DBRS Morningstar Changes Trends on Seven Classes, Confirms All Classes of JPMCC Commercial Mortgage Securities Trust 2016-JP2

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-JP2 issued by JPMCC Commercial Mortgage Securities Trust 2016-JP2:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class X-C at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

DBRS Morningstar changed the trends on Classes B, C, D, E, F, X-B, and X-C to Negative from Stable to account for increased risk associated with two of the pool’s 10 largest loans, one of which is specially serviced. All other trends are Stable.

The rating confirmations reflect the otherwise overall stable performance of the transaction since issuance, when the transaction consisted of 47 fixed-rate loans secured by 78 commercial and multifamily properties with an initial trust balance of $939.2 million. As of the June 2021 remittance report, 45 loans remain in the transaction with a current trust balance of $882.9 million, representing a collateral reduction of 6.0% since issuance resulting from amortization and the repayment of two loans.

The transaction is concentrated by property type as 10 loans, representing 35.8% of the current trust balance, are secured by office collateral while the second-largest concentration comprises 10 loans secured by retail collateral, representing 26.0% of the current trust balance. The transaction benefits from three defeased loans, including the second-largest loan in the pool, which make up 11.0% of the current trust balance.

As of the June 2021 remittance, one loan, representing 3.3% of the pool, is in special servicing. Marriott Atlanta Buckhead (Prospectus ID#4, 5.5% of the pool) is secured by a full-service hotel consisting of 349 rooms in Atlanta’s Buckhead neighborhood. The loan transferred to special servicing in February 2021 for payment default after the borrower requested relief related to the Coronavirus Disease (COVID-19) pandemic. The borrower submitted an initial proposal that was rejected and has since submitted a revised proposal, which is currently under review while the special servicer dual-tracks a foreclosure. In addition to the pandemic’s effects on full-service hotels in general, the property was likely affected particularly acutely as its largest demand generator since issuance has been the Meeting & Group segment, which may take a bit longer to rebound than the Leisure segment. In addition, there have been recent headlines regarding a stark increase in crime in Buckhead in 2021, which may make the property a less attractive option for travelers. As of the June 2021 remittance, the loan reported an immaterial reserve balance, which could limit options when contemplating a workout.

The largest loan in special servicing during the previous ratings review, Hagerstown Premium Outlets (Prospectus ID#9, 3.3% of the pool), transferred back to the master servicer in May 2021 after the loan received temporary relief and deferred principal payments from October 2020 through December 2020. Despite its return to the master servicer, the loan is still at an increased risk given the property’s precipitous decline in occupancy in recent years, falling to 51% as of YE2020 from 78% at YE2018. The drop in occupancy was in large part because of the departure of the property’s largest tenant, Wolf Furniture (13.8% of the net rentable area (NRA)), in Q1 2020 after its parent company filed for bankruptcy.

The largest loan on the servicer’s watchlist, 693 Fifth Avenue (Prospectus ID#3, 6.8% of the pool), is secured by a mixed-use office and retail property in Midtown Manhattan. The property had been approximately 66% occupied since issuance until recently, with more than 80% of rental income coming from the property’s sole retail tenant, Valentino (15.1% of NRA; lease expires July 2029). Valentino took legal action against the borrower in June 2020 in order to void its lease ahead of its expiry date, citing business interruption as a result of the coronavirus pandemic, and vacated its space in December 2020. In February 2021, a court rejected Valentino's lawsuit to exit the lease, which prompted Valentino to file an appeal. The borrower has simultaneously filed suit to collect back rents from Valentino. The property’s physical occupancy decreased to its current level of 36% after JDS Development Group (12% of gross leasable area) vacated in April 2021. Given the risks surrounding these properties, DBRS Morningstar analyzed all three of the above loans with elevated probabilities of default for this review.

At issuance, DBRS Morningstar shadow-rated one loan, The Shops at Crystals (Prospectus ID#6, 5.7% of the pool), as investment grade. This assessment was supported by the loan’s above-average property quality and strong sponsorship. With this review, DBRS Morningstar confirms that the characteristics of the loan remain consistent with the investment-grade shadow rating.

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.

DBRS Morningstar materially deviated from its North American CMBS Insight Model when determining the ratings assigned to Class B as the quantitative results suggested a lower rating. The material deviation is warranted due to uncertain loan level event risk. The most notable uncertainties surround two top 10 loans in Marriott Atlanta Buckhead, which is in special servicing, and Hagerstown Premium Outlets, which was previously with the special servicer and is showing performance declines from issuance. DBRS Morningstar assumed stressed scenarios in the model for both of these loans that suggested increased pressure on the Class B rating, but given the Hagerstown loan is not in default as of the July 2021 remittance and the sponsor appears committed to the property and loan at this stage, the rating confirmation but Negative trend for Class B was supported.

Classes X-A, X-B, and X-C 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.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

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.

DBRS Morningstar notes that this press release was amended on September 7, 2021, to add material deviation language to its rating on Class B.

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

The principal methodology is North American CMBS Surveillance Methodology (March 26, 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. 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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