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Rating Action: Moody's affirms seven classes of WFCM 2017-C41
Global Credit Research - 09 Dec 2020
Approximately $605.6 million of structured securities affected
New York, December 09, 2020 -- Moody's Investors Service, ("Moody's") has affirmed the ratings on seven classes in Wells Fargo Commercial Mortgage Trust 2017-C41, Commercial Mortgage Pass-Through Certificates Series 2017-C41:
Cl. A-1, Affirmed Aaa (sf); previously on Nov 19, 2018 Affirmed Aaa (sf)
Cl. A-2, Affirmed Aaa (sf); previously on Nov 19, 2018 Affirmed Aaa (sf)
Cl. A-3, Affirmed Aaa (sf); previously on Nov 19, 2018 Affirmed Aaa (sf)
Cl. A-4, Affirmed Aaa (sf); previously on Nov 19, 2018 Affirmed Aaa (sf)
Cl. A-S, Affirmed Aa3 (sf); previously on Nov 19, 2018 Affirmed Aa3 (sf)
Cl. A-SB, Affirmed Aaa (sf); previously on Nov 19, 2018 Affirmed Aaa (sf)
Cl. X-A*, Affirmed Aaa (sf); previously on Nov 19, 2018 Affirmed Aaa (sf)
* Reflects interest-only classes
The ratings on the 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 IO class was affirmed based on the credit quality of the referenced classes.
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 9.5% of the current pooled balance, compared to 5.6% at Moody's last review. Moody's base expected loss plus realized losses is now 9.4% of the original pooled balance, compared to 5.5% 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 rating all classes except interest-only classes was "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. The methodologies used in rating interest-only classes 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 and "Moody's Approach to Rating Structured Finance Interest-Only (IO) Securities" published in February 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1111179. Please see the list of ratings at the top of this announcement to identify which classes are interest-only (indicated by the *). Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
As of the November 15, 2020 distribution date, the transaction's aggregate certificate balance has decreased by 1.8% to $771.6 million from $785.9 million at securitization. The certificates are collateralized by 52 mortgage loans ranging in size from less than 1% to 6.5% of the pool, with the top ten loans (excluding defeasance) constituting 42% of the pool. One loan, constituting 1.9% of the pool, has an investment-grade structured credit assessment.
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 34, the same as at Moody's last review.
As of the November 2020 remittance report, loans representing 86% were current or within their grace period on their debt service payments and 2.1% were between 30 -- 59 days delinquent.
Eleven loans, constituting 25.3% of the pool, are on the master servicer's watchlist. 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.
No loans have been liquidated from the pool. Five loans, constituting 14.1% of the pool, are currently in special servicing. All of the specially serviced loans transferred to special servicing since March 2020.
The largest specially serviced loan is the Headquarters Plaza Loan ($50 million -- 6.5% of the pool), which represents a pari-passu portion of a $150 million mortgage loan. The loan is secured by an approximately 730,000 square feet (SF) mixed-use property located in Morristown, New Jersey. The property consists of three Class-A office towers, as well as a retail component which includes an AMC movie theatre, fitness center, and a connection to an adjacent full service Hyatt Hotel. The borrower has signed the PNA and has submitted a request for a loan modification. Outside counsel has been assigned and is working with special servicer to determine the appropriate next steps.
The second largest specially serviced loan is the Corporate Center I & III ($19.5 million -- 2.5% of the pool), which is secured by two office buildings located in Las Vegas, Nevada. Both properties were built in 2008. MVP Realty, the largest tenant which has been in occupancy at the property since 2010 was the prior owner of the property. Their most recent lease (17% of the net rentable area (NRA)) was signed in May 2017 and expires in May 2022. As of June 2020, the property was 80% leased, compared to 92% in 2019 and 100% leased at securitization. The loan transferred to special servicing in September 2020 due to payment default. The loan is currently paid through June 2020. The special servicer is assessing the appropriate next steps.
The remaining three specially serviced loans are secured by a hotel, retail, and a mixed-use property.
Moody's has also assumed a high default probability for one poorly performing loan, HGI Plymouth, constituting 1.6% of the pool. Moody's has estimated an aggregate loss of $25.9 million (a 24.5% expected loss) from the specially serviced and troubled loans.
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 97% of the pool, and partial year 2020 operating results for 72% of the pool (excluding specially serviced and defeased loans). Moody's weighted average conduit LTV is 122%, compared to 118% 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 21% to the most recently available net operating income (NOI). Moody's value reflects a weighted average capitalization rate of 10.3%.
Moody's actual and stressed conduit DSCRs are 1.52X and 0.93X, respectively, compared to 1.58X and 0.95X 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 loan with a structured credit assessment is the Del Amo Fashion Center Loan ($15 million -- 1.9% of the pool), which represents a 3.3% pari-passu portion of a $459 million senior mortgage. The property is also encumbered by additional subordinate debt. The loan is secured by a 1.8 million SF component of a 2.5 million SF super-regional mall located in Torrance, California. Since 2014, the sponsor has completed a $423.0 million renovation encompassing all three of the property's interconnected components. The property is anchored by Sears (non-collateral), Macy's (non-collateral), J.C. Penney, Nordstrom, and AMC Theatres. Other major tenants include Dick's Sporting Goods, Burlington Coat Factory, LA Fitness, Dave & Busters, and Marshalls. The property was 87% leased as of June 2020. As of June 2020, collateral occupancy, inline occupancy, and total mall occupancy were 82%, 72% and 87%, respectively. Year-end comparable in-line tenant sales were reported as $577 PSF for 2019, compared to $573 PSF in 2018. Moody's structured credit assessment and stressed DSCR are baa2 (sca.pd) and 1.20X, respectively.
The top three conduit loans represent 16% of the pool balance. The largest loan is the Marriott LAX Loan ($42.1 million -- 5.5% of the pool), which represents a pari-passu portion of a $138.6 million mortgage loan. The loan is secured by a 1,004-guestroom, full service hotel located in Los Angeles, California just east of Los Angeles International Airport. The hotel was originally developed in 1973 by Marriott International as their first in the Western United States. The property has undergone several renovations since construction and was most recently renovated in 2017. Through year-end 2019 the property's performance had declined 13% from securitization due to increased expenses and the 2019 actual NOI DSCR was 1.83X. Furthermore, the loan has amortized 4.5% since securitization. The loan is current and the lender indicated they are currently in discussions with the borrower regarding a COVID-19 relief request. The property's operations have been significantly impacted by the coronavirus pandemic, and the property did not generate enough NCF during the first six months of 2020 to cover operating expenses. Moody's LTV and stressed DSCR are 128% and 0.89X, respectively, compared to 123% and 0.92X at securitization. However, these metrics are based on return of both leisure and group and meeting demand which may lag that of the overall US pace of recovery.
The second largest loan is the Mall of Louisiana Loan ($40.8 million -- 5.3% of the pool), which represents a pari-passu portion of a $323.7 million mortgage loan. The loan is secured by a 776,789 SF portion of a 1,593,545 SF enclosed, two-story super-regional mall located in Baton Rouge, Louisiana and sponsored by Brookfield Properties Retail Group. The property is located approximately six miles from downtown Baton Rouge. The mall's anchors are Dillard's, Macy's, J.C. Penney and Sears, all of which are non-collateral. Additional large retailers at the property include AMC Theaters, Dick's Sporting Goods, and Nordstrom Rack. In 2008, a $100 million expansion occurred that added over 330,000 SF, which included a 125,000 SF lifestyle component, a 140,000 SF power center, and the 15-screen movie theater (65,000 SF) currently occupied by AMC Theatres. The property includes an adjacent lifestyle center attached to the main, two-level enclosed super-regional mall. Notable tenants include Apple and Versona. As of June 2020, the collateral was 93% occupied compared to 89% as of December 2018. Moody's LTV and stressed DSCR are 126% and 0.84X, respectively, compared to 102% and 0.98X at last review.
The third largest loan is the Adler Portfolio Loan ($40.3 million -- 5.2% of the pool), which is secured by the borrower's leasehold simple interest in three office properties and five industrial flex properties located in North Carolina, Tennessee, and Texas. The portfolio contains 27 buildings. Each of the properties operate subject to a 99-year ground lease which was signed at closing and includes a single, 99-year extension option. The ground lease requires annual payments starting at $1.85 million which increase 2% annually for the first 30 years and remains flat thereafter. The total portfolio was 84.6% leased as of March 2020, compared to 88% at securitization. Moody's LTV and stressed DSCR are 126% and 1.11X, respectively, the same as 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_1133569.
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.
Rhett Terrell 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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