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

DBRS, Inc. (DBRS) has today confirmed the ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2012-HSBC issued by 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, with Class E assigned an Interest in Arrears designation for an outstanding shortfall of $27 as of the April 2016 remittance. The servicer advises the shortfall is the result of interest that accrued on an expense advance made by the servicer in 2015. The expense was reimbursed by the borrower, but the servicer advises that the interest will not be billed back until the loan repays, meaning the shortfall will remain outstanding through the remainder of the deal term. DBRS has assigned an Interest in Arrears designation for Class E.

The rating confirmations are reflective of the stable performance of the transaction since issuance, with healthy cash flow and occupancy growth since issuance, driven by improvements in market fundamentals and the successful execution of the borrower’s leasing strategy over the past few years.

The trust loan is secured by an 860,000 square foot (sf) office tower located in Midtown Manhattan. The property comprises four buildings that occupy an entire block of Fifth Avenue between 39th Street and 40th Street. The property benefits from its location near Bryant Park and excellent views of the Manhattan skyline from the upper floors. The bulk of the office space at the property is considered Class A and there is approximately 50,000 sf of retail space located on the ground floor that has been occupied by HSBC, Panera Bread and Staples since issuance. The trust loan was structured with a five-year interest-only period over the ten-year loan term (13 months remaining as of the April 2016 remittance) and the total debt stack includes the $300 million trust loan and a $100 million mezzanine loan. As of the YE2015 reporting, the amortizing debt service coverage ratio on the trust debt was 1.72 times (x), with the property’s occupancy rate at 99.5% as of the December 2015 rent roll. Approximately 65.5% of the base rental revenue comes from investment-grade tenants in HSBC, Man Group and VTB Capital. The loan is considered low leverage, with the trust’s exposure at $346 per square foot (psf) and the DBRS term and refinance loan-to-value (LTV) at 75.4% and 68.8%, respectively. In-place cash flows are expected to grow over the near term, as the full effect of the HSBC rent step triggered in May 2015 is realized and cash flows from recently signed leases for two suites on the 30th floor are reflected for a full year’s reporting.

For the purposes of this review, DBRS modeled an underwritten (UW) net cash flow (NCF) figure of $30.73 million. That figure was derived using rents in place as of the December 2015 rent roll, with vacancy grossed up to market and a vacancy factor of 5.0% applied. Expenses were generally underwritten to the trailing 12 months figure ending December 31, 2015 plus 3.0% and below-the-line items included the servicer’s capital expense figure (based on actual reserve requirements) and a tenant improvement/leasing commission (TI/LC) figure of $2.75 million, which gives credit to up front reserves collected at closing and assumes TIs of $60 psf for new leases and $30 psf for renewals. The resulting NCF figure represents a haircut of -2.4% to the YE2015 NCF figure and +2.8% growth over the DBRS UW figure at issuance. The growth over the issuance DBRS UW figure is largely driven by a higher in-place occupancy rate since issuance, when the property was approximately 7.5% vacant, and increases in rental rates for recently signed leases over the issuance assumptions.

According to CoStar, the Grand Central submarket showed an overall vacancy rate of 10.5% for Class A properties, with Class A buildings in the one-block radius around Bryant Park averaging 7.7% vacancy as of April 2016. Class B buildings in those groups averaged 4.9% and 5.6% vacancy, respectively. Overall, vacancy is down in the submarket since issuance, but has recently spiked due to the delivery of 7 Bryant Park, a 470,000 sf, 30-story tower constructed in 2015 and situated near the subject between 39th Street and 40th Street along Sixth Avenue. The building was purchased by The Bank of China for a reported $600 million ($1,277 psf), which will reportedly occupy approximately 40% of the net rentable area (NRA) with the remainder of the building’s NRA showing as available for lease on CoStar.

The subject property’s average base rental rate of $62.38 psf and average gross rental rate of $69.13 psf compare well with the five-year average for the submarket’s Class A product of $62.76, but is below the five-year average of $81.43 psf for Class A space in the one-block radius around Bryant Park, as reported by CoStar. The driver for the below-average rental rate at the subject by comparison to similarly located properties is largely in the rental rate for HSBC, the property’s largest tenant, which occupies 56.6% of the NRA with an average gross rental rate of $57.81 psf (the space is split between Class A and Class B space at the property, but the majority of the space is Class A). The lease for HSBC rolls within the loan term, expiring in 2020, with two five-year renewal options at 95.0% of market rates available. The second-largest and third-largest tenants are Baker & McKenzie (12.2% of the NRA) and Man Group (5.6% of the NRA), with leases through 2028 and 2022, respectively. Near-term rollover is minimal, with only 1.9% of the NRA scheduled to roll between 2016 and 2017.

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

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

The applicable methodologies are North American CMBS Rating Methodology (March 2016) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.