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:

-- 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)

All trends are Stable.

The rating confirmations reflect the transaction’s continued stable performance since issuance. 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 HSBC’s North American headquarters. HSBC is 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 YE2013 reporting, the loan had debt service coverage ratio (DSCR) of 1.19 times (x). Future performance is expected to continue to improve, as the last remaining tenant free rent periods expired at the end of Q1 2013. The partial year reporting from Q1 2014 reflects this improvement as the DSCR was 1.41x.

According to the March 2014 rent roll, the subject was 95.9% occupied, with a weighted-average rental rate of $56.41 per square foot (psf). The largest tenant is HSBC, occupying 59% of the net rentable area (NRA) across various spaces at the property. HSBC’s lease expires in April 2020, approximately two years before loan maturity, representing significant refinance risk if the tenant vacates the property; however, DBRS believes that HSBC will remain at the property past its lease expiration date due to the fact that it spent $25 million renovating its space and the space serves as its North American headquarters. HSBC has two ten-year extension options at 95% of fair market rent.

In the event that HSBC declines to exercise its lease extension option(s), there is significant rental revenue growth potential, as it currently pays a weighted-average rental rate of $39.30 psf on its Class B office space located on Floor Two through Floor 11. According to the Q2 2014 CoStar report, rental rates for Class B office properties in the Grand Central submarket were quoted at $53.50 psf.

Along with HSBC, there are three other investment grade-rated tenants in occupancy at the subject. These include Man Group, VTB Capital and Staples. Combined, the four investment grade-rated tenants account for 72.9% of the NRA and 66.5% of the net rental income.

DBRS continues to monitor this transaction in its Monthly CMBS Surveillance Report, with additional information on its viewpoint for this transaction. The July 2014 Monthly CMBS Surveillance Report for this transaction will be published shortly.

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.