DBRS Morningstar Changes Trend, Confirms Rating on One Class of J.P. Morgan Chase Commercial Mortgage Securities Trust 2017-FL11
CMBSDBRS, Inc. (DBRS Morningstar) changed the trend to Stable from Negative and confirmed the rating of BB (low) (sf) on Class E of the Commercial Mortgage Pass-Through Certificates, Series 2017-FL11 issued by J.P. Morgan Chase Commercial Mortgage Securities Trust 2017-FL11.
The trend change reflects the significant collateral reduction from last review, considering the former largest loan in the pool (Prospectus ID#5; Hyatt Regency Riverfront Jacksonville) was repaid with the September 2022 remittance. As of the November 2022 remittance, only one of the original six loans remains in the trust with an outstanding principal balance of $42.5 million, representing a collateral reduction of 91.8% since issuance. Despite the considerable collateral reduction and increased credit support to Class E, DBRS Morningstar confirmed its rating, given the continued concerns about the only loan remaining in the pool, which is currently in special servicing. The collateral for the loan is an office property in Houston that has exhibited performance declines and is in a soft submarket, as further detailed below.
The One Westchase Center loan is secured by a 12-story Class A office property and an adjacent six-story parking garage in the Westchase submarket of Houston. The loan was previously in special servicing in June 2020 after the borrower requested relief as a result of the effects of the Coronavirus Disease pandemic. The mezzanine lender foreclosed on its interest in the borrower, forming a new borrowing entity on the senior note via a newly created joint venture with Nitya Capital. The mezzanine lender (OWS Commercial Mezz) retained a 25% stake in the new borrowing entity with the remaining 75% interest held by Nitya Capital.
The loan transferred back to special servicing in October 2022 for maturity default as the borrower was unsuccessful in refinancing the loan prior to the fully-extended maturity date. However, a loan modification was executed with a new maturity date in April 2023, with a six-month extension option to October 2023. Other terms of the agreement include an increase in the interest rate, the continuation of cash management, and a $4.5 million principal paydown to be applied at closing. The paydown was to be funded with $3.2 million of new equity contributed by the borrower and another $1.3 million from existing reserves. The paydown was reflected with the November 2022 remittance report and, according to the servicer’s loan level reserve report, $3.7 million is currently held in other reserves.
According to the September 2022 appraisal, the subject property was valued at $50.2 million, a significant decline from the issuance value of $85.2 million but above the outstanding loan amount of $42.5 million. Based on the most recent financials, the loan reported net cash flow of $2.7 million for the trailing 12-month period ended March 31, 2022, compared with $3.1 million for YE2021, $1.9 million for YE2020, and $4.0 million for YE2019. According to the September 2022 appraisal, the occupancy rate at the property has increased to 77.5% from 71.2% in June 2022 and 69.7% in December 2021; however, it is still below the issuance occupancy rate of 85.9%. There is tenant rollover risk as tenants representing 14.5% of the net rentable area have leases scheduled to expire in the next 12 months. In addition, Reis reports the Westheimer/Westchase office submarket continues to be challenged by persistently high vacancy rates, with the Q3 2022 rate at 26.0% compared with the Q3 2021 rate at 26.8%.
The DBRS Morningstar rating assigned to Class E is lower than the results implied by the loan-to-value sizing benchmarks. While Class E could be protected from significant principal loss given the September 2022 value of $50.2 million against the outstanding loan balance of $42.5 million, the variance is warranted given that DBRS Morningstar recognizes the elevated refinance risk in the face of current market dynamics and investor appetite for Houston office properties, compounded by the subject’s performance declining from expectations at issuance.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance (ESG) factors that had a significant or relevant effect on the credit analysis.
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/396929 (May 17, 2022).
All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.
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Notes:
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the North American CMBS Surveillance Methodology (October 3, 2022), 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.
The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.
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.
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