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)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction since issuance. DBRS had previously assigned Positive trends to the five junior classes in 2017 to reflect the outlook for near-term cash flow growth; however, DBRS changed the trends on those Classes to Stable at its last review due to a lower reported cash flow growth rate. The trends remain Stable following the subject review, as cash flow growth is in line with DBRS expectations. The underlying loan is secured by the fee interest in an 864,303 square foot (sf) Class A office tower in Midtown Manhattan. 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 low-leverage financing, its location near Bryant Park and its excellent views of the Manhattan skyline from the upper floors. The ten-year loan is currently amortizing over a 30-year schedule, as the interest-only (IO) period expired in July 2017, with a maturity date of July 2022. The whole loan includes the subject $300 million first mortgage trust loan and a $100 million mezzanine loan.

The property’s occupancy rate and financial performance have been consistently strong since year end (YE) 2013. The December 2018 rent roll showed the occupancy rate and weighted-average (WA) base rent were 99.5% and $64.51 per square foot (psf), respectively, which is similar to the September 2017 rent roll occupancy rate and WA base rent of 99.5% and $63.42 psf, respectively. Additionally, investment-grade tenants occupy 70.8% of the net rentable area (NRA), including HSBC (63.3% of NRA), Man Group (5.6% of NRA) and VTB Capital (1.9% of NRA). HSBC primarily leases office space in addition to some retail and storage space at the subject. Although HSBC pays below-market rent for its office space, the tenant provides a strong credit profile (rated AA (low) by DBRS) and a lease expiration date three years beyond the loan maturity date.

The loan reported a trailing 12-month (T-12) debt service coverage ratio (DSCR) ending June 2018 of 2.01 times (x), up from the YE2017 DSCR of 1.71x and YE2016 DSCR of 1.68x. The improvement in the T-12 ending June 2018 figures was due to an 88.7% increase in expense reimbursements. The December 2018 rent roll showed the scheduled reimbursements are 33.8% lower than the reported T-12 figure, which would result in a projected DSCR of 1.84x. DBRS expects the near- to medium-term outlook for the property to remain stable given the concentration of investment-grade tenants as well as the minimal lease rollover (0.4% of NRA) prior to loan maturity.

The local submarket demand for office space remains strong, as the subject is situated within the Grand Central submarket of Manhattan. According to a Q4 2018 Reis report, the submarket showed an average gross rental rate of $79.62 psf and a vacancy rate of 7.6%, while the greater area of Manhattan showed figures of $73.38 and 8.3%, respectively. According to the December 2018 rent roll, the subject’s WA gross rent would be $75.65 psf, indicating that the collateral performs slightly above market. The average rents and low vacancy at the subject speak to the demand for the subject’s office space due to its prime location and views.

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 applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

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

DBRS provides 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 North American CMBS Surveillance Methodology, which can be found on www.dbrs.com under Methodologies & Criteria. 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, which can be found on www.dbrs.com in the Commentary tab under Regulatory Affairs. 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.

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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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

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