DBRS Confirms Ratings of J.P. Morgan Chase Commercial Mortgage Securities Trust 2012-HSBC

DBRS has today confirmed the ratings of J.P. Morgan Chase Commercial Mortgage Securities Trust 2012-HSBC, as follows, all with Stable trends:

-- Class A at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (high) (sf)

The collateral consists of a $300 million first mortgage loan secured by a 30-story, 864,000 sf Class A office tower in Midtown Manhattan, known as HSBC Tower. The property spans an entire block of Fifth Avenue between 39th and 40th Streets and serves as the North American headquarters of HSBC Bank USA (HSBC; currently rated AA (low) by DBRS).

In addition to the first mortgage loan, there is mezzanine financing of $100 million. The trust loan has a ten-year term, with an initial interest-only period of five years. As of YE2012 reporting, the loan had DSCR of 0.99x, which was a result of low rental income. This outcome was expected, as two tenants, representing 14.8% of the NRA, did not assume their respective spaces until February 2013. The partial reporting from Q1 2013 produced a DSCR of 1.19x.

According to the February 2013 rent roll, the subject was 93.9% occupied, with a weighted-average rental rate of $54.87 psf. The largest tenant is HSBC, occupying 63.4% of the NRA across various spaces at the property. Among HSBC’s leased space at the subject are Class A and Class B office spaces, three trading floors, a data center, a retail bank branch with frontage along Fifth Avenue and a lower-level bank vault featuring drive-in and drive-out access for armored vehicles. HSBC’s lease expires in April 2020, approximately two years before loan maturity, representing significant refinance risk if the tenant vacates the property. DBRS believes that HSBC will remain at the property past its lease expiration date.

HSBC recently spent $25 million renovating its current space and consolidating its operations at the subject. The tenant currently pays an average of $39.32 psf on its office space, well below market, with two ten-year renewal options for all of its space, at 95% of fair market rent.

Along with HSBC, there are three other investment grade-rated tenants in occupancy at the subject. These include Staples, Man Group and VTB Capital. Combined, the four investment grade-rated tenants account for 73.0% of the NRA and 69.5% of the NRI.

The subject resides in the Grand Central submarket, located adjacent to Bryant Park and the New York Public Library. According to the Q2 2013 CoStar report, Class A office properties in the Grand Central submarket had an average vacancy rate of 10.4%, with average quoted rental rates of $63.16 psf. The subject is outperforming the submarket in terms of vacancy, and while the weighted-average rental rate is currently below market, this figure is heavily weighted by the HSBC office and vault space. Since May 2012, the sponsor has signed seven office tenants at base rental rates ranging from $68.00 psf to $88.00 psf, demonstrating the strength and desirability of the subject.

DBRS continues to monitor this transaction in its Monthly CMBS Surveillance Report, with additional information on its viewpoint for this transaction. The July 2013 Monthly CMBS Surveillance Report for this transaction will be published shortly. For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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

The applicable methodologies are CMBS Rating Methodology (January 2012) and North American CMBS Surveillance Methodology (November 2012), both of which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.