Rating Action: Moody's affirms two and downgrades one class of WFCM 2015-SG1
Global Credit Research - 17 Dec 2020
Approximately $484 million of structured securities affected
New York, December 17, 2020 -- Moody's Investors Service, ("Moody's") has affirmed the ratings on two classes and downgraded the rating on one class in Wells Fargo Commercial Mortgage Trust 2015-SG1, Commercial Mortgage Pass-Through Certificates, Series 2015-SG1 as follows:
Cl. A-4, Affirmed Aaa (sf); previously on Mar 17, 2020 Affirmed Aaa (sf)
Cl. A-SB, Affirmed Aaa (sf); previously on Mar 17, 2020 Affirmed Aaa (sf)
Cl. A-S, Downgraded to Aa3 (sf); previously on Mar 17, 2020 Affirmed Aa2 (sf)
The ratings on the two P&I classes were affirmed because the transaction's key metrics, including Moody's loan-to-value (LTV) ratio, Moody's stressed debt service coverage ratio (DSCR) and the transaction's Herfindahl Index (Herf), are within acceptable ranges.
The rating on the P&I class, Cl. A-S, was downgraded due to a decline in pool performance as a result of higher anticipated losses from specially serviced and troubled loans. Eight loans, mostly secured by hotel and retail properties, are in special servicing and make up 17% of the pool. In aggregate, loans secured by hotel and retail properties represent 22% and 34% of the deal, respectively (excluding the defeased loan).
The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Our analysis has considered the effect on the performance of commercial real estate from the current weak US economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high. Stress on commercial real estate properties will be most directly stemming from declines in hotel occupancies (particularly related to conference or other group attendance) and declines in foot traffic and sales for non-essential items at retail properties.
We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
Moody's rating action reflects a base expected loss of 13.7% of the current pooled balance, compared to 6.6% at Moody's last review. Moody's base expected loss plus realized losses is now 13.3% of the original pooled balance, compared to 7.0% at the last review. Moody's provides a current list of base expected losses for conduit and fusion CMBS transactions on moodys.com at http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF215255.
FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS:
The performance expectations for a given variable indicate Moody's forward-looking view of the likely range of performance over the medium term. Performance that falls outside the given range can indicate that the collateral's credit quality is stronger or weaker than Moody's had previously expected.
Factors that could lead to an upgrade of the ratings include a significant amount of loan paydowns or amortization, an increase in the pool's share of defeasance or an improvement in pool performance.
Factors that could lead to a downgrade of the ratings include a decline in the performance of the pool, loan concentration, an increase in realized and expected losses from specially serviced and troubled loans or interest shortfalls.
METHODOLOGY UNDERLYING THE RATING ACTION
The principal methodology used in these ratings were "Approach to Rating US and Canadian Conduit/Fusion CMBS" published in September 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1244778. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
As of the November 18, 2020 distribution date, the transaction's aggregate certificate balance has decreased by 9% to $651 million from $716 million at securitization. The certificates are collateralized by 68 mortgage loans ranging in size from less than 1% to 10% of the pool, with the top ten loans (excluding defeasance) constituting 42% of the pool. One loan, constituting 1% of the pool, has defeased and is secured by US government securities.
Moody's uses a variation of Herf to measure the diversity of loan sizes, where a higher number represents greater diversity. Loan concentration has an important bearing on potential rating volatility, including the risk of multiple notch downgrades under adverse circumstances. The credit neutral Herf score is 40. The pool has a Herf of 32, compared to 33 at Moody's last review.
As of the November 2020 remittance report, loans representing 89% were current or within their grace period on their debt service payments, and 1% were between 30 -- 59 days delinquent.
Twenty loans, constituting 43% of the pool, are on the master servicer's watchlist as of the November 2020 remittance report of which one loan, representing 1% of the pool, indicate the borrower has requested relief in relation to coronavirus impact on the property. The watchlist includes loans that meet certain portfolio review guidelines established as part of the CRE Finance Council (CREFC) monthly reporting package. As part of Moody's ongoing monitoring of a transaction, the agency reviews the watchlist to assess which loans have material issues that could affect performance.
Three loans have been liquidated from the pool, resulting in an aggregate realized loss of $6.9 million (for an average loss severity of 37%). Eight loans, constituting 17% of the pool, are in special servicing as of the November 2020 remittance report. All of the specially serviced loans have transferred to special servicing since March 2020.
The largest specially serviced loan is the Boca Park Marketplace Loan ($44.1 million -- 6.8% of the pool), which is secured by a 148,095 square foot (SF) anchored retail center located in Las Vegas, Nevada. The property was constructed in 2000 and is approximately 16 miles northwest of the Las Vegas Strip. The collateral was 100% leased as of June 2020, compared to 88% as of December 2019 and 95% in December 2018. Anchors include Target, OfficeMax, and now dark Haggen Food & Pharmacy, which are not part of the collateral, and Ross Dress for Less, which is the largest collateral tenant. The loan is last paid through its July 2020 payment date and transferred to special servicing in June 2020 due to imminent default. The special servicer is evaluating the next steps with the borrower.
The second largest specially serviced loan is the DoubleTree DFW Loan ($17.5 million -- 2.7% of the pool), which is secured by a 282-room, full-service hotel located in Irving, Texas just outside of the Dallas Fort Worth International Airport (DFW). The property is also encumbered with $4.5 million of mezzanine financing. The hotel was developed in 1974 and was most recently renovated between 2011-2013 at a cost of $1.9 million ($6,737 per room). Since 2004, approximately $18.6 million ($65,957 per room) has been invested in capital improvements. Amenities include an outdoor swimming pool, gym, business center, 17,122 SF of meeting space, restaurant/bar, Starbucks coffeehouse, and airport shuttle service. The loan is last paid through its November 2020 payment date, subsequent to the mezzanine lender curing the delinquent payments. The loan was previously 90+ days delinquent as of September 2020. The loan transferred to special servicing in July 2020 due to payment default. A payment relief proposal was presented to the borrower and is being negotiated.
The remaining six specially serviced loans are secured by a mix of retail, multifamily and hotel properties.
Moody's has also assumed a high default probability for six poorly performing loans, constituting 21.5% of the pool, and has estimated an aggregate loss of $69.1 million (a 34% expected loss on average) from these specially serviced and troubled loans. The largest troubled loan is the Patrick Henry Mall Loan ($63.0 million -- 9.7% of the pool), which represents a pari-passu portion of a $87.2 million loan. The loan is secured by a 432,401 SF portion of a 716,558 SF regional mall located in Newport News, Virginia. The anchors include Macy's and Dillard's, which are not part of the collateral, and J. C. Penney and Dick's Sporting Goods, which are part of the collateral. The center was built in 1988 and renovated in 2005 at a cost of $28.9 million ($40 PSF) which included structural expansions and tenant improvements. As of June 2020, the collateral was 94% occupied compared to 98% in December 2018 and December 2017. While occupancy levels have been stable since securitization, both sales and rental revenues have experienced declines. The year-end 2019 property net operating income (NOI) was approximately 7% lower than underwritten levels and the NOI DSCR was 1.71X. The mall reopened in May 2020 after a temporary closure as a result of the coronavirus outbreak. The sponsor, PREIT, filed for bankruptcy recently and the loan is last paid through its November 2020 payment date.
The second largest troubled loan is the Fifth Third Center Loan, discussed in further detail below. The third largest troubled loan is the Hilton Garden Inn Green Bay Loan ($16.6 million -- 2.6% of the pool), which is secured by a 125-room limited service hotel in Green Bay, Wisconsin. The fourth largest troubled loan is the Hilton Garden Inn Grand Forks Loan ($10.9 million -- 1.7% of the pool), which is secured by a 100-room limited service hotel in Grand Forks, North Dakota. The fifth largest troubled loan is the Holiday Inn Express - Troutville Loan ($7.4 million -- 1.1% of the pool), which is secured by a 85-room limited service hotel in Troutville, Virginia. The remaining troubled loan represented less than 1% of the pool.
The credit risk of loans is determined primarily by two factors: 1) Moody's assessment of the probability of default, which is largely driven by each loan's DSCR, and 2) Moody's assessment of the severity of loss upon a default, which is largely driven by each loan's loan-to-value ratio, referred to as the Moody's LTV or MLTV. As described in the CMBS methodology used to rate this transaction, we make various adjustments to the MLTV. We adjust the MLTV for each loan using a value that reflects capitalization (cap) rates that are between our sustainable cap rates and market cap rates. We also use an adjusted loan balance that reflects each loan's amortization profile. The MLTV reported in this publication reflects the MLTV before the adjustments described in the methodology.
Moody's received full year 2019 operating results for 99% of the pool, and full or partial year 2020 operating results for 83% of the pool (excluding defeased and specially serviced loans). Moody's weighted average conduit LTV is 114%, compared to 115% at Moody's last review. Moody's conduit component excludes loans with structured credit assessments, defeased and CTL loans, and specially serviced and troubled loans. Moody's net cash flow (NCF) reflects a weighted average haircut of 17% to the most recently available NOI. Moody's value reflects a weighted average capitalization rate of 10.3%.
Moody's actual and stressed conduit DSCRs are 1.51X and 0.99X, respectively, compared to 1.48X and 0.99X at the last review. Moody's actual DSCR is based on Moody's NCF and the loan's actual debt service. Moody's stressed DSCR is based on Moody's NCF and a 9.25% stress rate the agency applied to the loan balance.
The top three conduit loans represent 13% of the pool balance. The largest loan is the Fifth Third Center Loan ($36.5 million -- 5.6% of the pool), which is secured by a 160,565 SF eight story office property located in Naples, Florida. Subsequent to Fifth Third Bank (originally 65% of the net rentable area (NRA)) downsizing their space, the property will be approximately 50% leased as of July 2020, compared to 88% in December 2018 and 84% in December 2017. Moody's considers this loan a troubled loan.
The second largest loan is the Hilton - Harrisburg Loan ($30.3 million -- 4.7% of the pool), which is secured by a 341-room, full-service hotel located in the central business district (CBD) of Harrisburg, Pennsylvania. The property was originally built in 1990 and most recently renovated in 2014-2015 for $8.0 million ($23,460 per room). Amenities include two restaurants, a bar, gift shop, indoor pool, fitness center, and 13 conference rooms/ballrooms totaling 25,344 SF. The property is situated in the heart of downtown Harrisburg, two blocks from the Pennsylvania State Capitol building and offers the highest quality guestroom product in downtown Harrisburg. Moody's LTV and stressed DSCR are 132% and 0.90X, respectively, compared to 131% and 0.89X at the last review.
The third largest loan is the Ohio Document Portfolio Loan ($18.1 million -- 2.8% of the pool), which is secured by a portfolio of four warehouse facilities totaling 569,224 SF. The properties are located within Cleveland, Ohio (1 property; 216,728 SF; 38.1% of NRA), Cincinnati, Ohio (1 property, 244,016 SF; 42.9% of NRA), and Columbus, Ohio (2 properties; 108,480 SF; 19.1% of NRA). The average facility size is 142,306 SF with ceiling heights ranging from 24 feet to 50 feet. As of September 2020, the portfolio was 100% occupied with one tenant, Retrievex, Inc., leasing 93% of the NRA. All Retrievex, Inc. leases, which were originally set to expire in October 2021, were recently renewed with a lease expiration in January 2032. Moody's LTV and stressed DSCR are 110% and 1.12X, respectively, compared to 112% and 1.11X at the last review.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
The analysis includes an assessment of collateral characteristics and performance to determine the expected collateral loss or a range of expected collateral losses or cash flows to the rated instruments. As a second step, Moody's estimates expected collateral losses or cash flows using a quantitative tool that takes into account credit enhancement, loss allocation and other structural features, to derive the expected loss for each rated instrument.
Moody's did not use any stress scenario simulations in its analysis.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Seth Glanzman Associate Lead Analyst Structured Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Romina Padhi VP - Senior Credit Officer Structured Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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