DBRS Upgrades Two Classes and Confirms Five Classes of J.P. Morgan Chase Commercial Mortgage Securities Trust 2012-HSBC

DBRS Limited (DBRS) has today upgraded the following 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 X-B to BBB (high) (sf) from BBB (sf)
-- Class E to BBB (sf) from BBB (low) (sf)

DBRS has also confirmed the following ratings:

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

Additionally DBRS has changed the trends on Classes B, C, D, E and X-B to Positive from Stable. The trends on classes A and X-A remain Stable.

The rating upgrades and trend changes reflect the increased performance of the underlying collateral and the favorable credit metrics of the first mortgage loan. The subject loan is secured by a Class A office tower in Midtown Manhattan with the fee interest consisting of 860,000 square feet (sf) of space originally constructed as four buildings encompassing an entire block of Fifth Avenue between 39th Street and 40th Street. Approximately 51,000 sf is configured as retail space that is occupied by Staples, Inc., Panera Bread and HSBC Bank plc (HSBC). The property benefits from its location near Bryant Park and excellent views of the Manhattan skyline from the upper floors. The ten-year trust is structured with a five-year interest-only period that expires in July 2017. The whole loan includes the $300 million first mortgage trust loan and a $100 million mezzanine loan.

As of year-end (YE) 2016 reporting, the loan had an amortizing debt service coverage ratio of 1.89 times and as of the December 2016 rent roll, the property was 99.5% occupied, with only one vacant suite. Approximately 65.5% of the base rental revenue comes from investment-grade tenants HSBC, Man Investment Holdings Inc. and VTB Capital. The loan is considered low leverage, with the trust exposure at $346 per square foot (psf) and a DBRS lona-to-value (LTV) ratio and refi LTV at 75.4% and 68.8%, respectively. In the past year, build-outs were completed on the two penthouse suites at the property for long-term tenants, Varadero Capital, L.P. and Triangle Capital Corporation, which signed leases in June and September 2015, respectively, at base rental rates of $102 psf and $105 psf, respectively, through 2026. As expected the YE2016 net cash flow figure improved from the realization of both tenants’ rental revenue, as well as from the contractual rental rate increase of HSBC, the property’s largest tenant. According to the YE2016 operating statement analysis report, year-over-year net cash flow growth was 10.7%, compared against the YE2015 figure and 11.9% over the DBRS issuance figure.

At issuance, DBRS noted the existence of potential significant term and refinance risk as HSBC (63.2% of the net rentable area (NRA) and 53.1% of the base rental revenue) had a lease expiration in 2020, approximately two years prior to the loan’s maturity date, even though the space serves as the firm’s North American headquarters and it spent $25 million renovating its space just prior to issuance. According to the servicer, HSBC has chosen to extend its lease at the subject property to 2025, three years beyond the loan’s maturity. While all terms of the lease extension have yet to be confirmed by DBRS, at issuance, HSBC has options to renew its lease at 95% of fair market rent. The tenant currently pays an average gross rental rate of $59.40 psf. Given the investment-grade rating of the tenant, the strong performance of the subject and the continued stable performance of the Grand Central submarket, property performance is expected to remain sound.

According to CoStar, as of April 2017, the Grand Central submarket reported an overall vacancy rate of 9.7% for Class A properties, with Class A buildings in a one-block radius around Bryant Park reporting an average vacancy rate of 10.5%. Class B buildings in those groups averaged 6.2% and 8.6% vacancy, respectively. Although the delivery of 7 Bryant Park, a 470,000 sf, 30-story tower constructed in 2015 inflated vacancy rates since issuance, market metrics have remained relatively stable. 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 NRA. More recently, Shroder Investment Management North America Inc. entered into a lease for roughly 73,000 sf of space, bringing total occupancy up to approximately 78.9%, with the remainder of the building’s NRA showing as available for lease on CoStar.

Other large tenants at the subject property include Baker McKenzie (12.2% of the NRA, expires January 2028) and Man Investment Holdings Inc. (5.6% of the NRA, expires July 2022). As of the December 2016 rent roll, the average base rental rate for the property was approximately $62 psf (average gross rental rate of $69 psf), which similarly with the Grand Central submarket average gross rental rates of approximately $69 psf for Class A properties and $61 psf for Class B properties. The slight discrepancy in the subject’s average rental rate compared to the market statistics reported by CoStar is that a portion of the HSBC space is considered to be Class B. Near term rollover is minimal, with only 1.5% of the NRA scheduled to roll in 2017.

The ratings assigned to Classes C and D materially deviate from the higher ratings implied by the quantitative results. DBRS considers a methodology deviation when there is a rating differential of three or more notches between the assigned rating and the rating implied by the quantitative results that is a substantial component of a rating methodology; in this case, the assigned ratings reflect uncertain loan level event risk.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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

The principal methodologies are North American CMBS Rating Methodology (January 2017) and CMBS North American Surveillance (December 2016), which can be found on www.dbrs.com under Methodologies.