DBRS Assigns Provisional Ratings to JPMCC Commercial Mortgage Securities Trust 2016-JP2

DBRS, Inc. (DBRS) has today assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-JP2 (the Certificates) to be issued by JPMCC Commercial Mortgage Securities Trust 2016-JP2. All trends are Stable.

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 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 X-C at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

Classes X-C, D, E and F will be privately placed.

The X-A, X-B and X-C balances are notional. DBRS ratings on interest-only (IO) certificates address the likelihood of receiving interest based on the notional amount outstanding. DBRS considers the IO certificate’s position within the transaction payment waterfall when determining the appropriate rating.

The collateral consists of 47 fixed-rate loans secured by 78 commercial and multifamily properties, comprising a total transaction balance of $939,196,709. The conduit pool was analyzed to determine the provisional ratings, reflecting the long-term probability of loan default within the loan term and its liquidity at maturity. When the cut-off loan balances were measured against the DBRS Stabilized net cash flow (NCF) and their respective actual constants, there were seven loans, representing 17.0% of the pool, with a DBRS Term debt service coverage ratio (DSCR) below 1.15 times (x), a threshold indicative of a higher likelihood of mid-term default. Additionally, to assess refinance risk given the current low interest rate environment, DBRS applied its refinance constants to the balloon amounts. This resulted in 20 loans, representing 52.8% of the pool, having DBRS Refinance (Refi) DSCRs below 1.00x; however, the DBRS Refi DSCRs for the loans are based on a weighted-average (WA) stressed refinance constant of 9.41%, which implies an interest rate of 8.72%, amortizing on a 30-year schedule. This represents a significant stress of 4.15% over the WA contractual interest rate of the loans in the pool. The loans’ probability of default (POD) is based on the more constraining of the DBRS Term or Refi DSCR.

Eleven loans, comprising 45.5% of the pool, are located in urban markets with increased liquidity that benefit from consistent investor demand, even in times of stress. In addition, there are only five loans, representing 4.1% of the pool, that are either fully or primarily leased to a single tenant. Loans secured by properties occupied by single tenants have been found to have higher loss severities in the event of default. As such, DBRS modeled single-tenant properties with a higher POD and cash flow volatility compared with multi-tenant properties. Overall, the pool exhibits a relatively strong DBRS WA Term DSCR of 1.51x based on the whole-loan balances, indicating moderate term default risk.

Five loans, representing 25.6% of the pool, are structured with full IO payments for the full term, including four of the top 15 loans, including the largest two loans in the pool (Opry Mills and Center 21), representing 17.0% of the pool. An additional 20 loans, representing 46.8% of the pool, have partial IO periods remaining, ranging from ten to 59 months, including seven of the top 15 loans. The DBRS Term DSCR is calculated by using the amortizing debt service obligation, and the DBRS Refi DSCR is calculated considering the balloon balance and lack of amortization when determining refinance risk. DBRS determines POD based on the lower of Term or Refi DSCR, so loans that lack amortization will be treated more punitively. The pool has a high concentration of properties that are securitized by assets that are fully or primarily used as retail, representing 34.7% of the pool. The retail sector has generally underperformed since the Great Recession because of declining consumer spending power, store closures, chain bankruptcies and the rapidly growing popularity of ecommerce. According to the U.S. Census Bureau, ecommerce sales represented 7.0% of total retail sales in 2015 compared with 3.9% in 2009. As the ecommerce share of sales is expected to continue to grow significantly in the coming years, the retail real estate sector may continue to be relatively weak. DBRS considers 80.2% of the pool’s retail loans to be secured by either anchored or regional mall properties, which are more desirable and have shown lower rates of default historically.

The DBRS sample included 29 of the 47 loans in the pool. Site inspections were performed on 31 of the 78 properties in the pool (73.5% of the allocated loan balance). DBRS conducted meetings with the on-site property manager, leasing agent or a representative of the borrowing entity for 65.4% of the pool. The DBRS average sample NCF adjustment for the pool was -11.8% and ranged from -26.7% to +8.9%. DBRS identified eight loans, representing 9.9% of the pool, with unfavorable sponsor strength; however, none are in the top 15. DBRS increased the POD for the loans with identified sponsorship concerns.

One of the largest ten loans, The Shops at Crystals, exhibits credit characteristics consistent with investment-grade shadow ratings. The Shops at Crystals has credit characteristics consistent with a BBB (high) shadow rating. This loan represents 5.3% of the pool.

The ratings assigned to the Certificates by DBRS are based exclusively on the credit provided by the transaction structure and underlying trust assets. All classes will be subject to ongoing surveillance, which could result in upgrades or downgrades by DBRS after the date of issuance.

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 methodology is North American CMBS Rating Methodology, which can be found on our website under Methodologies.

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form 15-E) which contains the description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not rely on the due diligence services outlined in Form 15-E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.

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