DBRS Morningstar Downgrades Ratings on Five Classes of JPMCC Commercial Mortgage Securities Trust 2015-JP1, Changes Trends on Six Classes to Negative from Stable

DBRS Limited (DBRS Morningstar) downgraded its ratings on five classes of the Commercial Mortgage Pass-Through Certificates, Series 2015-JP1 issued by JPMCC Commercial Mortgage Securities Trust 2015-JP1 as follows:

-- Class X-D to BBB (high) (sf) from A (low) (sf)
-- Class D to BBB (sf) from BBB (high) (sf)
-- Class X-E to BB (high) (sf) to BBB (high) (sf)
-- Class E to BB (sf) from BBB (sf)
-- Class F to CCC (sf) from B (low) (sf)

The following classes were confirmed:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (high) (sf)
-- Class B at AA (sf)
-- Class X-C at A (high) (sf)
-- Class C at A (sf)
-- Class G at CCC (sf)

DBR Morningstar also changed the trends on Classes C, X-C, D, X-D, E and X-E to Negative from Stable. Classes F and G have commercial mortgage-backed security (CMBS) ratings that do not carry trends. All other trends are Stable.

The rating actions reflect DBRS Morningstar’s increased loss expectations for the pool since the last rating action, primarily driven by the three cross-collateralized/cross-defaulted Franklin Ridge loans (Prospectus ID#13, #14, and #15; theFranklin Ridge Loans), which have been listed for sale and are expected to incur loss upon resolution. To date, four loans have been liquidated from the trust with a cumulative realized loss of approximately $34.0 million. In its analysis for this review, DBRS Morningstar liquidated the Franklin Ridge loans from the trust, as further described below, resulting in an implied loss of more than $6.5 million. Based on these results, the balance of the nonrated Class NR would be written down by nearly 93.0%, significantly eroding the transaction’s credit support, particularly towards the bottom of the capital stack.

The Franklin Ridge loans (totaling 3.0% of the current trust balance) are secured by a total of 133,869 square feet (sf) of medical office space across three buildings in White Marsh, Maryland, about 11 miles east of Baltimore. The loans were transferred to the special servicer in February 2021 because of payment default following the departure of major tenant, John Hopkins University (48.9% of portfolio net rentable area (NRA)), upon lease expiration in December 2020. The tenant was the sole occupant of the building at 9910 Franklin and occupied additional space at both 9900 and 9920 Franklin. The combined occupancy for the three properties is 52.2% per the December 2022 rent rolls, up from 41.3% in September 2021. The borrower’s initial modification request was rejected, and negotiations have since stalled as the borrower has reportedly been resistant to funding any capital to re-tenant the vacancy. According to the servicer, cash receipts from the only cash-flowing property at 9920 Franklin are lock-boxed and have been applied to principal and interest advances and also used to fund essential services at the properties. A receiver was appointed in February 2022.

Although occupancy has improved since the departure of Johns Hopkins University, for tenants that were paying rent, rental rates have fallen from $22.37 per sf (psf) in September 2021 to $20.20 psf as of the December 2022 rent roll. In-place rents continue to lag the market rate, which is reported to be $21.90 psf as of Q4 2022, according to Reis. Benjamin John LLC (7.5% of portfolio NRA) recently signed a lease beginning in October 2022 at 9900 Franklin through June 2033; however, rental rates were not provided to DBRS Morningstar. During the next 12 months, three tenants, representing 20.6% of the portfolio NRA, have leases scheduled to expire, including two tenants at 9920 Franklin, representing 35.8% of the property’s NRA.

Per the August 2022 appraisals, the portfolio was valued at $16.0 million combined, reflecting a loan-to-value ratio (LTV) of 118.7% based on the total loan exposure. While value has improved marginally over the combined figure of $15.6 million from the September 2021 appraisals, it represents a marked decline from the combined issuance appraised values of $24.4 million. Additionally, advances, and therefore loan exposure, continue to accumulate. DBRS Morningstar’s analysis includes a liquidation scenario with an implied loss of $6.7 million across all three loans, or a WA loss severity of 41.3%.

The pool is concentrated by property type, with office representing approximately 43.0% of the current trust pool balance. There is continued uncertainty related to end-user demand and investor appetite for this property type. DBRS Morningstar anticipates upward pressure on vacancy rates in the broader office market, challenging landlords’ efforts to backfill vacant space, and, in certain instances, contributing to value declines, particularly for assets in noncore markets and/or with disadvantages in location, building quality, or amenities offered. Where applicable, DBRS Morningstar increased the probability of default penalties, and, in certain cases, applied stressed LTVs for loans that are secured by office properties, including 32 Avenue of the Americas (Prospectus ID#1; 18.2% of the pool balance) and Heinz 57 Center (Prospectus ID#3, 8.0% of the pool). Excluding the Franklin Ridge loans, which were liquidated from the pool, the weighted-average (WA) expected loss for office loans was approximately 32.0% higher than the WA pool expected loss.

As of the June 2023 remittance, 32 of the original 51 loans remain in the pool, with an aggregate trust balance of $548.2 million, representing a collateral reduction of approximately 31.4% since issuance as a result of loan repayments, scheduled amortization, and the liquidation of four loans. Six loans, representing 13.5% of the pool, are fully defeased. Five loans, representing 29.5% of the pool, are on the servicer’s watchlist, including the largest loan in the pool.

32 Avenue of the Americas is secured by a 1.2 million sf dual office and data center property in the Tribeca District of Manhattan. The 10-year interest-only (IO) loan is scheduled to mature in November 2025 and is one of five pari passu pieces of a $425.0 million whole loan. The loan was added to the servicer’s watchlist in April 2023 because of occupancy concerns. The property was 61.8% occupied as per the February 2023 rent roll, compared with 70.0% at year-end (YE) 2022, 75.6% at YE2021, and 95.0% at issuance. The most recent tenant departure was AMFM Operating Inc., part of iHeartMedia, which occupied 8.1% of the NRA before vacating at lease expiry in December 2022.

The largest tenants at the subject property include Telx, LLC (12.4% of the NRA, lease expiry in July 2033), Dentsu Holdings USA Inc. (5.9% of the NRA, lease expiry in August 2025), and CenturyLink Communications, LLC (5.8% of the NRA, lease expiry in August 2040). Near-term rollover risk is minimal, with leases representing only 1.0% of the NRA scheduled to expire over the next 12 months. Approximately 3.0% of sublease space is listed as available on Optimal Space as two current tenants that had previously expanded have since condensed their footprints at the property. The YE2022 debt service coverage ratio (DSCR) was reported to be 1.78 times (x), down from 1.96x at YE2021 and 2.01x at YE2020. The loan is equipped with a cash management account that will be activated at a DSCR trigger of 1.15x for two consecutive quarters.

The sponsor, Rudin Management (Rudin), acquired the subject property in 1999 and has reportedly spent $10.0 million on upgrading the building interiors, exteriors, and systems, indicative of strong sponsor commitment to the property. Rudin is currently advertising 38.8% of the vacant space as available for leasing at the average rental rate of $73.40 per sf (psf), which is higher than the current average in-place rental rate of $63.70 psf. As per Reis, office properties in the South Broadway submarket reported a Q1 2023 vacancy rate of 11.5% with an average asking rent of $70.31, compared with the Q1 2022 vacancy rate of 7.7% and an average asking rent of $68.70 psf. Given the unfavorable conditions of the current office property market, with several companies downsizing and year-over-year declines in occupancy since the onset of the of the Coronavirus Disease (COVID-19) pandemic, DBRS Morningstar expects the stabilization period for the property could take longer than anticipated. In its analysis, DBRS Morningstar applied LTV stress and an elevated probability of default adjustment to increase the expected loss for this loan, given these concerns.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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, X-B, X-C, X-D, and X-E 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 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.

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].

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 (June 9, 2023; https://www.dbrsmorningstar.com/document/415687)

Legal Criteria for U.S. Structured Finance (December 7, 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].