DBRS Morningstar Downgrades Two Classes and Confirms All Other Classes of JPMCC Commercial Mortgage Securities Trust 2016-JP2

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

-- Class E to B (high) (sf) from BB (low) (sf)
-- Class F to CCC (sf) from B (low) (sf)

In addition, DBRS Morningstar confirmed the following ratings:

-- 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)

DBRS Morningstar also changed the trends on Classes C, D, X-C, and E to Stable from Negative and removed the trend on Class F, which is assigned a rating that does not typically carry trends in commercial mortgage-backed securities (CMBS) ratings. All remaining classes carry Stable trends.

The rating downgrades are reflective of DBRS Morningstar’s concerns about the specially serviced loan, 693 Fifth Avenue (Prospectus ID#3; 6.8% of the pool), as well as increased risks for the second-largest loan on the servicer’s watchlist, Hagerstown Premium Outlets (Prospectus ID#9; 3.3% of the pool).

The subject pool has a notable concentration of office properties (24.4% of the outstanding balance). Given the shift in demand for office space following the Coronavirus Disease (COVID-19) pandemic, DBRS Morningstar anticipates upward pressure on vacancy rates in the broader office market, challenging efforts to backfill vacancies and contributing to the larger trend of value declines, particularly for assets in non-core markets and/or those with disadvantages in location, building quality, or amenities offered. In the analysis for this review, loans backed by office and other properties that were showing performance declines from issuance or otherwise exhibiting increased risks from issuance were analyzed with stressed scenarios to increase the expected losses as applicable.

Two office loans on the servicer’s watchlist, 7083 Hollywood Boulevard (Prospectus ID#11; 2.6% of the pool) and 700 17th Street (Prospectus ID#12; 2.4% of the pool), were analyzed with a stressed probability of default (POD) to reflect performance declines driven by occupancy losses for both collateral buildings. According to the financials for the year to date ended September 30, 2022, the debt service coverage ratio (DSCR) for the 7083 Hollywood Boulevard loan was reported at -0.66 times (x) with a 50.4% occupancy rate, while the reported figures for 700 17th Street were 0.05x and 52.3%, respectively. The 700 17th Street loan was also reported less than 30 days delinquent as of the March 2023 remittance. DBRS Morningstar’s stressed analysis for these loans resulted in expected loss figures that were approximately 175% higher than the pool average expected loss.

The rating confirmations and the trend changes for three classes reflect the generally stable performance of the underlying loans, outside of those loans previously mentioned. DBRS Morningstar previously noted its concerns about one of the top 10 loans previously in special servicing, Marriott Atlanta Buckhead (Prospectus ID#4; 5.9% of the pool). The loan was returned to the master servicer as of October 2022 after a loan modification was executed, requiring the borrower to provide approximately $500,000 in new equity to establish reserves and bring the loan current. The underlying hotel’s performance remains depressed, but cash flows are trending up. Given that the DSCR remains below breakeven and revenue per available room (RevPAR) metrics continue to significantly lag the issuance figure, a stressed analysis was applied with the resulting expected loss at approximately 5% over the pool average.

According to the March 2023 remittance, 43 of the original 47 loans remain in the pool with an aggregate principal balance of $845.8 million, representing a collateral reduction of 9.3% since issuance as a result of scheduled loan amortization and loan repayments. Eight loans, representing 18.9% of the pool, are fully defeased. Fourteen loans, representing 27.4% of the pool, are on the servicer’s watchlist for low DSCR and/or occupancy rates.

The specially-serviced 693 Fifth Avenue loan is secured by a mixed-use office and retail property in Midtown Manhattan. The loan has been monitored since the property’s largest retail tenant at issuance, Valentino, which occupied approximately 15.1% of the net rentable area (NRA) and contributed more than 80% of rental income, vacated its space and initiated legal action against the borrower in June 2020. The legal action was an attempt to nullify Valentino’s lease, which was set to expire in 2029. The borrower filed suit to collect the back rents and, according to an April 2022 Real Deal article, Valentino has settled the rent dispute for an undisclosed sum, finalizing its lease termination. Since Valentino’s departure, occupancy has been holding at approximately 51.5% since YE2020, with an average annual rental rate of $57.09 per square foot (psf). However, according to the special servicer, a new retail lease for Burberry Limited (Burberry) has been approved. The improvement in cash flows will be limited, however, as the leased rate of $372 psf for Burberry contrasts starkly with Valentino’s in-place rate at issuance of $1,144 psf and is also notably below the Q4 2022 average asking rent of $615 psf for Manhattan’s retail corridors, according to CBRE.

Although the loan has remained current since Valentino’s exit with the sponsor continuously funding shortfalls, DBRS Morningstar notes that the property was reporting low cash flows because of declining occupancy even prior to the pandemic. The net cash flow for the trailing nine months (T-9) ended September 30, 2022, was reported at -$4.8 million (with a DSCR of -0.31x), down from $274,000 (with a DSCR of 0.02x) at YE2021, and well below the issuance figure of $15.7 million (with a DSCR of 1.55x). Given these factors and the below-market rental rate for Burberry, a stressed scenario was assumed for this loan to increase the expected loss.

The Hagerstown Premium Outlets loan is secured by an open-air retail outlet center in Hagerstown, Maryland, approximately 70 miles northwest of Washington, D.C. The property is owned and operated by Simon Property Group. The loan is on the servicer’s watchlist because of low performance as the occupancy rate has been precipitously declining in recent years, most notably beginning with the loss of Nike Factory Store in 2019 and Wolf’s Furniture in 2020, both anchor stores. As of the September 2022 financials, the property was 42.2% occupied compared with 44.5% at YE2021 and 90.4% at issuance. The DSCR for the T-9 ended September 30, 2022, was reported at 0.64x, compared with the DSCR of 0.90x at YE2021 and the DSCR of 3.20x at issuance. Near-term rollover risk is high, with the second- and third-largest tenants (Banana Republic Factory and The North Face, respectively), included among the tenants representing 14.0% of the NRA that have leases expiring in 2023. Although this loan is current, DBRS Morningstar considered a liquidation scenario given the very low in-place occupancy rate and the related decline in as-is value since issuance. Based on a significant haircut to the issuance value, DBRS Morningstar analyzed a loss severity in excess of 35% for this loan.

At issuance, DBRS Morningstar shadow-rated one loan, The Shops at Crystals (Prospectus ID#6; 5.9% 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 performance of the loan remains consistent with investment-grade characteristics.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/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 (May 17, 2022).

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.

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

The principal methodology is the North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 [email protected].

The rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model v 1.1.0.0
https://www.dbrsmorningstar.com/research/410913

Rating North American CMBS Interest-Only Certificates (December 19, 2022) https://www.dbrsmorningstar.com/research/407577

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022) https://www.dbrsmorningstar.com/research/402646

North American Commercial Mortgage Servicer Rankings (September 8, 2022) https://www.dbrsmorningstar.com/research/402499

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022) https://www.dbrsmorningstar.com/research/402153

Legal Criteria for U.S. Structured Finance (December 17, 2022)
https://www.dbrsmorningstar.com/research/407008

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].