum loans (Prospectus ID#3 and #17; collectively 8.0% of the pool) transferred to special servicing in July 2023 for imminent monetary default. Both of these loans are secured by office properties in downtown Cincinnati, within walking distance of each other, and are sponsored by Rubenstein Properties Fund II, LP. As of April 2024, the borrower remains in discussion with the special servicer in regard to potential workout strategies. As noted during the prior review, both of these loans have reported declines in performance in recent years following the departure of several large tenants at each property. For 312 Elm, while the borrower was able to sign several new smaller tenants in 2023, including Apex Systems, LLC (3.3% of the NRA), occupancy remains low at 52.0% as of September 2023 given the departure of previous major tenants, the General Services Administration (approximately 20.0% of the NRA) and Gannett (28.9% of the NRA), which vacated the property in 2018 and 2022, respectively. For 312 Plum, the occupancy rate dropped to 38.0% as of September 2023 from 63.1% as of YE2022 after the previous largest tenant, KAO USA Inc. (23.8% of the NRA) vacated the property at its lease expiry in June 2023. According to the Cincinnati Business Courier, there is potential for converting the property into an office/residential-mixed-use space. Due to the sustained decline in occupancy, both properties reported DSCRs of approximately 0.50x as of the YTD ended September 30, 2023, period.

As the properties have yet to be reappraised, Morningstar DBRS liquidated these loans based on a stressed haircut to the issuance appraisal values of $67.0 million (Elm) and $26.5 million (Plum) given the softening submarket performance, upcoming rollover risk, and general lack of liquidity for this property type. The resulting projected loss severity exceeds 42.0% and 26.0%, respectively, with the stressed value estimates on a per square foot basis relatively in line with several other Ohio office properties that are securitized in CMBS transactions that are in special servicing and/or nonsecuritized office properties within a 0.5 mile radius that have been sold in 2023, per Reis.

The 300 East Lombard loan (Prospectus ID#9; 3.3% of the pool), is secured by a 20-story, 225, 485-sf Class A office property in the Baltimore central business district. The loan was transferred to special servicing in March 2022 due to imminent monetary default, and is currently over 121 days delinquent. After the property lost its largest tenant, Ballard Spahr (previously 15.0% of the NRA), upon its lease expiration in April 2022, occupancy dropped to 65.9% as of YE2022. Although two new tenant leases were signed in 2023, the previous second and fourth largest tenants, Offit Kurman (7.4% NRA) and Alex Brown Realty (4.7% of the NRA), vacated in August and May 2023, respectively, bringing occupancy down again, to 52.4% as of December 2023. The annualized T6 through June 30, 2023, NCF of $1.1 million, as a result, is expected to decline further with those tenant exits. In addition, tenants representing more than 7.0% of the NRA, have lease expirations scheduled in prior to the loan's maturity in February 2025.

The property was reappraised in January 2024, at a value of $9.1 million, which represents a 76.4% decline from the issuance appraised value of $38.5 million, and is well below the current whole-loan amount of $23.5 million. In the analysis for this review, Morningstar DBRS liquidated the loan via a stressed haircut to the updated value in consideration of the continuous decline in occupancy, soft submarket metrics, and rollover risk prior to the loan's maturity. This resulted in a loss severity in excess of 76.0%.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS  
There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (January 23, 2024; https://dbrs.morningstar.com/research/427030).

Classes X-A and X-B 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 Morningstar DBRS.

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

The principal methodology is North American CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798.

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

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-DBRS@morningstar.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.

Morningstar DBRS 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 Morningstar DBRS 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

DBRS Limited
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Tel. +1 416 593-5577

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

-- North American CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model v 1.2.0.0, (https://dbrs.morningstar.com/research/428797)

-- Rating North American CMBS Interest-Only Certificates (December 13, 2023), https://dbrs.morningstar.com/research/425261

-- DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023), https://dbrs.morningstar.com/research/420982

-- North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592

-- Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279, (July 17, 2023).

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.