DBRS Morningstar Confirms Ratings on All Classes of JPMCC Commercial Mortgage Securities Trust 2017-JP6

DBRS Limited (DBRS Morningstar) confirmed the following ratings on the Commercial Mortgage Pass-Through Certificates, Series 2017-JP6 issued by JPMCC Commercial Mortgage Securities Trust 2017-JP6:

-- 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)
-- Class B at AA (high) (sf)
-- Class X-B at AA (low) (sf)
-- Class C at A (high) (sf)
-- Class D at A (sf)
-- Class E-RR at BBB (sf)
-- Class F-RR at BB (sf)
-- Class G-RR at B (high) (sf)

All trends are Stable.

The rating confirmations reflect the pool performance that generally remains in line with DBRS Morningstar’s expectations since the last rating action. Bond-level credit enhancement continues to support the ratings despite ongoing concerns with a select number of assets, which are further detailed below.

As of the March 2023 remittance, 32 of the original 48 loans remain in the pool with an aggregate principal balance of $586.6 million, which represents a collateral reduction of 25.4% since issuance following scheduled loan amortization and repayment. Nine loans, representing 20.2% of the total pool balance, are on the servicer’s watchlist. Four of the watchlist loans (11.8% of the pool) are secured by office properties, another three by retail properties (5.5% of the pool), while the remaining two are secured by mixed-use and hotel properties (0.6% and 2.3% of the pool, respectively).

Given the shift in demand for office space because of the Coronavirus Disease (COVID-19) pandemic, DBRS Morningstar expects higher vacancy rates and difficulties backfilling space, especially for Class B/C properties in less desirable markets. Although the pool’s office concentration is high, representing 55.4% of the overall trust balance, reported credit metrics remain generally healthy. The weighted-average occupancy for pooled office properties is 90.3% as of the most recent reporting, and the weighted-average debt service coverage ratio (DSCR) was 2.36 times (x) for the YE2021. Despite this, DBRS Morningstar remains cautious about the high office concentration in the pool, especially given nine of the 11 underlying office properties are in suburban markets. Therefore, DBRS Morningstar has increased the probability of default and applied stressed loan-to-value ratios (LTVs) in certain instances.

The largest loan in the pool, 245 Park Avenue (Prospectus ID#1, 16.7% of the pool), is secured by a high-rise Class A office tower in Midtown Manhattan. The loan was recently returned to the master servicer following a loan assumption. It previously transferred to special servicing in November 2021 after the original sponsor (PWM Property Management LLC, an affiliate of HNA Group Co.) filed for Chapter 11 bankruptcy. According to servicer documents, SL Green Realty Corp. purchased the property and assumed the debt in late 2022. There had been occupancy declines prior to this, specifically with major tenant Major League Baseball (MLB; previously 12.7% of the net rentable area (NRA)) vacating in January 2020 prior to its October 2022 lease expiration and the subsequent challenges in backfilling the space. DBRS Morningstar has requested the most recent rent roll but has not received it yet. The property was 79% occupied as of December 2022, down from 83% at YE2021 and 93% at YE2020, according to servicer reporting. Rollover risk was a primary concern throughout 2022, with JP Morgan’s lease (45.4% of NRA) and MLB’s lease (12.7% of NRA) both expiring in October 2022. The sponsor website suggests 112,000 square feet of space in total is currently available for lease, representing 6.5% of the NRA, with approximately 4.0% of the NRA scheduled to become available throughout 2023. DBRS Morningstar did not apply an LTV stress to this loan given the new sponsor’s ability to backfill vacant space and strong experience. DBRS Morningstar expects performance to continue improving as the remaining space is backfilled.

The largest loan on the watchlist, Bingham Office Center (Prospectus ID#6, 4.8% of the pool), is secured by a Class B low-rise office complex in Bingham Farms, Michigan. The servicer added the loan to its watchlist in February 2022 for a low DSCR because of the departure of the largest tenant, Comcast Corporation (14.0% of NRA), in August 2019, which triggered a cash flow sweep. Physical occupancy declined to 70.0% at the time, although the borrower has signed 42 new tenants, which have signed new leases or lease extensions since Q4 2019. Occupancy has bounced back to approximately 80.0% as of the June 2022 rent roll. Despite leasing activity, cash flow and DSCR have been in year-over-year decline since issuance. The annualized NCF for the trailing six months ended June 2022 was $2.28 million (a DSCR of 1.25x), compared with YE2020 at $3.05 million (a DSCR of 1.67x) and the issuance NCF of $3.65 million (a DSCR of 1.99x). The decline in cash flows can be attributed to a consistent decline in base rents. In its analysis, DBRS Morningstar applied a stressed LTV to this loan to reflect rollover concerns and potential for further cash flow decline. The resulting expected loss for this loan is 250.0% higher than the pool-level expected loss.

The second-largest loan in the pool is 211 Main Street (Prospective ID#2, 11.1% of the pool). It is backed by a Class A office tower in San Francisco, which has been 100.0% occupied by Charles Schwab since issuance. Although the recent collapse of Silicon Valley Bank resulted in financial turmoil for many financial institutions, Charles Schwab’s financial position remains well defended given its access to cash and capital and recent influx of deposits as former clients of troubled banks transfer their assets to large brokerages. Although DBRS Morningstar does not believe Charles Schwab is at risk of defaulting on its lease, high vacancy rates in downtown San Francisco and the loan’s upcoming maturity in April 2024 post increased maturity risk. To reflect this, DBRS Morningstar has applied a stressed LTV adjustment in its analysis for this loan.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no environmental, social, and governance 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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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.

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

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023), 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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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