DBRS Morningstar Confirms Credit Rating on One Class of J.P. Morgan Chase Commercial Mortgage Securities Trust 2017-FL11

DBRS Limited (DBRS Morningstar) confirmed its credit rating on the following class of Commercial Mortgage Pass-Through Certificates issued by J.P. Morgan Chase Commercial Mortgage Securities Trust 2017-FL11:

-- Class E at BB (low) (sf)

The trend is Stable.

The credit rating confirmation reflects DBRS Morningstar’s recoverability expectations for the remaining loan in the pool, One Westchase Center, which is in special servicing and is secured by a Class A office property in the Westchase submarket of Houston, located approximately 15 miles west of the central business district. The loan has received several maturity extensions in the past, with a loan modification most recently executed in November 2022 where the borrower provided a $4.5 million principal paydown in order to extend the maturity to April 2023 with an option to further extend to October 2023. Other terms of the agreement included an increase in the interest rate spread and the continuation of cash management. The principal paydown was funded with a $3.2 million equity injection from the borrower and $1.3 million from existing reserves. The loan remains outstanding, however, as of the October 2023 remittance and the servicer’s commentary states an agreement has been reached to further extend the maturity. The commentary did not provide any specifics on the terms of the agreement; DBRS Morningstar has requested an update from the servicer and as of the date of this press release, a response is pending.

According to the most recent appraisal obtained by the special servicer, dated September 2022, the property was valued at $50.2 million, a significant decline from the issuance value of $85.2 million but above the estimated loan exposure of about $43.0 million when accounting for special-servicing fees. The property reported a June 2023 annualized net cash flow (NCF) of $4.1 million (reflecting a debt service coverage ratio (DSCR) of 1.02 times (x)), compared with the YE2021 figure of $3.1 million (a DSCR of 1.97x) and the DBRS Morningstar NCF of $4.6 million. The decline in DSCR is due to the increased interest rate spread from the loan modification and the floating-rate nature of the loan as the debt service doubled to the June 2023 annualized figure of $4.0 million from $1.6 million at YE2021. The increase in the most recent NCF, however, was primarily driven by an increase in occupancy to 81.3% as of June 2023 from 69.7% at YE2021.

According to the August 2023 rent roll, rollover risk is elevated over the next 12 months with 16 tenants, representing 32.1% of net rentable area (NRA), with leases scheduled to roll. Per Reis, office properties located in the Westheimer/Westchase submarket report a Q2 2023 vacancy rate of 26.0%, which is expected to remain elevated in the next five years. The in-place average rental rate at the property was reported at $16 per square foot (psf) as of August 2023, which is below other Class A office properties within a five-mile radius of the property at an asking rental rate of $23 psf, while the broader Westheimer/Westchase submarket reported asking rental rate of $27 psf.

The trust has experienced considerable collateral reduction since issuance of approximately 90.0%. The remaining rated Class E certificate has a balance of $20.0 million, with the unrated Class F certificate balance of $20.3 million providing cushion against loss for the remaining loan. For this review, DBRS Morningstar conducted a recoverability analysis based on a stressed value of $41.1 million, which was derived from the in-place NCF as of June 2023 and a cap rate of 10.0%; this compares with the September 2022 appraised value of $50.2 million. When applying a haircut to the stressed value of $41.1 million in a hypothetical liquidation scenario, the loss was contained to the unrated Class F certificate; however, DBRS Morningstar notes the low demand within the Houston market for office properties, as well as the high vacancy rates across the market as a whole as factors that could adversely affect a sale should a liquidation ultimately occur and for these reasons, the BB (low) (sf) credit rating for the rated Class E certificate was confirmed.

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).

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 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.

DBRS Morningstar notes that a sensitivity analysis was not performed for this review as the transaction is winding down, with only one loan remaining. In such cases, DBRS Morningstar credit ratings are typically based on a recoverability analysis.

DBRS Limited
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Tel. +1 416 593-5577

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

North American Single-Asset/Single-Borrower Ratings Methodology (October 19, 2023; https://www.dbrsmorningstar.com/research/422174)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023; https://www.dbrsmorningstar.com/research/420982)

North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://www.dbrsmorningstar.com/research/419592)

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].