DBRS Morningstar Downgrades Credit Ratings on Three Classes of J.P. Morgan Chase Commercial Mortgage Securities Trust 2021-410T

DBRS Limited (DBRS Morningstar) downgraded its credit ratings on three classes of Commercial Mortgage Pass-Through Certificates, Series 2021-410T issued by J.P. Morgan Chase Commercial Mortgage Securities Trust 2021-410T as follows:

-- Class C to BB (sf) from A (low) (sf)
-- Class D to B (sf) from BBB (high) (sf)
-- Class HRR to B (low) (sf) from BBB (sf)

In addition, DBRS Morningstar confirmed its credit ratings on the remaining classes as follows:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class X-A at AA (sf)

The credit ratings on all classes have been removed from Under Review with Negative Implications, where they were placed on March 24, 2023. All classes carry Negative trends.

The transaction is collateralized by a 20-story, Class A office building in Manhattan's Hudson Yards submarket on 10th Avenue between 33rd Street and 34th Street. The credit rating downgrades and Negative trends reflect the increased risks to the transaction, following the early lease termination of the property’s second-largest tenant, First Republic Bank (First Republic). In May 2023, the U.S. government announced it had taken control of First Republic and sold the bank to JPMorgan Chase Bank, N.A. (JPM; rated AA with a Stable trend by DBRS Morningstar and most recently confirmed on December 6, 2023). JPM bought most of First Republic’s assets in May 2023 but did not acquire the subject lease. The Federal Deposit Insurance Corporation (FDIC) took possession of First Republic’s 211,521 square foot (sf) lease in September 2023 and ultimately negotiated a termination agreement with the landlord, 601W Companies. First Republic’s lease formerly represented 33.5% of the property’s net rentable area (NRA).

At issuance, DBRS Morningstar considered First Republic to be a long-term, investment-grade tenant, with credit given to rent steps in the tenant’s lease over the loan term. As part of this review, DBRS Morningstar reanalyzed the collateral’s cash flow stream based on the in-place tenancy and expected lease-up costs of the vacant First Republic space. The analysis concluded to a stabilized occupancy rate of 85.0%, with the resulting as-is value decline suggesting that the lower rated certificates in the pool could be exposed to loss, as further detailed below. The exposure to potential loss is further amplified by the transaction’s structure as Classes HRR and D are both quite small relative to the rest of the classes in the structure, with credit enhancement of less than 5.0% for the Class D certificate. The Class C balance of $126.0 million is substantial, further supporting DBRS Morningstar’s analysis, which continues to imply that the higher-rated certificates (Classes A and B) are generally well insulated against loss with credit enhancement levels of 44.0% and 30.0%, respectively. Additional mitigating factors that support the rating confirmations include strong institutional sponsorship, a prime location in a premier New York office market, and the lack of significant rollover risk during the remaining loan term. Moreover, the loan’s anticipated repayment date (ARD) in January 2028, will provide the sponsor a fair amount of time to backfill First Republic’s vacant space and work toward stabilization.

The collateral property, which totals 631,944 sf, was originally built in 1927 and recently underwent a complete redevelopment overseen by the prior owner, SL Green, in 2020. The current sponsor, 601W Companies, acquired the property, formerly known as the Master Printers Building, for $952.5 million from SL Green. Whole loan proceeds of $705 million consist of seven senior A notes totaling $408 million, one junior B note totaling $157 million, a senior mezzanine loan totaling $20 million, and one junior mezzanine loan totaling $120 million. Six of the seven senior A notes and the junior B note are securitized in this transaction. The loan is interest only (IO) throughout its fully extended 10-year term. The terms of the ARD require that, should the loan remain outstanding beyond that date, it will incur additional interest and will begin hyper-amortizing, with the fully extended maturity date occurring in March 2032. However, should the former First Republic space remain vacant, DBRS Morningstar notes that there would likely be no excess cash flow available to hyper-amortize the loan.

The two largest remaining tenants at the property are Amazon.com, Inc. (Amazon) (53.1% of the NRA, lease expiry in May 2037) and Related (11.3% of the NRA, lease expiry in 2045). Both tenants have termination options beginning in 2030 and every subsequent five years. Related can terminate its lease with 18 months’ notice and no termination penalty. Amazon will be eligible to exercise its one-time termination option in 2032, approximately four years after the anticipated repayment date in 2028 and during the year of the loan’s maturity. Amazon’s termination fee would be equal to the sum of unamortized brokerage commissions, landlord’s contribution, rent abatement applicable to terminated premises, and six months’ fixed annual rent for the terminated premises. The loan is currently cash managed as a result of First Republic’s lease termination. Per the loan agreement, in the event of a tenant trigger, the lender will continue to sweep excess cash until such time the cumulative amount being held in the excess cash flow reserve fund exceeds $100 per sf. While structural features, such as lockbox triggers and cash flow sweeps, help to mitigate some of these concerns, it is important to note that these mechanisms do not always result in a significant (or at times any) monetary hedge. Although the property is expected to generate positive cash flow, even after First Republic’s departure, the cash flow sweep is unlikely to produce a meaningful monetary cushion, given the amount of excess cash available, if any, will be limited.

The servicer reported a trailing nine months ended September 2023 occupancy rate of 98.2% and net cash flow (NCF) (annualized) of $46.2 million, with a debt service coverage ratio (DSCR) of 2.12 times (x). These figures do not reflect First Republic’s departure and as such, the property’s physical occupancy rate is likely 65.0%. First Republic formerly accounted for 38.0% of the base rent, suggesting that the DSCR has declined considerably. DBRS Morningstar estimates the coverage now remains marginally above breakeven at approximately 1.1x. According to Q3 2023 Reis data, Class A properties within a one-mile radius reported vacancy and average rental rates of 10.0% and $84.05 per square foot (psf), respectively, compared with the subject property’s average rental rate of $81.85 psf.

Despite the generally challenging economic conditions and the adoption of remote and hybrid, work which continues to place downward pressure on the office sector, DBRS Morningstar believes that the ultimate beneficiaries will be higher quality assets with well capitalized sponsors that can weather short-to-medium term disruptions. With this review, DBRS Morningstar considered a stabilized property value of $539.3 million, which is a -19.0% and -44.0% variance from the DBRS Morningstar value and appraised value derived at issuance, respectively. The updated DBRS Morningstar value implies a loan-to-value (LTV) ratio of 75.7% on the senior debt, and an LTV of 105.0% based on the total mortgage debt amount of $565.0 million (compared with the LTV of 85.0%, based on the DBRS Morningstar value at issuance). The leverage increases substantially to an all-in DBRS Morningstar LTV of 131.0% when factoring in both the senior and junior mezzanine loans. With this credit rating action, DBRS Morningstar removed the positive qualitative adjustment of 2.75% applied at issuance for low cash flow volatility and maintained positive qualitative adjustments to the LTV sizing benchmarks totaling 5.0% to account for property quality and market fundamentals.

The DBRS Morningstar rating assigned to Classes A, B, and C are higher than the results implied by the LTV sizing benchmarks by more than three notches. The variance is warranted given the higher-rated certificates are generally well insulated against loss as suggested by the value analysis for this review. In addition, the loan’s ARD in January 2028 will provide the sponsor a fair amount of time to backfill First Republic’s vacant space and work toward stabilization. DBRS Morningstar will continue to monitor this transaction for updates.

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).

Class X-A is an IO certificate that references 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 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 ratings were 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.

These are solicited credit ratings.

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

-- Rating North American CMBS Interest-Only Certificates (December 13, 2023; https://www.dbrsmorningstar.com/research/425261/)

-- 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, 2023;
https://www.dbrsmorningstar.com/research/425081)

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].