DBRS Morningstar Confirms Ratings on J.P. Morgan Chase Commercial Mortgage Securities Trust 2017-FL11, Negative Trends; Removes from Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) confirmed the ratings on the following classes of the Commercial Mortgage Pass-Through Certificates, Series 2017-FL11 issued by J.P. Morgan Chase Commercial Mortgage Securities Trust 2017-FL11
(the Issuer):

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

All trends are Negative because the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic. The ratings have been removed from Under Review with Negative Implications, where they were placed on March 27, 2020.

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 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.

As it reviewed the ratings for 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 stress 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
At issuance, the subject transaction was backed by seven floating-rate mortgages secured by 20 commercial properties with a total mortgage loan amount of $519.1 million, which were divided up into two collateral groups. Collateral Group A consists of six loans secured by 19 commercial properties with a collective mortgage balance of $496.6 million, and Collateral Group B represents a $22.5 million junior companion loan secured by the Park Hyatt Beaver Creek. The pooled certificates in this transaction (Classes A, B, C, D, E, F, X-CP, X-EXT, and VRR Interest) are backed by Collateral Group A, while the nonpooled certificates (Classes BC and BC-RR Interest) are backed by Collateral Group B. The DBRS Morningstar analysis of this transaction incorporates only Collateral Group A, and the nonpooled certificates are not rated by DBRS Morningstar.

As of the September 2020 remittance, five of the original six loans remain in the trust with an aggregate principal balance $383.5 million, representing a collateral reduction of 22.8% since issuance because of one loan repayment. All remaining loans in the trust are structured with two-year terms and three one-year extension options. The loans are all secured by properties located in core suburban markets. In addition to loan size concentration, the transaction has a high concentration of hotel exposure (44.2% of the current trust balance) as well as exposure to a loan secured by a Houston office property (23.2% of the current trust balance); the performance declines that some of these loans were already experiencing prior to the coronavirus have since exacerbated.

There are currently three loans on the servicer’s watchlist (70.4% of the current trust balance): Cooper Hotel Portfolio (Prospectus ID#2; 27.2% of the trust balance), The Centre at Purchase (Prospectus ID#3; 24.2% of the trust balance), and Bank of America Campus (Prospectus ID#4; 19.0% of the trust balance). The Cooper Hotel Portfolio loan has had significant performance declines from issuance. The other two loans have upcoming loan maturities. The borrower for the Centre at Purchase loan has requested its extension, which is currently in process with the servicer. The requested maturity extension for the Bank of America Campus loan has been executed, with the maturity date now in August 2021 and the loan is expected to be removed the servicer’s watchlist in the near term.

As of the trailing 12-month June 2020 reporting, the Cooper Hotel Portfolio loan’s in-place debt service coverage ratio (DSCR) was reported at 0.31 times (x) a significant decline from the YE2019 in-place DSCR of 1.52x and the DBRS Morningstar DSCR at issuance of 2.85x. The loan was set to mature in September 2020 and is required to meet certain debt yield requirements in order to exercise the option. Given the recent performance figures, it seems unlikely the threshold will be met, which could require a loan modification or other action by the servicer in the event of a maturity default. At issuance, DBRS Morningstar assigned an investment-grade shadow rating to this loan, reflective of the strong credit characteristics; however, the loan has experienced sustained cash flow declines since issuance that were primarily attributed to rising expenses and disruption to bookings as hotel renovations were completed at various points in the first few years of the loan term. Given the diminished outlook for improvement amid the effects of the pandemic, DBRS Morningstar removed the shadow rating with this review.

In addition to the increased risks with the Cooper Hotel Portfolio, there are two remaining collateral loans in special servicing (Prospectus ID#5, Hyatt Regency Jacksonville Riverfront (Jacksonville), 17.0% of the trust balance; and Prospectus ID#6, One Westchase Center, 12.3% of the trust balance). The Jacksonville loan was transferred in August 2020 when the borrower requested debt relief ahead of the scheduled September 2020 maturity date. The loan remains current as of the September 2020 remittance, and the special servicer continues to work with the borrower to determine a workout strategy. The hotel was closed at issuance because of damage sustained during Hurricane Irma. The last few years of reported revenue per available room figures showed strides in getting occupancy and room rates back to pre-hurricane levels; however, the impact to travel amid the pandemic has undoubtedly stunted those trends. The borrower’s commitment to keeping the loan current and proactively working with the servicer to resolve the outstanding issues are considered positive signs for the near- to medium-term outlook, and DBRS Morningstar will monitor the loan for developments.

One Westchase Center was transferred to the special servicer in May 2020 for an anticipated maturity default at the scheduled October 2020 maturity date. The collateral for the loan is a Class A office property in Houston which has historically struggled with low rental rates relative to market and rent abatements that have kept in-place cash flows low as compared with the Issuer’s figures from issuance. The special servicer reports that the mezzanine lender is expected to take over the borrower and assume the senior debt, with other loan modifications, including a maturity extension, to be processed in conjunction with those developments.

DBRS Morningstar reanalyzed the net cash flow (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 $44.1 million and DBRS Morningstar applied a cap rate of 9.2%, which resulted in a DBRS Morningstar Value of $479.7 million, a variance of 34.3% from the appraised value of $730.1 million at issuance. The DBRS Morningstar Value implies an LTV of 80.6% compared with the LTV of 52.9% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the middle end of the range of DBRS Morningstar Cap Rate Ranges for lodging and office properties, reflecting the diversification by asset type and the core suburban location of all the properties.

DBRS Morningstar made no qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis.

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 20.6% 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 B and C were lower than those results implied by the LTV sizing benchmarks when MVDs are assumed under the Coronavirus Impact Analysis given the loan-level event risk, particularly as it pertains to the substantial hotel and Houston office concentrations. The trends on these classes are Negative as DBRS Morningstar continues to monitor the evolving economic impact of 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.

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.

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

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