DBRS Morningstar Changes Trends to Negative on Four Classes of JPMCC Commercial Mortgage Securities Trust 2017-JP7, Confirms All Ratings

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2017-JP7 issued by JPMCC Commercial Mortgage Securities Trust 2017-JP7 as follows:

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

In addition, DBRS Morningstar changed the trends on Classes D, E-RR, F-RR, and G-RR to Negative from Stable. All other trends remain Stable.

The rating confirmations and Stable trends reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations since the last rating action. However, there are some challenges for the pool in two loans in special servicing and a high concentration of loans secured by office properties, with sizable exposure to more challenged markets in Stamford, Connecticut, and San Francisco. DBRS Morningstar notes mitigating factors in the relatively low loss severity expected for the largest loan in special servicing and the overall stable performance as of the most recent reporting for most of the office loans in the pool. The transaction also benefits from the five years of amortization since issuance, as well as some defeasance and loan repayments, as further described below. However, given the loan-specific challenges for some of the office loans and the downward pressure implied by the CMBS Insight Model results, the Negative trends for the four lowest-rated classes most exposed to loss were warranted.

As of the July 2023 remittance, 35 of the original 37 loans remain in the pool, with an aggregate principal balance of $736.2 million, reflecting a collateral reduction of 9.2% since issuance as a result of loan repayments and scheduled amortization. Since the last rating action in November 2022, one additional loan has fully defeased, bringing the total defeased collateral to five loans or 5.7% of the pool. Six loans (26.9% of the pool) are on the servicer’s watchlist; however, only three loans (5.5% of the pool) are being monitored for performance-related concerns. There are an additional two loans (4.4% of the pool) in special servicing, which were also in special servicing at the time of the last rating action.

The largest specially serviced loan, Springhill Suites Newark Airport (Prospectus ID#13, 2.3% of the pool), is secured by a 200-key limited-service hotel in Newark, New Jersey. The loan initially transferred to special servicing in June 2020 for imminent monetary default and most recently became real estate owned in January 2023. The special servicer continues to work to stabilize property performance while finalizing a disposition strategy. As of the December 2022 STR report, the subject reported a trailing 12-month occupancy rate, average daily rate (ADR), and revenue per available room (RevPAR) of 72.1%, $133.78, and $96.43, respectively, while posting a RevPAR penetration figure of 110.1%. At issuance, the subject was appraised at $28.6 million and, since the loan’s transfer to special servicing, has been re-appraised on an as-is basis three times, most recently in April 2023 when the value was estimated at $23.3 million. This figure is below the trust exposure of approximately $24.5 million, and a -18.5% delta to the issuance value, but represents a moderate improvement from the previous as-is appraisals of $20.8 million and $21.7 million in 2020 and 2021, respectively. DBRS Morningstar liquidated this loan from the pool based on a 10% haircut to the April 2023 value and projected future expenses, with the loss severity approaching 30%. The loss figure is contained to the unrated Class NRRR, which still had the full balance as of issuance ($32.4 million) as of the July 2023 remittance as no losses have been incurred by the trust to date.

Excluding collateral that has been defeased, the pool is most concentrated by loans that are secured by office properties, which represent 39.1% of the pool balance. Most of those loans continue to perform in line with issuance expectations, but the concentration is noteworthy given the overall stress for the office market as a whole in recent years. To account for this risk, DBRS Morningstar conducted an analysis to determine office loans that could be exposed to value declines for the collateral properties based on the current performance or future challenges that could arise given rollover concentrations through the loan term. Where applicable, DBRS Morningstar increased the probability of default (POD) penalties, and, in certain cases, applied stressed loan-to-value ratios (LTVs) for those loans exhibiting increased risks, with the resulting weighted-average expected loss (EL) approximately 40% higher than the pool EL as a whole.

The 211 Main Street loan (Prospectus ID#6, 6.1% of the pool) is secured by the borrower’s fee-simple interest in a 417,000-square-foot (sf) office property in downtown San Francisco. Although the loan is not currently on the servicer’s watchlist or in special servicing with this review, DBRS Morningstar remains cautious as recent online news articles have stated the single tenant, Charles Schwab (lease expiry in April 2028), will be downsizing its footprint at the subject, a particularly noteworthy development given the loan’s April 2024 maturity date. In addition to San Francisco, Charles Schwab is reported to also be closing locations in Atlanta, San Antonio, San Diego, St. Louis, and Tampa with employees moving to remote work. DBRS Morningstar has requested specifics on the tenant’s plans for the subject property from the servicer and the response remains outstanding as of the date of this press release. As noted at issuance, the tenant does not have any termination options but has the ability to sublet a portion or the entirety of the space. The in-place debt service coverage ratio (DSCR) is quite strong, above 2.0 times (x) and as noted, Charles Schwab is on the hook for the lease through 2028.

Even before the information regarding the tenant’s plans to downsize became known, DBRS Morningstar had a cautious outlook on the sponsor’s ability to refinance the loan given its location and general lack of options for borrowers looking to refinance debt on office stock in that area. The loan does benefit from strong sponsorship in an affiliate of The Blackstone Group L.P., but the sponsor’s commitment could be challenged if a replacement loan (or extension of the subject loan) requires a significant equity contribution. Given these challenges, the loan was significantly stressed in the analysis for this review, with the resulting EL more than double the pool average.

The second-largest office loan in the pool is the First Stamford Place loan (Prospectus ID#5, 8.1% of the pool), which is secured by a Class A office complex in Stamford, Connecticut. The loan was added to the servicer’s watchlist in June 2023 for low occupancy, which, as per the March 2023 rent roll, was reported at 72.9%, a significant drop from the issuance occupancy rate of 90.8%. At issuance, the largest tenant was Legg Mason & Co., LLC, which initially occupied 17.0% of net rentable area (NRA) on a lease expiring in September 2024. Franklin Templeton Companies acquired the company in 2020 and reduced its footprint at the subject to approximately 9.0% of NRA on a lease extending to September 2035. Other large tenants at the subject include Odyssey Reinsurance Company (11.0% of NRA, lease expires in September 2033) and Partner Reinsurance Company of the US (7.0% of NRA, lease expires in January 2029). In the next 12 months, there is nominal tenant rollover. According to a Q1 2023 Reis report, office properties in the Stamford submarket reported a vacancy rate of 28.5%, compared with the Q1 2022 vacancy rate of 25.9%. According to the YE2022 financials, the loan reported a DSCR of 1.57x, down from the YE2021 DSCR of 2.13x and the DBRS Morningstar DSCR of 2.38x derived at issuance. Given the decline in performance, paired with the soft market conditions, DBRS Morningstar analyzed this loan with a stressed LTV and POD, resulting in an EL over double the pool average.

At issuance, DBRS Morningstar assigned investment-grade shadow ratings to the Gateway Net Lease Portfolio loan (Prospectus ID#2, 9.5% of the pool). DBRS Morningstar confirmed that the performance of this loans remains consistent with the investment-grade loan characteristics with this review. The loan reported a robust DSCR of 2.54x as of the YE2022 reporting, which remains in line with the YE2021 DSCR of 2.57x.

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/416784 (July 4, 2023).

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 credit ratings are subject to surveillance, which could result in credit 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) https://www.dbrsmorningstar.com/research/410912.

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

The credit ratings assigned to Classes B and D materially deviate from the credit ratings implied by the predictive model. DBRS Morningstar typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider a three-notch or more deviation from the credit ratings stress implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviation is uncertain loan level event risk. The analysis for this review included stressed scenarios for several office loans given the general challenges faced in that sector. The results of that analysis suggested downward pressure through the middle of the bond stack, most pronounced for Classes B and D; however, given the most challenged loans would likely be transferred to special servicing and possibly liquidated, DBRS Morningstar believes the increased risks are most concentrated in the lowest-rated classes, supporting the Negative trends assigned with this review.

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

The rated entity or its related entities did participate in the credit rating process for this credit 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 credit rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

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 credit ratings are monitored.

DBRS Limited
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The credit 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/research/415687)

Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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