DBRS Morningstar Downgrades Credit Ratings on All Classes of JPMCC 2021-1440, Changes All Trends to Negative

DBRS Limited (DBRS Morningstar) downgraded the credit ratings on all classes of Commercial Mortgage Pass-Through Certificates issued by J.P. Morgan Chase Commercial Mortgage Securities Trust 2021-1440 as follows:

-- Class A to A (sf) from AAA (sf)
-- Class B to BBB (sf) from AA (low) (sf)
-- Class C to B (sf) from A (low) (sf)
-- Class D to CCC (sf) from BBB (low) (sf)
-- Class E to CCC (sf) from BB (low)
-- Class F to CCC (sf) from B (low)

All trends have been changed to Negative from Stable.

The credit rating downgrades and trend changes reflect DBRS Morningstar’s liquidation scenario for the specially-serviced underlying loan, which is secured by an office property in Midtown Manhattan with significant exposure to bankrupt WeWork and a scheduled 2024 lease expiry for the second-largest tenant, which is currently dark. The borrower communicated a desire to transfer title to the lender, prompting the loan’s transfer to special servicing in September 2023. As of the November 2023 remittance report, the loan remains current and with the special servicer. An updated appraisal has not been provided to date; however, DBRS Morningstar notes that the as-is value has likely declined significantly from issuance, as further described below. Based on the liquidation scenario analyzed for this review, DBRS Morningstar expects losses could be realized through the Class C Certificate, supporting the downgrades for all rated classes.

The underlying floating-rate loan is interest only through its initial maturity date in March 2024 and has two 12-month extension options for a fully extended maturity in March 2026. The loan is sponsored by CIM Group, a fully integrated real estate private equity firm, and QSuper Board, an Australian super fund. As of the August 2023 rent roll, the collateral property was 85.4% leased, with the largest tenants being WeWork (40.3% of the net rentable area (NRA), lease expiry in June 2035), Macy’s Inc. (Macy’s; 26.6% of the NRA, lease expiry in January 2024), and Mizuho Capital Markets L.L.C. (Mizuho; 5.3% of the NRA, lease expiry in May 2026). At issuance, it was noted that both Macy’s and Mizuho were dark and a reserve was established for the remainder of the Macy’s rent obligations (the initial balance of $34.0 million has been drawn down to $2.9 million as of the November 2023 remittance). When accounting for the dark tenants, the physical occupancy rate as of the August 2023 rent roll was 53.6%.

WeWork filed for bankruptcy in early November 2023 and, to date, has filed a request to reject 67 active leases across the company’s locations in the United States and Canada. The subject location was not included in the filing. According to the special servicer, WeWork has recently been paying a reduced rental rate of $55.00 per square foot (psf), lower than the contractual rate of $73.51 psf as of August 2023. The special servicer notes the tenant has requested a further reduction in the rental rate as part of another amendment to the lease, expressing a desire to remain in place at the property. At issuance, it was noted that approximately 92.0% of the WeWork space was being used by Pinterest and Amazon as clients of WeWork. DBRS Morningstar has requested an update on the status of those contracts, but the servicer has advised the tenant is not required to provide that information. According to an article published by CoStar in August 2023, Amazon re-upped for 210,000 sf (70.0% of the WeWork space) at the subject.

At issuance, the loan was structured with $30.0 million in upfront reserves, $27.3 million of which funded a rollover reserve, and the remaining $2.7 million funded a capital expenditure reserve. A $15.8 million outstanding tenant improvement and leasing costs reserve was also established to cover outstanding obligations associated with the WeWork space. According to the November 2023 loan-level reserve report, approximately $33.1 million is held across all reserves, with $26.4 million in a rollover reserve. The loan also features a full cash sweep that commenced at loan closing, which was to build until $20.0 million was collected in an excess cash reserve. Trapped proceeds could be used for approved capex and leasing costs after the initial rollover and capex reserves had been depleted and $20.6 million of future equity contributions were fully invested. The excess cash reserve account had a balance of $8.5 million in December 2022, but was most recently reported at $1.4 million as per the servicer’s November 2023 update provided to DBRS Morningstar. Further clarification on the status of reserves has been requested given the excess cash reserve appears to have been depleted ahead of the depletion of the leasing and capex reserves. There has not been excess cash to trap for a few years; however, the loan has reported a below breakeven debt service coverage ratio (DSCR) since YE2021 due to an increase in the operating expense ratio, which climbed from 43.4% in YE2021 to 55.5% in YE2022.

Given the low physical occupancy rate, a stressed DBRS Morningstar value was derived for this review, based on a blended approach that gave credit to the in-place tenancy and an estimate of revenue for the vacant space, less the cost to re-lease to a stabilized rate of 18.1%. The estimated stabilized occupancy rate was based on the availability rate reported by CBRE for the subject’s Manhattan Midtown submarket as of Q3 2023. Rents were estimated at $74.50 psf, based on the average rents reported for the submarket by CBRE and the subject’s leases in place. Tenant improvements for vacant space were estimated at $100 psf and credit was given to the leasing reserves currently on hand with the servicer. The resulting DBRS Morningstar value of $205.0 million compares with the issuance DBRS Morningstar value of $353.9 million and results in an as-is loan-to-value (LTV) ratio of 195.0%. A liquidation scenario based on stressed DBRS Morningstar value suggests losses would be realized into the Class C certificate, supporting the CCC (sf) credit ratings for that class and the rated classes below. Given the lack of an updated appraisal, the ongoing WeWork bankruptcy proceedings, and the general uncertainty surrounding the investor demand for high vacancy office collateral, DBRS Morningstar believes there remains significant unknowns that could further increase the credit risks for this transaction, supporting the Negative trends for Classes A and B with this review.

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 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 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 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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar Long-Term Obligation Rating Scale definition indicates that credit 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 credit ratings are monitored.

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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 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].