DBRS Morningstar Assigns Provisional Ratings to J.P. Morgan Chase Commercial Mortgage Securities Trust 2021-1440

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Securities to be issued by J.P. Morgan Chase Commercial Mortgage Securities Trust 2021-1440 as follows:

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

All trends are Stable.

The J.P. Morgan Chase Commercial Mortgage Securities Trust 2021-1440 single-asset/single-borrower transaction is collateralized by the borrower’s fee-simple interest in 1440 Broadway, a 740,387-square foot office building with retail components in the Midtown submarket of Manhattan, New York. DBRS Morningstar has a favorable view of the asset given its desirable Midtown Manhattan location and institutional level sponsorship. Built in 1925 and renovated between 1999 and 2001 and again in 2018, the office property consists of 25 stories, with multilevel retail space, within the Midtown West office submarket of Midtown Manhattan, as defined by Reis. The property benefits from its proximate location to Bryant Park, Times Square, Port Authority, and Penn Station as well as Grand Central Terminal. In addition, the 1440 Broadway building offers efficient and flexible floorplates with outdoor terraces that appeal to both large and boutique tenants.

The subject was 93.0% leased as of December 31, 2020; however, there are several concerns with the current tenancy at the building. The property has significant exposure to WeWork as the largest tenant, comprising 40.7% of the net rentable area (NRA). The subject’s second-largest tenant, Macy’s (26.6% of the NRA; lease expiry on January 31, 2024), is currently marketing its space for sublease. The third-largest tenant, Kate Spade (9.1% of the NRA; lease expiry on January 31, 2022), has executed two subleases for the entirety of its space. The subject’s fourth-largest tenant, Mizuho Capital (Mizuho; 5.3% of the NRA; lease expiry on May 31, 2026), is currently dark and is marketing its space for sublease. The subject’s sixth-largest tenant, InnerWorkings (3.1% of the NRA; lease expiry on March 31, 2022), is not open for business as a result of Coronavirus Disease (COVID-19) closures but is current on its rent. Macy’s recently elected to prepay all of its outstanding lease obligations, worth approximately $32.9 million, through the end of its lease term. Kate Spade and Mizuho are both investment-grade rated and current on their rent obligations.

The ongoing coronavirus pandemic continues to pose challenges and risks to virtually all major commercial real estate property types and has created an element of uncertainty around future demand for office space, even in gateway markets that have historically been highly liquid. Despite the disruptions and uncertainty, the collateral has largely been unaffected. Because of the coronavirus pandemic, building tenants are operating at a modified capacity, with a large majority of their employees currently working from home, and are targeting to begin to return to the office as coronavirus-related restrictions are eased. With the exception of Mexicue and Le Café, comprising 0.8% of the NRA, all tenants remain current on their contractual lease obligations as of February 2020. InnerWorkings, Mexicue, and Le Café have requested rent relief, which was denied by the borrower. InnerWorkings, representing 3.1% of the NRA, is current on its rental payments. InnerWorkings is closed because of pandemic and is assumed to be reopening once limitations are lifted. Additionally, Mexicue is reportedly looking to return in spring 2021.

The property has significant exposure to WeWork as the largest tenant, comprising 40.7% of the NRA. Although there is a long-term lease in place through June 2035, the company has shuttered many of its facilities since the outbreak of the coronavirus pandemic, which places WeWork at increased risk in the short term, with significantly reduced revenue.
WeWork utilizes its space at the subject primarily for its WeWork Enterprise model. According to the sponsor, the WeWork space is approximately 92% leased to two publicly traded Fortune 500 tech companies. Additionally, since taking possession of its space in 2019, WeWork has provided $76.6 million of credit support in the form of an approximately $65.7 million guaranty from its parent entity, a $10.9 million letter of credit, and a surety bond equal to approximately six months of rental payments. Additionally, DBRS Morningstar assumed a 50% renewal probability for WeWork, resulting in higher leasing costs in DBRS Morningstar’s net cash flow analysis.

The loan is structured with $30.0 million of upfront reserves, $27.3 million of which will be allocated toward future leasing costs, with the remainder allocated toward future capital expenditure (capex). Additionally, the sponsor will be required to provide $20.6 million of new equity, supported by an equity contribution guarantee, of which $15.3 million will be allocated toward accretive tenant improvement and leasing costs. The loan also features a full cash sweep that commences at loan closing until $20.0 million is collected in an excess cash reserve. Trapped proceeds can be used for approved capex and leasing costs after the initial rollover and capex reserves have been depleted and $20.6 million of future equity contributions are fully invested.

The property benefits from the experienced institutional sponsorship of CIM Group L.P. and QSuper Board. The borrower acquired the property for $520 million in 2017, when it was approximately 50% leased, and brought it up to the 93% leased level as of December 2020. Starting in 2017, the borrower initiated a $20.2 million capital improvement plan, including an extensive lobby renovation and the addition of a roof deck amenity on the 26th floor. The sponsor has plans to continue its planned renovations, including elevator upgrades, facade work, and common area upgrades. As of February 16, 2021, the borrower has approximately $253.2 million of cash equity in the property (including previous leasing costs).

The property is well located within Midtown Manhattan, proximate to area demand drivers such as Bryant Park, Times Square, Port Authority, and Penn Station as well as Grand Central Terminal. Given the property’s desirable location, the appraiser's concluded land value was approximately $215 million, which covers 53.9% of the first-mortgage loan balance.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

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

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2020) 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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

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

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