Research: Rating Action: Moody’s affirms four classes of WFCM 2017-RC1

Approximately $305 million of structured securities affected

New York, August 12, 2022 — Moody’s Investors Service, (“Moody’s”) has affirmed the ratings on four classes in Wells Fargo Commercial Mortgage Trust 2017-RC1, Commercial Mortgage Pass-Through Certificates, Series 2017-RC1, as follows:

Cl. A-3, Affirmed Aaa (sf); previously on Sep 11, 2019 Affirmed Aaa (sf)

Cl. A-4, Affirmed Aaa (sf); previously on Sep 11, 2019 Affirmed Aaa (sf)

Cl. A-SB, Affirmed Aaa (sf); previously on Sep 11, 2019 Affirmed Aaa (sf)

Cl. X-A*, Affirmed Aaa (sf); previously on Sep 11, 2019 Affirmed Aaa (sf)

*  Reflects Interest-Only Classes

RATINGS RATIONALE

The ratings on the P&I classes were affirmed because of their credit support and 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 its referenced classes.

Moody’s rating action reflects a base expected loss of 5.9% of the current pooled balance, compared to 4.2% at Moody’s last review. Moody’s base expected loss plus realized losses is now 4.8% of the original pooled balance, compared to 4.1% 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 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 “US and Canadian Conduit/Fusion Commercial Mortgage-Backed Securitizations Methodology” published in July 2022 and available at https://ratings.moodys.com/api/rmc-documents/391056. The methodologies used in rating interest-only classes were “US and Canadian Conduit/Fusion Commercial Mortgage-Backed Securitizations Methodology” published in July 2022 and available at https://ratings.moodys.com/api/rmc-documents/391056 and “Moody’s Approach to Rating Structured Finance Interest-Only (IO) Securities” published in February 2019 and available at https://ratings.moodys.com/api/rmc-documents/59126. 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 https://ratings.moodys.com for a copy of these methodologies.

DEAL PERFORMANCE

As of the July 15, 2022 distribution date, the transaction’s aggregate certificate balance has decreased by 19% to $508.4 million from $624.9 million at securitization. The certificates are collateralized by 55 mortgage loans ranging in size from less than 1% to 10% of the pool, with the top ten loans (excluding defeasance) constituting 51.5% of the pool. Six loans, constituting 12% of the pool, have defeased and are secured by US government securities. The pool contains 15 low leverage cooperative loans, constituting 8.9% of the pool balance, that were too small to credit assess; however, have Moody’s leverage that is consistent with other loans previously assigned an investment grade Structured Credit Assessments.

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 21, compared to 26 at Moody’s last review.

As of the July 2022 remittance report, loans representing 90% were current or within their grace period on their debt service payments and 10% were greater than 90 days delinquent.

Fourteen loans, constituting 17% 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.

There have been no loans liquidated from the pool. One loan, constituting 10.3% of the pool, is currently in special servicing. The specially serviced loan is the Hyatt Place Hotel Portfolio Loan ($52.4 million — 10.3% of the pool), which is secured by the borrowers’ fee simple interests in six limited-service hotels totaling 754 guestrooms and located across six states. The properties are located in Greenville, SC; Roanoke, VA; Topeka, KS; Alpharetta, GA; Charlotte, NC, and Dallas, TX. The loan transferred to special servicing in June 2020 due to payment default and is last paid through the March 2020 payment date. A receiver was appointed in early 2022 and the receiver marketed the portfolio for sale in March 2022. Special servicer commentary indicates a contract with the highest bidder was executed with a potential closing date in September 2022. The property was last appraised for $58.1 million in September 2021, which is slightly above the outstanding loan balance.

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 2021 operating results for 97% of the pool, and partial year 2022 operating results for 90% of the pool (excluding specially serviced and defeased loans). Moody’s weighted average conduit LTV is 118%, compared to 116% 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 24% to the most recently available net operating income (NOI), excluding hotel properties that had significantly depressed NOI in 2021.  Moody’s value reflects a weighted average capitalization rate of 10.0%.

Moody’s actual and stressed conduit DSCRs are 1.43X and 0.93X, respectively, compared to 1.55X and 0.97X 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 performing conduit loans represent 19.4% of the pool balance. The largest performing loan is the International Paper Global HQ Loan ($38.0 million — 7.5% of the pool), which is secured by the borrower’s fee simple interest in a 214,060 square foot (SF) suburban office building located in Memphis, TN. The building is leased to International Paper Company with a lease expiration in April 2027. The lease provides International Paper Company with three, five-year lease extension options. Due to the single tenant exposure, Moody’s value incorporated a lit/dark analysis. The loan has passed its initial 5-year interest only period and has amortized 0.8% since securitization. Moody’s LTV and stressed DSCR are 129% and 0.94X, respectively, compared to 130% and 0.93X at the last review.

The second largest loan is the Preferred Freezer Vernon Loan ($33.0 million — 6.5% of the pool), which is secured by a class A, 184,273 SF, single-tenant, cold storage facility in Vernon, California. The property is approximately 6.3 miles southeast of downtown Los Angeles. Constructed in 2007 as a build-to-suit for Preferred Freezer, the property is a modern class A cold storage facility with above average ceiling heights, 23 dock high loading doors, insulated refrigeration type panel walls, and ceilings with high intensity metal light fixtures. The property is 100% occupied by Preferred Freezer pursuant to a triple net lease which expires in 2042. The loan is interest-only for the duration of the term. Moody’s LTV and stressed DSCR are 101% and 1.00X, respectively, unchanged from the last review.

The third largest loan is the Promenade at Tutwiler Farm Loan ($27.7 million – 5.4% of the pool), which is secured by a 223,153 SF anchored retail property located in Trussville, AL, within the Birmingham MSA. The property was built in 2000 and consists of four, one-story buildings. The property was 86% leased as of December 2021, compared to 96% in December 2020 and 97% at securitization. The loan is interest-only for the duration of the term.  Moody’s LTV and stressed DSCR are 111% and 0.90X, respectively, unchanged from the last review.

REGULATORY DISCLOSURES

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 on https://ratings.moodys.com/rating-definitions.

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 issuer/deal page for the respective issuer on https://ratings.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 https://ratings.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://ratings.moodys.com/documents/PBC_1288235.

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 https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Fred Kasimov
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

Matthew Halpern
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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