DBRS Morningstar Confirms All Ratings on J.P. Morgan Chase Commercial Mortgage Securities Trust 2019-OSB, Removes UR-Dev. Status

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the following classes of the Commercial Mortgage Pass-Through Certificates, Series 2019-OSB issued by J.P. Morgan Chase Commercial Mortgage Securities Trust 2019-OSB (the Issuer):

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

All trends are Stable. The ratings have been removed from Under Review with Developing Implications, where they were placed on November 14, 2019.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, on the DBRS Morningstar website at www.dbrsmorningstar.com.

Prior to the finalization of the NA SASB Methodology, the DBRS Morningstar ratings for the subject transaction and all other DBRS Morningstar-rated transactions subject to the methodology in question were previously placed Under Review with Developing Implications, as the proposed methodology changes were material.

The subject rating actions are the result of the application of the NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology,” as applicable. Qualitative adjustments were made to the final loan-to-value (LTV) sizing benchmarks used for this rating analysis.

The loan is secured by the borrower’s leasehold interest in Osborn Triangle, a collection of three Class A office and laboratory buildings totaling 676,947 square feet (sf) and a 650-space parking garage. The three buildings include 610 Main Street North (278,738 sf), One Portland Street (229,330 sf), and 700 Main Street (168,879 sf). Loan proceeds of $575.0 million in addition to approximately $581.9 million of cash equity financed the sponsors’ $1.15 billion acquisition of the collateral from the Massachusetts Institute of Technology Investment Management Company, which retains ownership of the underlying ground and a 5.0% interest in the collateral. The 10-year loan is full-term interest only (IO) and represents a relatively low loan-to-cost of 49.7%.

The collateral is superbly located in the East Cambridge/Kendall Square submarket of the greater Boston metropolitan statistical area, less than 500 feet from Massachusetts Institute of Technology’s (MIT) main campus. The East Cambridge/Kendall Square submarket is quickly becoming one of the most desirable submarkets for office and laboratory space nationally, offering a highly educated workforce, strong economic fundamentals, and an increasingly dominant presence of life sciences and biotechnology companies. Per Reis, the Cambridge office submarket features nearly 13.4 million sf of Class A office space with an average vacancy rate of only 0.9% and average asking rents of $62.99 per sf (psf) for office properties constructed after 2009. Though Reis identified approximately 1.4 million sf of new construction under development in the local market, at the time of DBRS Morningstar’s inspection in May 2019, management indicated that all but approximately 100,000 sf of the new supply was pre-leased, further evidencing the increasingly tight market conditions throughout the Cambridge Class A office submarket. Per Reis, office properties constructed after 2009 throughout the Cambridge/Charlestown/Somerville submarket accounted for approximately 12.0% of submarket inventory as of Q1 2019. The strength of the market is also evident in that all buildings serving as collateral for this transaction have been 100.0% leased since construction/conversion.

The properties were constructed to state-of-the-art office and laboratory standards between 2002 and 2016 and have been exceptionally well maintained. The properties additionally benefit from strong tenancy with 88.5% of total net rentable area, representing 91.5% of total DBRS Morningstar base rent, leased to investment-grade-rated tenants, such as Pfizer Inc. (Pfizer) and Novartis International AG (Novartis). Pfizer leases 100.0% of the One Portland Street building and 100.0% of the office/laboratory space at the 610 Main Street North building. Pfizer subleases 48.5% of its space at 610 Main Street North, though its current lease at the building extends through December 2031 and Pfizer has reportedly continued to invest significant capital into its space. Novartis leases nearly 180,000 sf of space at the 700 Main Street building to accommodate spillover from its neighboring headquarters. Though the Novartis lease in place per the May 1, 2019, rent roll is scheduled to expire in July 2024, Novartis’ in-place base rent of $55.15 psf is well below the appraiser’s market rent estimate of $87.50 psf.

Both Pfizer and Novartis use their respective spaces at the property to house critical research and development (R&D)
departments focused on using cutting-edge scientific research to pursue potential medical breakthroughs and new drug discoveries. In addition to providing proximity to MIT’s main campus and a highly educated labor force, the collateral offers both Pfizer and Novartis proximity to LabCentral, which leases 32,988 sf of space at the 700 Main Street property and subleases additional space from Pfizer at 610 Main Street North. LabCentral is an office and laboratory incubator space geared toward high-potential life sciences and biotechnology startups, many of which spill over from the neighboring MIT campus. By proximity, Pfizer and Novartis benefit from early exposure to the flourishment of new innovations in the life sciences and biotechnology spaces from startups at LabCentral. The synergistic relationship of tenants at the collateral is further evidenced by the presence of CRISPR Therapeutics AG; Casebia Therapeutics LLP; and KSQ Therapeutics, Inc., all of which sublease space from Pfizer at the 610 Main Street North building and operate collectively within the gene editing and functional genomics industries. The sponsor for this loan is a joint venture between Harrison Street Real Estate Capital LLC (Harrison; 94.5%); The Bulfinch Companies, Inc. (Bulfinch; 0.5%); and MIT (5.0%). Harrison is a leading real estate investment management firm with a current portfolio of approximately $18.0 billion in assets. Harrison has acquired or developed more than 900 properties since its inception in 2006, bringing nationally recognized investment management experience to this transaction. Bulfinch focuses on the acquisition, management, and leasing of commercial properties within the Boston area, offering specialized local expertise to the sponsorship team. MIT is a globally renowned leader in higher education and a crucial anchor to the collateral’s East Cambridge/Kendall Square submarket. Furthermore, as the seller of the collateral’s leasehold interest via this transaction, MIT’s continued interest in the property is indicative of its commitment to the innovative potential of the collateral’s R&D-focused tenancy.

The DBRS Morningstar net cash flow (NCF) derived at issuance was re-analyzed for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The resulting NCF figure was $46.3 million and a cap rate of 6.5% was applied, resulting in a DBRS Morningstar Value of $711.7 million, a variance of 38.5% from the appraised value at issuance of $1.16 billion. The DBRS Morningstar Value implies an LTV of 80.8%, as compared with the LTV on the issuance appraised value of 49.7%. The NCF figure applied as part of the analysis represents a 10.5% variance from the Issuer’s NCF, primarily driven by potential base rent, vacancy, and expense reimbursements.

The cap rate applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for office properties, reflective of the subject’s cash flow volatility, property quality, and market fundamentals. In addition, the 6.5% cap rate applied is substantially above the implied cap rate of 4.5% based on the Issuer’s underwritten NCF and appraised value.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis totaling 7.5% to account for cash flow volatility, property quality, and market fundamentals.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 Morningstar.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology and North American CMBS Surveillance Methodology, which can be found on dbrsmorningstar.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 Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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 Morningstar 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.dbrsmorningstar.com or contact us at [email protected].

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