DBRS Morningstar Finalizes Provisional Ratings on J.P. Morgan Chase Commercial Mortgage Securities Trust 2021-MHC

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Securities 2021-MHC issued by J.P. Morgan Chase Commercial Mortgage Securities Trust 2021-MHC (JPMCC 2021-MHC):

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AA (high) (sf)
-- Class X-CP at A (high) (sf)
-- Class X-EXT at A (high) (sf)
-- Class D at A (sf)
-- Class E at BB (sf)

All trends are Stable.

The JPMCC 2021-MHC transaction is a single-asset/single-borrower transaction collateralized by the borrower’s fee-simple interest in of 93 manufactured housing communities (MHCs) containing 11,129 pads and one self-storage property across 13 states. Of the 11,129 total pads, 10,897 are manufactured housing pads, 194 are recreational vehicle (RV) pads, and 38 are site-built homes. Additionally, the collateral includes the indirect equity interest in the entities that own 1,504 community-owned home (COH) units, which were predominately acquired by the seller in recent years in order to increase occupancy across the portfolio. The $488.6 million first-mortgage loan, $40.0 million mezzanine loan, and $258.8 million of sponsor equity were used to acquire the portfolio for $743.3 million, fund an earn-out reserve of $11.0 million, finance an immediate repair upfront reserve of $1.0 million, and cover closing costs of $32.2 million.

The sponsor for the transaction, Horizon Land Co., contributed a significant amount of equity, representing 34.8% of the $743.3 million purchase price. DBRS Morningstar generally views acquisition loans with significant amounts of cash equity more favorably, given the stronger alignment of economic incentives when compared with cash-out financings. The sponsor owned over 150 MHC parks containing approximately 24,000 pads across the United States in 2020, and is using data from its existing portfolio to identify cost-saving measures across the portfolio. The portfolio operated at an expense ratio of 48.8% for the trailing 12-month period ended February 28, 2021, and the sponsor is projecting the expense ratio to decrease to 45.6% for the YE2021 and 44.1% for the YE2022. DBRS Morningstar concluded to an expense ratio of 49.1% in the DBRS Morningstar Stabilized Net Cash Flow, which is well above the weighted-average (WA) Issuer expense ratio of 40.2% for 382 loans secured by MHC properties in Agency K-series transactions from 2015 through 2019. The sponsor believes management can lower expenses by identifying water leakage at certain properties, implementing lower insurance premiums, and reduce staffing by consolidating responsibilities. The portfolio will likely benefit from the sponsor’s experience with cost-saving measures in its existing portfolios.

MHC properties have historically performed well during the past economic recessions relative to other property types. The portfolio exhibited a collection rate of 97.8% in 2020 despite the Coronavirus Disease (COVID-19) pandemic. Zoning designations for new mobile home parks in the Unites States are generally more difficult to obtain compared with zoning for new single-family homes and multifamily buildings. MHC properties generally provide more affordable housing options for people in the portfolio’s markets relative to home ownership and multifamily and single-family home rental rates.

The transaction benefits from additional cash flow stability attributable to multiple property pooling. The portfolio has a property Herfindahl score of 49.98 by allocated loan amount (ALA), which provides favorable diversification of cash flow when compared with a single asset. The portfolio exhibits a WA by ALA DBRS Morningstar Market Rank of 2.4, which indicates the collateral is predominately located in tertiary markets. According to the appraisals, in-place base rents across the portfolio are approximately 5.1% below market. The previous sponsor was able to raise in-place rental rates for MHC, RV, and site-built sites to $450 per site in February 2021 from $423 per site in February 2020. MHC pad renters tend to have higher renewal probabilities even with annual rental rate increases than traditional multifamily renters, as the cost to move manufactured homes deters pad lessees from moving manufactured homes to competitive MHCs. The portfolio may face a decline in collections following securitization, as the prior sponsor increased rental rates this past year and the U.S. federal government has provided eligible recipients up to $3,200 per adult and up to $2,500 per child through the Coronavirus Aid, Relief, and Economic Security Act; Consolidated Appropriations Act, 2021; and the American Rescue Plan Act of 2021, respectively, since the beginning of the coronavirus pandemic.

The DBRS Issuance Morningstar Loan-to-Value (LTV) on the trust loan and the total debt stack are significant at 119.77% and 129.58%, respectively. The high leverage point, combined with the lack of amortization, could potentially result in elevated refinance risk and/or loss severities in an event of default. While the appraisal’s portfolio appraised LTV of 64.1% appears low for a portfolio secured by MHC properties, the appraisal aggregate individual portfolio, excluding the portfolio premium, COH value, and excess land value, is equal to a more moderate LTV of 74.8%.

The collateral includes the indirect equity interest in the entities that own 1,504 COH, which the sponsor plans to sell over the course of the loan. The sale of the COH properties will not reduce the senior loan amount. DBRS Morningstar did not give credit in its NCF analysis to COH revenue, but did allocate a 0.25% LTV hurdle threshold credit associated with the value of the COH collateral.

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-CP and X-EXT 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.

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.

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.

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 North American Single-Asset/Single-Borrower Ratings Methodology (March 2, 2021), 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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