DBRS Confirms Ratings on J.P. Morgan Chase Commercial Mortgage Securities Trust 2012-HSBC

DBRS Limited (DBRS) confirmed 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 B at AA (sf)
-- Class C at A (high) (sf)
-- Class D at BBB (high) (sf)
-- Class X-B at BBB (high) (sf)
-- Class E at BBB (sf)

Last year, DBRS assigned Positive trends to the Class B, Class C, Class D, Class X-B and Class E Certificates to reflect the outlook for near term cash flow growth; however, 2017 reporting suggests cash flows remain strong, but with less pronounced year-over-year growth as compared with previous reporting cycles. As such, DBRS has placed Stable trends on all classes as part of this year’s review.

The rating confirmations reflect the overall stable performance of the transaction since issuance. The underlying loan is secured by the fee interest in an 860,000 square foot (sf) Class A office tower in Midtown Manhattan. The property’s largest tenant is HSBC Holdings plc (HSBC), which occupies 63.2% of the net rentable area (NRA).

The property was originally constructed as four buildings encompassing an entire block of Fifth Avenue between 39th and 40th Streets. Approximately 51,000 sf of space is configured for retail use and that space is occupied by Staples Inc., Panera Bread and 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 (IO) period that expired in July 2017. The loan is currently amortizing over a 30-year schedule, with a maturity date of July 2022. The whole loan includes the $300 million first mortgage trust loan and a $100 million mezzanine loan.

As of Q3 2017 reporting, the loan had an amortizing debt service coverage ratio (DSCR) of 1.90 times (x) and as of the September 2017 rent roll, the property was 99.5% occupied, with only one vacant suite. Approximately 62.1% 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 $343 per square foot (psf) and the DBRS loan-to-value (LTV) ratio and the DBRS Refi LTV at 64.5% and 59.6%, respectively. Although cash flow has trended up since issuance, growth year over year in 2017 has been flat according to the Q3 2017 financials, but still well above the DBRS net cash flow figure, with a variance of +16.5%. While DBRS believes the near to medium term outlook for the performance at the property is strong, revenue growth is expected to remain minimal until 2020, when the new lease terms commence for HSBC.

Although the subject property is situated at the border of the Penn Plaza/Garment Submarket, for market comparison purposes DBRS determined that the Grand Central submarket would be more appropriate due to the higher concentration of Class A office towers. According to CoStar, as of April 2018, the Grand Central submarket reported an overall vacancy rate and average rental rate of 9.0% and $67.55 psf, respectively, for Class A properties. Class A buildings in a one-block radius around Bryant Park reported an average vacancy rate and rental rate of 6.5% and $86.90, respectively.

Other large tenants at the subject property include Baker & McKenzie LLP (12.2% of the NRA, expires January 2028) and Man Investment Holdings Inc. (5.6% of the NRA, expires July 2022). As of the September 2017 rent roll, the average base rental rate for the property was approximately $63.42 psf, roughly in line with the Grand Centralsubmarket’s average rates. The slight discrepancy between the subject’s average rental rate compared to the market statistics reported by CoStar is due to a portion of the HSBC space being considered Class B. The average rental rate for Class B properties in the Grand Central submarket is $60.08 psf. There are no tenants scheduled to roll over in 2018.

At issuance, DBRS noted the existence of potential significant term and refinance risk as HSBC (63.2% of the net rentable area (NRA) and 51.6% of the base rental revenue) had a lease expiration in 2020, approximately two years prior to the loan’s maturity date. At the time, DBRS noted mitigants in the fact that the space serves as the firm’s North American headquarters and had 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 April 2025, three years beyond the loan’s maturity. HSBC currently leases office, retail and storage space at the property and pays an average base rental rate of $51.46 psf through to April 2020. Upon commencement of its new lease in May 2020, HSBC will pay an average base rental rate of $79.00 psf through to April 2025, resulting in an annual rent of approximately $43 million. Given the significant cash flow growth that will be realized with these new terms, the investment-grade rating of the tenant, subject and the continued stable performance of the subject’s Grand Central submarket, property performance is expected to remain sound.

Classes X-A and X-B are IO certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated reference tranche adjusted upward by one notch if senior in the waterfall.

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

As part of this review, DBRS has provided updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.
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Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is CMBS North American Surveillance, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. Please note that not every related methodology listed under a principal Structured Finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

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 under Related Documents or by contacting us at info@dbrs.com.

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

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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