DBRS Upgrades Three Classes of J.P. Morgan Chase Commercial Mortgage Securities Trust 2012-C8

DBRS Limited (DBRS) has today upgraded three classes of J.P. Morgan Chase Commercial Mortgage Securities Trust 2012-C8, as follows:

-- Class B to AA (high) (sf) from AA (sf)
-- Class C to A (high) (sf) from A (sf)
-- Class EC to A (high) (sf) from A (sf)

In addition, DBRS has confirmed the remaining classes in the transaction, as listed below:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (sf)
-- Class G at B (sf)

Class EC is exchangeable with Class A-S, Class B and Class C (and vice versa). All trends are Stable.

The rating upgrades reflect the strong performance of the transaction, which has experienced collateral reduction of 8.3% since issuance, with 42 of the original 43 loans remaining in the pool as of the June 2016 remittance report. One loan (Prospectus ID #19, Wolf Creek Apartments Phase II) paid out in December 2015, ahead of its scheduled maturity date in September 2017. Based on the servicer’s reported figures, the transaction benefits from strong overall credit metrics with a weighted-average (WA) DSCR of 1.80 times (x) and WA debt yield of 12.0%. These metrics compare well with the issuance levels of 1.60x and 10.1%, respectively. The performance for the largest 15 loans has also been quite strong since issuance, with WA net cash flow (NCF) growth of 20.8% over DBRS underwritten figures at YE2015 and a WA DSCR of 1.84x, up from 1.53x as based on the DBRS underwritten (UW) NCF figures.

The largest loan in the pool is Prospectus ID #1, Battlefield Mall (11.8% of the pool). The collateral consists of the partial fee and partial leasehold interest in 1.0 million square feet (sf) of a 1.2 million sf, single-level regional mall located in Springfield, Missouri. The property’s tenancy comprises approximately 124 retailers and is anchored by Dillard’s, Dillard’s Men’s and Home, JC Penney, Macy’s and Sears (not collateral). The mall was originally developed in 1970, and was later renovated/expanded in 2006. Although the mall is located in a tertiary location, the property benefits from its status as the only regional mall in the area and strong sponsorship in Simon Property Group (Simon), the largest owner/operator of mall properties in the United States. According to the YE2015 operating statement analysis report, the DSCR was 2.48x, compared to 1.96x at DBRS UW, and 2.39x at YE2014. NCF experienced a +26.8% increase from DBRS UW, and a +3.8% increase from YE2014 for the period.

As of the March 2016 rent roll, the collateral was 96.5% occupied, compared to 97.8% at YE2014 and 98.0% at issuance. There is minimal near-term rollover, as just 2.2% of the net rentable area (NRA) is rolling by YE2016. There are two relatively near-term anchor expiries for Macy’s, which is scheduled to expire in July 2017, and Dillard’s, which is scheduled to expire in January 2018. The remaining three anchor leases are scheduled for expiration between 2020 and 2022. According to the April 2016 tenant sales report, in-line sales are projected to average approximately $399.00 per square foot (psf) at YE2016, up from the YE2015 average of $394.00 psf and the average of $386.00 psf at issuance. Anchor sales are projected to be relatively flat year over year for all anchors, with the exception of Macy’s, whose sales are projected to be $86.00 psf at YE2016, down from $98.00 psf at YE2015 and $123.00 psf at issuance. Sales for Dillard’s and Dillard’s Men’s and Home are projected at $160.00 psf and $78.00 psf at YE2016, in line with issuance levels. JC Penney sales are projected to end 2016 at $133.00 psf, down from $183.00 psf at issuance.

As of the June 2016 remittance report, there are three loans on the servicer’s watchlist, representing 3.0% of the pool balance. Two of the loans, representing 2.3% of the pool balance, are on the watchlist due to a low DSCR; however, one of those loans, Hillcrest Shopping Center (Prospectus ID #31, 0.9% of the pool), showed a drop in performance related to a temporary occupancy decline that has since been recovered, with cash flows expected to return to historical levels in the near term. The third loan on the watchlist, Chenal Commons (Prospectus ID #39, 0.7% of the pool), is being monitored for minor deferred maintenance issues noted in the most recent inspection.

The largest loan on the watchlist is Prospectus ID #24, Challenger South (1.37% of Pool). The collateral for the loan consists of a 146,591 sf industrial office center in Orlando, Florida. The property was built in 2005 and renovated in 2007. The trust loan refinanced existing debt for the sponsor, which developed the property and retained $7.84 million in cash equity at closing. This loan was placed on the watchlist with the low YE2014 DSCR of 0.85x, the result of decreased occupancy at the property to approximately 59.0% from 81.8% at issuance. As of the February 2016 rent roll, the property was 63.0% occupied, but the DSCR fell further, to 0.78x at YE2015, with average rental rates at $14.35 psf, down from $15.98 psf at issuance. The most significant contributor to the occupancy decline at the property was the loss of Carley Corporation (23.5% of the NRA) at lease expiration in March 2014. That space remains vacant as of the February 2016 rent roll, with two smaller tenants combining for 8.1% of the NRA signed in April and November 2015. According to CoStar, the property is located in the University Research Market submarket, which showed an average vacancy rate and availability rate for both office and industrial properties of 5.4% and 6.4%, respectively, as of July 2016, with average asking rental rates of $21.10 psf. In addition, occupancy has been trending upward over the past five years in the submarket, with a five-year average vacancy rate of 9.1%.

There is one loan, Main Street Tower (Prospectus ID #23, 1.4% of the pool), in special servicing. This loan is secured by a 200,000 sf office property located in Norfolk, Virginia, and was transferred to special servicing in January 2016 due to imminent default, as two major tenants, representing 27.3% of the NRA, vacated the property at YE2014 and the borrower was unable to continue to fund debt service and reserve payment shortfalls out of pocket. As of the June 2016 remittance report, the loan was due for the April 2016 payment and all payments due thereafter. According to the servicer’s analysis, the property was 65.6% occupied at March 2016 with YE2015 DSCR of 0.79x, down from the DBRS UW figure of 1.29x and the issuer’s UW figure of 1.39x. CoStar places the property in the Downtown Norfolk submarket, which showed an average vacancy rate and availability rate of 13.5% and 18.3%, respectively, as of July 2016, with a five-year average vacancy rate of 14.6%. According to the updated appraisal obtained by the special servicer dated June 2016, the property’s value has declined to $18.80 million ($93.39 psf), down from $23.40 million ($116.24 psf) at issuance, implying an LTV of approximately 77.1% on the outstanding loan balance as of June 2016. According to Real Capital Analytics, from June 2015, comparable office properties in the Downtown Norfolk submarket have sold at price points ranging between $71.00 psf to $171.00 psf, with a respective occupancy range between 45% and 100%.

As part of the workout strategy, the special servicer has agreed to a forbearance of rollover and leasing reserves of $65,000 per month between January 2016 and June 2016 to enable the borrower to fund operating expenses at the property and satisfy outstanding payables. According to the servicer, the borrower has submitted proposals to four prospective tenants to occupy the remainder of the vacant space at the property. The status of those negotiations is unknown and the servicer advises the borrower’s final workout proposal is pending as well, with the servicer noting foreclosure will be pursued if resolution is not achieved in the near term. Given the property’s performance decline and payment delinquency, DBRS has modeled this loan with a high probability of default and an increased loss severity to account for the increased risk to the trust.

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 ww.dbrs.com or contact us at info@dbrs.com.