Wells Fargo Commercial Mortgage Trust 2020-SOP

Presale:

Wells Fargo Commercial Mortgage Trust 2020-SOP

January 23, 2020

Preliminary Ratings

Class A B C D E F G RR(iv)

Preliminary rating(i) AAA (sf) AA- (sf) A- (sf) BBB- (sf) BB- (sf) B- (sf) NR (sf) NR (sf)

Preliminary amount ($) 107,635,000 24,453,000 18,354,000 22,496,000 30,590,000 29,583,000 31,796,500 13,942,500

LTV (%) 44.0 54.0 61.5 70.7 83.2 95.3

108.3 108.3

Market value decline (%)(ii)

70.0 N/A N/A 63.0 57.8 51.3 22.7 22.7

Debt yield (%)(iii) 19.0 N/A N/A 15.4 13.5 11.7 7.4 7.4

Note: This presale report is based on information as of Jan. 23, 2020. The ratings shown are preliminary. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings. Accordingly, the preliminary ratings should not be construed as evidence of final ratings. This report does not constitute a recommendation to buy, hold, or sell securities. (i)The issuer will issue the certificates to qualified institutional buyers in-line with Rule 144A of the Securities Act of 1933. (ii)Reflects the approximate decline in the $393.850 million appraised as-is value of the entire portfolio that would be necessary to experience a principal loss at the given rating level. (iii)Based on S&P Global Ratings' NCF and the mortgage balance. (iv)Non-offered vertical risk retention certificates. LTV--Loan-to-value ratio, based on S&P Global Ratings' values. NCF--Net cash flow. N/A--Not applicable. NR--Not rated.

PRIMARY CREDIT ANALYST

Ravi Alimchandani San Francisco + 1 (415) 371 5093 ravi.alimchandani @

SECONDARY CONTACT

Samson Joy New York (1) 212-438-3107 samson.joy @

Profile

Expected closing Feb. 14, 2020. date

Collateral

A two-year, floating-rate interest-only commercial mortgage loan totaling $278.9 million (with five one-year extension options), secured by first-mortgage liens on the fee and leasehold interests in 10 primarily single-tenant office properties in five states.

Payment structure Principal and interest payments will be made sequentially to the class A, then B, then C, then D, then E, then F, and then G certificates. Realized losses will be allocated in reverse sequential order. Prepayments up to $55.7 million (20.0% of the original loan balance) will be applied on a pro rata basis to all of the certificates.

Depositor

Wells Fargo Commercial Mortgage Securities Inc.

Mortgage loan seller

Wells Fargo Bank N.A.

Borrowers

Ten special-purpose entities that are indirectly wholly owned and controlled by TPG Real Estate.

Servicer

KeyBank N.A.



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Presale: Wells Fargo Commercial Mortgage Trust 2020-SOP

Profile (cont.)

Special servicer

Trustee

Certificate administrator

Risk retention sponsor

Midland Loan Services. Wilmington Trust N.A. Wells Fargo Bank N.A

Wells Fargo Bank N.A

Rationale

The preliminary ratings assigned to Wells Fargo Commercial Mortgage Trust 2020-SOP's (WFCM 2020-SOP's) commercial mortgage pass-through certificates reflect S&P Global Ratings' view of the collateral's historical and projected performance, the sponsor's and managers' experience, the trustee-provided liquidity, the loan's terms, and the transaction's structure. We determined that the trust loan has a beginning and ending loan-to-value (LTV) ratio of 108.3%, based on S&P Global Ratings' value.

Strengths

The transaction has the following strengths:

- The loan is secured by first-mortgage liens on the borrowers' fee and leasehold interests in 10 primarily single-tenant suburban office properties in five states. The three largest geographic concentrations are in Arizona, Florida, and Texas, which make up 43.7%, 18.4%, and 14.1%, respectively, of the allocated loan balance. No other state accounts for more than 13.1% of the portfolio by allocated loan balance.

- The portfolio is large and diverse, comprising 1,640,187 million square feet (sq. ft.); and it was 99.4%-occupied by 14 unique tenants as of the January 2020 rent roll. Also, the average remaining lease term across the portfolio is 6.0 years, and most of the assets house strategic locations for nationally recognized tenants that have shown their commitment to their space through expansion and tenant improvements (TIs).

- All of the properties are located in markets that we consider to be primary or secondary. These markets have historically exhibited lower default and loss rates relative to tertiary markets. Five properties accounting for 40.9% by allocated loan amount (ALA) are located in primary markets, while the remainder are in secondary markets.

- The portfolio benefits from high-quality tenancy. Approximately 53.5% of the in-place gross rent is derived by investment-grade (rated 'BBB-' and above) tenants, as calculated by S&P Global Ratings. The three largest tenants are Syniverse Holdings Inc. (B-/Stable/--; 12.1% of net rentable area [NRA];), Lockheed Martin Corp. (A-/Stable/A-2; 10.7%), and T-Mobile US Inc. (BB+/Watch Neg/--; 10.6%), as calculated by S&P Global Ratings.

- The loan benefits from the experienced sponsorship of Strategic Office Partners (SOP), a wholly owned platform of TPG Real Estate Partners. TPG Real Estate is the real estate platform of TPG Capital, a private leading global alternative asset management firm with more than $119 billion of assets under management and 17 offices worldwide. SOP specializes in suburban office properties and since inception in 2016 has acquired 36 buildings across the U.S., totaling nearly four million sq. ft.



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Presale: Wells Fargo Commercial Mortgage Trust 2020-SOP

- The loan is structured with a hard, in place lockbox and springing cash management. During a cash sweep event, all excess cash flow will be deposited into a lender-controlled account. However, a cash sweep event only occurs upon an event of default or if the debt yield falls below 6.5%.

- The transaction structure holds the borrowers responsible for expenses that would typically result in shortfalls to the certificateholders, such as special servicing, work-out, and liquidation fees, as well as costs and expenses incurred from the special servicer's appraisals and inspections. If deemed recoverable from the liquidation proceeds, the servicer must make administrative advances (provided the collateral has sufficient value) to prevent interest shortfalls that might otherwise arise from expenses if the borrowers do not pay them on time.

Risk Considerations

We considered the following risks for this transaction:

- The loan has high leverage with a 108.3% LTV ratio, based on our valuation. The LTV ratio based on the appraiser's as-is valuation is 70.8%. Our estimate of long-term sustainable value is 34.6% lower than the appraiser's valuation.

- The loan is interest-only for its seven-year extended term, meaning there will be no scheduled amortization during the loan term. Compared with an amortizing loan, an interest-only loan bears a higher refinance risk because of the higher loan balance at maturity. We accounted for this lack of amortization by using lower LTV recovery thresholds at each rating category.

- The borrowers may obtain the release of one or more of the properties at a release price of 105% of the ALA up to $27.9 million (10% of the loan), 110% up to $55.7 million (20% of the loan), and 115% thereafter. This is below the minimum that we generally look for compared to other single-borrower transactions we have rated. However, additional restrictions on property releases apply, including a debt yield test.

- Any voluntary prepayments of the first 20% of the loan will be applied to the certificates on a pro rata basis, and all subsequent prepayments will be applied sequentially among the certificates in the trust. This structure benefits the junior certificateholders because principal prepayments will be distributed to subordinate classes despite their lower payment priority than the more highly rated senior classes. We evaluated this payment structure and stress-tested the portfolio using adverse selection scenarios where either the higher-valued or lower-leveraged properties (by ALA) are released first, potentially leaving a less diverse portfolio with weaker credit characteristics than at the loan's origination. However, this risk is mitigated because the loan documents require the debt yield after release to be greater than or equal to the 10.1% debt yield as of the closing date. We accounted for the lower release premiums and the pro rata paydown percentage by using lower LTV recovery thresholds at each rating category.

- The transaction's loan bears interest at a floating rate indexed to one-month LIBOR. Increases in LIBOR will raise the amount of interest payable on the underlying loan, decreasing the loan's DSC. However, the loan has a comparably short term (24 months plus five one-year extensions), which somewhat mitigates the risk of rising interest rates. In addition, the loan is structured with a 3.0% LIBOR cap during the initial term, and the loan agreement requires the interest rate cap agreement be no greater than 4.0%. The interest rate cap agreement does support 'AAA' ratings under our counterparty criteria. Therefore, we did not apply any additional interest rate stress.



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Presale: Wells Fargo Commercial Mortgage Trust 2020-SOP

- The properties face considerable rollover risk in 2024 and 2026 when 19.7% and 38.2% of the in-place gross rent, respectively, expires. However all but two tenants, Allstate Insurance (7.3% of total gross rent) and Amkor Technology (5.1%) have at least one renewal option remaining.

- Six of the 10 properties (60.2% by ALA) in the portfolio have tenant concentration risk because they are 100%-occupied by a single tenant. This risk is partially mitigated by the loan being secured by a portfolio of properties, the tenants having demonstrated a commitment to their respective spaces, and 62.5% of the single tenants by ALA having investment-grade ratings. We accounted for risks posed by the single-tenant nature of the properties by applying an increased vacancy factor on those properties.

- EB Quickstart (0.6% NRA; 0.7% gross rent) recently executed its termination option and vacated the Cigna Austin property. Additionally, three other tenants have outstanding termination options: Lockheed Martin (10.7% of gross rent), Allstate Insurance (7.3%), and Sage Publications (7.5%). However, all three have lease termination penalties and a cash flow sweep is triggered if any one or more tenants accounting for 12% or more of the base rent terminates its lease.

- Although the collateral for this loan consists of multiple properties, the transaction is concentrated by sponsor and property type. The borrowers, however, are structured as bankruptcy-remote special-purpose entities (SPEs) with prohibitions on future debt.

- Although the collateral for this loan consists of multiple properties, they are all suburban office buildings. We consider suburban office properties to be relatively riskier than central business district office properties because of the lower barriers to entry and the generally lesser-quality tenant base. We accounted for these risks in our capitalization rates for the individual properties.

- Although the SPE borrower is structured with a nonconsolidation opinion and two independent directors, the independent directors can be removed without cause with five to 10 business days' notice.

- There is no warm body carve-out guarantor, and the carve-out guarantee is capped at only 15% of the loan amount for full recourse liability. In our view, these limitations generally lessens the disincentive provided by a full nonrecourse carve-out related to "bad acts" or voluntary bankruptcy.

- During alterations to the property, the loan agreement does not require that all collateral posted by the borrower be rated by S&P Global Ratings. This structure potentially exposes the transaction to risks associated with additional leverage beyond a de minimis amount.

- The loan does not require reserves for taxes, insurance, or tenant improvement/leasing commission (TI/LC), unless during a trigger period. Additionally, there will be no replacement reserve account.

- The refinancing returns approximately $263.0 million (94.3% of the loan balance) in equity to the sponsor. However, the properties were all recently acquired and previously unencumbered. The sponsor will retain $108.9 million in hard equity after giving effect to this transaction.

- The ground lessor for Amkor Technology property, Arizona State University, is not required to enter into a new ground lease upon termination of the existing ground lease unless lender first completes a foreclosure. In our view, this structure introduces additional risk into the transaction that may result in the borrower's failure to refinance the mortgage and pay off the related securities. However, we believe that this risk is sufficiently remote and mitigated by existing legal regulations.



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- The transaction documents include provisions for the transaction parties to seek rating agency confirmation (RAC) that certain actions will not result in a downgrade or withdrawal of the then-current ratings on the securities. The RAC definition in the transaction documents includes an option for the transaction parties to deem their RAC request satisfied if, after having delivered a RAC request, the transaction parties have not received a response to the request within a certain time period. We believe it is possible for a situation to arise where an action subject to a RAC request would cause us to lower our ratings on the securities according to our ratings methodology, even though a RAC request is deemed to be satisfied per this option.

Collateral Characteristics

Collateral description

The properties are located in five states. The three largest geographic concentrations are in Arizona, Florida, and Washington, which make up 43.7%, 18.4%, and 14.1%, respectively, of the allocated loan balance. No other state accounts for more than 13.1% of the portfolio by allocated loan balance.

As part of our analysis, we classify the metropolitan statistical area (MSA) where each property is located as primary, secondary, or tertiary. The nature of each market type affects capitalization rates and valuation dynamics, and it can influence the timing and amount of liquidation proceeds if a mortgage loan is foreclosed. Of the properties in the portfolio, five properties accounting for 40.9% by allocated loan amount (ALA) are located in primary markets, while the remainder are in secondary markets, and none are in tertiary markets (see table 1).

SOP Portfolio

Property name Vanguard/EWS Scottsdale T-Mobile Bothell Syniverse The Circuit

Conejo Corporate Campus Lockheed Martin Dallas Allstate Chandler DB Jacksonville Amkor Tempe Cigna Austin Total

State Sq. ft. Ariz. 255,573

ALA Market (%) type

18.1 S

Largest tenant The Vanguard Group

Lease expiration date

6/29/2026

Wash. 174,546 Fla. 198,750 Ariz. 184,291

13.1 P 10.4 S

5.9 S

Calif. 196,592 10.8 P

T-Mobile PCS Holdings Syniverse Mulberry Management Corp (Oscar) SAGE Publications

6/29/2024 1/29/2027 5/29/2030

1/29/2026

Texas 175,537

9.1 P

Lockheed Martin

10/7/2026

Ariz. 117,394

7.5 S

Fla. 150,000

8.0 P

Ariz. 97,504 12.2 S

Texas 90,000

5.0 S

-

- 100.0 -

Allstate Insurance Deutsche Bank Amkor Technology Cigna -

1/30/2024 1/29/2027 1/29/2025 1/30/2023

-

ALA--Allocated loan amount. P--Primary. S--Secondary.

Appraised value ($)

71,750,000

53,000,000 40,100,000 46,500,000

42,300,000

37,400,000

29,000,000 30,000,000 21,900,000 21,900,000 393,850,000



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Ground lease

The Amkor Tempe property is subject to a ground lease. The property is located in the Arizona State University Research Park, the owner of which is the ground lessor. The ground expires on Dec. 31, 2101. The current ground rent is $268,738 per year, and it escalates throughout the lease term. In our analysis, we utilized the highest annual ground rent payment for 10 years past the fully extended loan term.

If the borrower were to enter bankruptcy and the ground lease is rejected, there is no provision requiring that the lessor provide a new ground lease to lender without lender first foreclosing on the ground lease. Additionally, if the property were to go dark for two consecutive years, with 75% of the floor area not being occupied and actively used by the tenant and the tenant not actively trying to sublease the space or otherwise cure, the ground lessor can terminate the lease. Both of these provisions pose additional risks to the transaction. However, because the property represents 12.2% of the ALA and in general these risks are sufficiently remote, we did not apply an LTV threshold adjustment.

Site Visits

In December 2019, we conducted site visits of five properties (56.8% by ALA): Vanguard/EWS Scottsdale, T-Mobile Bothell, The Circuit, Allstate Chandler, and Amkor Tempe. On our tours of the Arizona properties, we were accompanied by a sponsor representative. We toured the T-Mobile Bothell property independently.

Vanguard/EWS Scottsdale

The property improvements consist of two three-story office buildings, a two-story 757-space parking structure, and 473 surface parking spaces. Each building is 100% leased to Vanguard and EWS Scottsdale (Zelle), respectively. Both tenants appeared to fully utilize their buildings. The buildings are L-shaped and mirror each other. Access is good, and the property is one block from the Loop 101, a major freeway in Greater Phoenix. Although the layout is similar the Vanguard building, the EWS Scottsdale building was more recently renovated and is more attractive in general; and it serves as the company's corporate headquarters. The property is generally well maintained and merits its class A designation.

T-Mobile Bothell

The property improvements consist of two nearly identical three-story office buildings surrounded by 702 surface parking spaces. The buildings are 100% leased to T-Mobile, whose headquarters is about 17 miles to the south in Bellevue, Wash. According to the sponsor, T-Mobile fully utilizes both buildings. The property is located within the Canyon Park Business Center, a large office park. The floor plates are designed similarly with a breakroom and kitchen on each level with adjoining balcony on the upper levels. The private office/meeting rooms surround the building core with cubes along perimeter. Access is good, as the property is one mile from Interstate-405, a major freeway in Greater Seattle. The property is generally well maintained and merits its class A designation.



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The Circuit

The property improvements consist of a one-story office building surrounded by 1,288 surface parking spaces. The building is 100% leased to Oscar Health (77.1% of gross potential rent [GPR]) and On Q Financial (22.9% of GPR). On Q Financial fully utilizes its suite, while Oscar Health is occupying a portion of its space and has taken possession of the remainder in order to complete tenant improvements. From 2015 to 2018, the property was redeveloped from an electronics factory into a creative office space. The property features a variety of amenities such as barbeques, bocce ball courts, and landscaped patios. Access is good, as the property is adjacent to the Loop 101, a major freeway in Greater Phoenix. The property is generally well maintained and merits its class B designation.

Allstate Chandler

The property improvements consist of a newly built two-story office building surrounded by 692 surface parking spaces. The building is 100% leased to Allstate Insurance Co. (AA-/Stable/--), which fully utilizes most of its space, with a small portion still being built out. Allstate leased the building before construction was completed and has taken full possession of the premises. The property is located within the Chandler Corporate Center, a large office park. Access is good, as the property is one mile from the Loop 101 and Loop 202 interchange, both of which are major freeways in Greater Phoenix. The property is generally well maintained and merits its class A designation.

Amkor Tempe

The property improvements consist of a two-story office building surrounded by 417 surface parking spaces. The building is 100% leased to Amkor Technology Inc. (BB/Stable/--), which fully utilizes the property. The property serves as Amkor's global headquarters and has been constructed with top-of-the line security equipment to protect the tenant's high-technology proprietary engineering business. The property is located within the Arizona State University Research Park, a large office park. Access is good, as the property is less than 0.25 mile from the Loop 101, a freeway in Greater Phoenix. The property is generally well maintained and merits its class B designation.

Market Summary

The properties are located in seven distinct submarkets (see table 2 for the submarket rent and vacancy we utilized in our analysis). The portfolio is 99.4% leased, as calculated by S&P Global Ratings, but we underwrote to a weighted average vacancy of 13.2%. In general, according to the appraisals, the properties have in-place rents that are at or below submarket levels.



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Table 2

Market Summary Table

Property

CBRE market/submarket

Vanguard/EWS Scottsdale

Phoenix > Scottsdale

T-Mobile Bothell

Seattle > Bothell/Kenmore

Syniverse

Tampa > Northeast Tampa

The Circuit

Phoenix > East Valley

Conejo Corporate Ventura > Conejo Valley Campus

Lockheed Martin Fort Worth > Mid-Cities Dallas

Allstate Chandler Phoenix > East Valley

DB Jacksonville

Jacksonville > Butler/Baymeadows

Amkor Tempe

Phoenix > East Valley

Cigna Austin

Austin > Far Northwest/Round Rock

CBRE vacancy

(%)

11.1

CoStar vacancy

(%)

S&P Global Ratings applied

vacancy (%)

12.2

12.2

In-place

Market

gross rent rents ($/sq.

($/sq. ft)

ft)

28.19

29.04

7.8

12.4

12.4

27.81

30.23

14.7

9.9

14.7

24.30

25.76

11.0

7.2

13.7

9.6

11.0 13.7

26.93 21.83

28.78 29.10

21.5

9.9

15.7

25.55

22.06

11.0

12.2

16.8

10.1

12.2 16.8

25.01 24.72

24.42 23.80

11.0

13.2

8.6

5.5

13.2 10.0

21.19 25.77

23.86 31.55

Third-Party Reviews

We reviewed appraisal, environmental, and engineering reports prepared within the past six months for the portfolio. In our opinion, the environmental and engineering reports revealed no causes of concern at the property.

Two properties, T-Mobile Bothell and Conejo Corporate Campus, (23.8% of the ALA), are located in areas with a high degree of risk for earthquakes. However, both of these properties have probable maximum loss (PML) of less than 20.0%, with T-Mobile Bothell having the highest overall estimated PML of 15.0%. In addition, the current insurance policy provides earthquake coverage of up to $250.0 million per occurrence for all locations and up to $100.0 million per occurrence in the state of California.

Structural Issues

We reviewed structural matters that we believe are relevant to our analysis. We analyzed the major transaction documents, including the offering circular, trust and servicing agreement, and other relevant documents and opinions, to understand the transaction's mechanics and its consistency with our applicable criteria. We also conducted a focused review of the mortgage loan and cash management agreements.



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