DBRS Morningstar Downgrades Eight Classes, Changes Trends to Negative on Two Classes of JPMBB Commercial Mortgage Securities Trust 2015-C32
CMBSDBRS, Inc. (DBRS Morningstar) downgraded its ratings on eight classes of Commercial Mortgage Pass-Through Certificates, Series 2015-C32 issued by JPMBB Commercial Mortgage Securities Trust 2015-C32 as follows:
-- Class X-B to AA (low) (sf) from AA (sf)
-- Class B to A (high) (sf) from AA (low) (sf)
-- Class C to CCC (sf) from A (low) (sf)
-- Class EC to CCC (sf) from A (low) (sf)
-- Class D to C (sf) from BBB (low) (sf)
-- Class E to C (sf) from BB (low) (sf)
-- Class F to C (sf) from B (sf)
-- Class G to C (sf) from B (low) (sf)
DBRS Morningstar also confirmed its ratings on the following classes:
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
DBRS Morningstar removed Classes C, D, E, F, G, and EC from Under Review with Negative Implications, where they were placed on August 6, 2020. In addition, DBRS Morningstar discontinued its ratings on Classes X-C and X-D as they reference classes with a CCC (sf) or lower rating. All trends are Stable with the exception of Classes B and X-B, which have Negative trends, and Classes C, D, E, F, G, and EC, which have ratings that do not carry a trend. DBRS Morningstar also designated Classes E, F, and G as having Interest in Arrears because of ongoing shortfalls.
The downgrades and Negative trends are reflective of a loss incurred by the trust since the last review, as well as anticipated losses upon resolution of the transaction’s specially serviced loans, including the three largest loans in the pool.
As of the March 2021 remittance, the pool’s balance had been reduced to $874.5 million from $1.1 billion at issuance, resulting from the payoff of 11 loans and scheduled amortization. Additionally, the trust recorded its first loss in January 2021, when the $25.0 million Hyatt Place Texas Portfolio loan, formerly the 12th-largest loan in the pool, liquidated with a $4.0 million loss.
Ten loans, representing 32.0% of the pool, are with the special servicer and include the three largest loans in the pool: the $70.4 million Hilton Suites Chicago Miracle Mile loan; the $72.0 million Civic Opera Building loan; and the $59.8 million Palmer House Retail Shops loan. These loans account for more than 23% of the current pool balance, and, as part of this analysis, DBRS Morningstar assumed a liquidation scenario for all three loans from the trust and expects significant losses upon their resolutions.
The Hilton Suites Chicago Miracle Mile loan (Prospectus ID#1, 8.1% of the pool) is secured by a 345-room full-service hotel in Chicago’s Magnificent Mile district. The loan fell delinquent ahead of its October 2020 maturity and was transferred to the special servicer. The hotel’s performance had been on a downward trend for the past few years, with the most recent 12-month financials from March 2020 reporting a debt service coverage ratio (DSCR) of 0.79 times (x) and $3.9 million in net cash flow, which represents a 48.5% decline from the issuer’s underwritten level of $7.5 million. Modification discussions have not been successful, and the special servicer is pursuing its legal remedies. While an updated appraisal has not been reported, DBRS Morningstar expects a significant loss to the trust upon resolution.
The Civic Opera Building loan (Prospectus ID#2, 8.2% of the pool) is secured by an office building in Chicago’s West Loop District. The loan was transferred to special servicing in June 2020 for imminent monetary default and, as of the March 2021 remittance, was most recently paid in October 2020. The trust loan is a pari passu portion of a $164.0 million whole loan that was originated in 2015 and split between this transaction and the JPMBB Commercial Mortgage Securities Trust 2015-C31 transaction, which is also rated by DBRS Morningstar. Although the loan’s transfer to special servicing has been attributed to the effects of the Coronavirus Disease (COVID-19) pandemic, the property has reported cash flow declines from issuance for most years since the loan closed, with the most recent year-end figures showing a DSCR of 0.76x, with an occupancy rate of 80.0%. By Q2 2020, the annualized DSCR had fallen to 0.69x and the occupancy rate was at 75.0%. At issuance, the property was 92.0% occupied and the DBRS Morningstar DSCR was 1.06x.
Although the tenancy is quite granular, with the largest tenant representing only 6.9% of the net rentable area since issuance, precipitous tenancy losses have resulted in a sustained low occupancy rate for several years; the building’s age (constructed in 1929) and style bring some inherent challenges for leasing, particularly in this area of Chicago, where a significant amount of new supply has been delivered. Vacancy rates for most submarkets in Chicago were ticking up prior to the coronavirus pandemic, and those trends have recently been exacerbated with a glut of sublease space that has been put on the market in the last year. Given the sustained low coverage ratios and the challenges in leasing up the vacant space and securing renewals for existing tenants, the risk of loss to the trust for this loan has significantly increased from issuance. In the analysis for this review, DBRS Morningstar assumed a liquidation scenario based on a significant haircut to the issuance value, resulting in a loss severity in excess of 40.0%. The special servicer has not provided an updated appraisal, but DBRS Morningstar anticipates that figure will come in well below the issuance valuation of $220.0 million and could suggest an even higher loss severity at resolution.
The third-largest loan, the Palmer House Retail Shops loan, is secured by a 134,536-square-foot mixed-use retail and office property in downtown Chicago. The collateral comprises retail shops, a 166-space parking garage, and a portion of office space within the Palmer House Hilton Hotel. The hotel is not part of the collateral but is owned by an affiliate of the borrower of the subject loan and is also experiencing severe operational difficulties and facing foreclosure. The hotel has been closed since March 2020 because of the coronavirus pandemic and is not accepting reservations before May 20, 2021, according to the hotel’s website. Furthermore, the largest collateral tenant, Ampco System Parking Inc., which operated the parking garage, exercised its early lease termination option in July 2020. The loan fell delinquent and transferred to the special servicer in July 2020. With a receiver now assigned to the property, DBRS Morningstar liquidated the loan from the trust and expects a loss upon resolution.
The Hilton Atlanta Perimeter loan (Prospectus ID#12, 3.1% of the pool) is secured by a 224-room select-service hotel in the Central Perimeter submarket of Atlanta. Cash flow has been trending downward for the past few years and fell to $1.1 million as of June 2020, which is 64% below the issuer’s underwritten figure of $3.1 million. The loan fell delinquent amid the pandemic and could not pay off at the October 2020 scheduled maturity date. The property was reappraised in 2020 and reported a value of $26.6 million, a 38.3% decrease from the appraised value at issuance. The servicer had classified the loan as real estate owned as of the March 2021 remittance, and a loss is anticipated upon resolution.
There are 11 additional loans, representing 16.6% of the pool, on the servicer’s watchlist. These loans are being monitored for various reasons, including low DSCRs or occupancy, tenant rollover risk, and/or pandemic-related forbearance requests.
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.
Classes X-A and X-B are interest-only (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 issuance metrics and all historical surveillance commentary on the DBRS Viewpoint platform.
For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer 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 methodology is North American CMBS Surveillance Methodology (March 6, 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. 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 info@dbrsmorningstar.com.
DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 696-6293
Ratings
ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.