DBRS Morningstar Assigns Ratings to J.P. Morgan Chase Commercial Mortgage Securities Trust 2016-WIKI, Places Certain Ratings Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2016-WIKI (the Certificates) issued by J.P. Morgan Chase Commercial Mortgage Securities Trust 2016-WIKI as follows:

-- Class A at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class X-B at A (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)

The trends on Classes A, X-A, B, X-B, C, and D are Negative because the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic.

DBRS Morningstar also placed Classes E and F Under Review with Negative Implications, given the negative impact of the coronavirus on the underlying collateral.

These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about October 7, 2020. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

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, at www.dbrsmorningstar.com. On March 27, 2020, DBRS Morningstar placed the ratings on its outstanding SASB transactions secured by hospitality properties Under Review with Negative Implications while MCR placed the ratings on its outstanding SASB transactions secured by hospitality properties Under Review Negative as the global shelter-in-place and travel restrictions related to the coronavirus have had an extreme impact on the short-term performance of this asset class. For further information on these rating actions, please see the DBRS Morningstar press release dated March 27, 2020, at www.dbrsmorningstar.com and the MCR press release dated March 27, 2020, at www.morningstarcreditratings.com.

To assign ratings to this transaction, DBRS Morningstar considered both the impact of the updated NA SASB Methodology and its scenarios attributable to the ongoing coronavirus pandemic on the ratings.

Because of the coronavirus’ significant impact on hospitality performance, DBRS Morningstar first considered the application of the updated NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology” to arrive at a baseline result, which incorporated qualitative assumptions, capitalization rates, and loan-to-value (LTV) ratio sizing benchmark quality/volatility adjustments and excluded any potential changes in current or future expected asset performance resulting from the coronavirus.

DBRS Morningstar then overlaid scenarios incorporating market value declines (MVDs) consistent with the projections in its “Global Macroeconomic Scenarios: September Update” published on September 10, 2020, on top of the baseline result to determine the impact of coronavirus-related changes in asset performance on the subject transaction on a tranche-by-tranche basis. For more information on these scenarios, please refer to the Coronavirus Impact Analysis section of this document. The global macroeconomic scenarios include a moderate decline of 15% for all commercial real estate (CRE), which acts as an average for all CRE property types. However, DBRS Morningstar expects a higher stress for hospitality properties, ranging from 25% to 45% based on the type of demand segmentation and asset location, and expects corporate demand and remote fly-to locations to be at the higher end of the value decline.

LOAN/PROPERTY OVERVIEW
The Certificates are backed by a single five-year, fixed-rate, interest-only (IO) first-lien mortgage loan of $400.0 million on the oceanfront Hyatt Regency Waikiki Beach Resort and Spa in Honolulu on the island of Oahu, Hawaii. In addition to the loan, $407.2 million of sponsor cash equity facilitated the acquisition of the hotel for $780.0 million plus upfront reserves and closing costs. The reserves included a $20.0 million ground lease reserve and a $13.0 million retail capital expenditure reserve. Additional financing includes a $145.0 million mezzanine loan.

The loan is secured by the leasehold interest in the two-building, 40-storey, 1,230-room luxury beachfront resort hotel offering views of Waikiki Beach, Diamond Head State Monument, and downtown Honolulu. The hotel was developed in 1976 and the former sponsor completed a $110.5 million renovation between 2014 and 2015 prior to the sale. The hotel sits on four land parcels subject to ground leases that expire in December 2087. Leasehold ownership is the most common ownership structure for most commercial buildings in Hawaii with a limited number of exceptions. The hotel also features three restaurants, meeting and event spaces, a fitness centre and spa, an outdoor pool, as well as a 362-space parking garage and a ballroom in the adjacent convention centre building, which is also part of the collateral. The hotel features a retail component in the Pualeilani Atrium Shops located on the first three floors of the hotel and the first story of the convention centre. The retail shops provide approximately one-quarter of the collateral’s net cash flow (NCF).

The sponsor is Hyeon Joo Park, the founder of Mirae Asset Management, LLC, which is an affiliate of Mirae Asset Global Investments Co., Ltd., an independent financial services group based in Seoul, South Korea, that was founded in 1997. As of June 2019, the company reported real estate investments of $13.9 billion, including other luxury hotels in Hawaii, San Francisco, Seoul, and Sydney. Hyatt Hotels Corporation manages the hotel under an agreement that expires in 2062.

The hotel concentrates on the leisure/transient demand segment of the travel industry with 87% of hotel guests from that segment as of the trailing 12-month (T-12) period ended August 31, 2016. Hotel performance prior to issuance showed occupancies in the low-90% range, in line with the competitive set of hotels from 2012 to 2016 with exceptions for the large renovations in 2014 and 2015. In 2016, competitors’ average daily rates (ADRs) were slowly increasing to $270 from $260. The Hyatt Regency Waikiki Beach Resort and Spa was also approaching this level following renovations. For the T-12 period ended February 29, 2020, Smith Travel Research reported an occupancy of 90.4%, ADR of $275, and a revenue per available room penetration of 104.6% for the subject property.

The hotel’s financial performance has suffered in the past three years, resulting in a 26.6% decline in net operating income since issuance, primarily driven by spikes in real estate taxes and franchise fees as well as significant declines in other revenue. The current year presented more challenges with the coronavirus pandemic lockdown beginning in mid-March 2020. The governor responded to the virus by closing the island’s tourism-related industry and has now further delayed the reopening date for this industry to October 2020 from September 2020.

On March 20, 2020, the borrower requested coronavirus relief from the master servicer, Midland Loan Services Inc. (a division of PNC Bank, N.A.), in the form of a debt service deferral and waiver of furniture, fixtures, and equipment payments through the end of 2020. The master servicer did not accommodate the request and the loan transferred to special servicing April 2, 2020, for imminent default. Debt service payments were not covered beginning in April 2020; however, a three-month forbearance agreement was executed ending on July 31, 2020. The hotel will be accepting room reservations for stays from October 15, 2020, and beyond. All guests and employees will be subject to precautionary measures and safety procedures.

DBRS Morningstar reanalyzed the NCF derived at issuance 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 $36.8 million and DBRS Morningstar applied a cap rate of 9.50%, which resulted in a DBRS Morningstar Value of $387.6 million, a variance of 50.4% from the appraised value of $782.0 million at issuance. The DBRS Morningstar Value implies an LTV of 103.2% compared with the LTV of 51.1% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is in the middle of the range of DBRS Morningstar Cap Rate Ranges for lodging properties. The excellent oceanfront location in a market with high barriers to entry would typically place the cap rate toward the lower end of the range, but the leasehold nature of the collateral raised the cap rate to the middle of the range.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totalling 3.0% to account for property quality and market fundamentals.

CORONAVIRUS IMPACT ANALYSIS
DBRS Morningstar overlaid various scenarios incorporating MVDs consistent with the projections in the “Global Macroeconomic Scenarios: September Update” (https://www.dbrsmorningstar.com/research/366542) to estimate the impact of coronavirus-related changes in asset performance on a tranche-by-tranche basis for the subject transaction. The scenarios included subjecting the most recent appraised collateral value to generalized CRE asset value decline projections with an assumption of approximately 45% under the moderate scenario. In cases where the rated debt exceeded the scenario value, DBRS Morningstar assumed that a principal writedown had occurred to account for the difference. Because of the reverse-sequential allocation of losses in commercial mortgage-backed security (CMBS) transactions, DBRS Morningstar’s analysis considered the most subordinate certificate first and, if a complete principal writedown of the certificate had occurred during the scenario, DBRS Morningstar repeated the analysis for the second-most subordinate certificate and so on until the rated debt no longer exceeded the scenario value.

Under the moderate scenario, the cumulative rated debt was insulated from loss.

The DBRS Morningstar ratings assigned to Classes E and F vary by three of more notches from the results implied by the LTV sizing benchmarks when MVDs are assumed under the Coronavirus Impact Analysis. These classes are Under Review with Negative Implications as DBRS Morningstar continues to monitor the evolving economic impact of the coronavirus-induced stress on the transaction.

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 (March 1, 2020) and North American CMBS Surveillance Methodology (March 6, 2020), which can be found on www.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 www.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 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 [email protected].

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

DBRS Morningstar’s North American CMBS analytical team will continue to monitor the transaction to evaluate the increased risk factors related to the coronavirus pandemic. As information (e.g., updated property-level financials, Smith Travel Research Reports, new valuations for specially serviced loans, and workout and/or modification specifics, if applicable) becomes available, DBRS Morningstar will address the Under Review with Negative Implications rating actions over the near to moderate term. DBRS Morningstar typically endeavors to resolve an Under Review rating action within 90 days, but the circumstances surrounding these rating actions (i.e., the unknown length of the pandemic-related downturn) may result in a prolonged resolution period.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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