Morningstar DBRS Changes Trends on Two Classes of J.P. Morgan Chase Commercial Mortgage Securities Trust 2019-ICON

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2019 - ICON issued by J.P. Morgan Chase Commercial Mortgage Securities Trust 2019-ICON as follows:

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

In addition, Morningstar DBRS changed the trends on Classes F and G to Negative from Stable. All other trends are Stable.

The trend changes to Negative reflect the increased credit risk to the bonds following the underlying loans’ transfer to special servicing in February 2024. The transfer was initiated after the borrower was unable to secure takeout financing and defaulted at its January 2024 maturity date. Although the portfolio’s cash flow as of September 2023 remains in line with issuance expectations based on aggregated reporting from the Investor Reporting Package, Morningstar DBRS is concerned over the potential for value deterioration given the current interest rate and capitalization (cap) rate environment. In the event that the sponsor decides to stop supporting the loans, this value volatility suggests trust losses are possible in a liquidation scenario. Morningstar DBRS updated its loan-to-value ratio (LTV) sizing to reflect this concern, which resulted in a Morningstar DBRS value and LTV of $164.7 million and 104.5%, respectively.

Following the release of the smallest loan in the pool in October 2023, the trust is now secured by 17 separate nonrecourse, first-lien mortgage loans totalling $172.0 million, which include nine multifamily properties and eight mixed-use properties with 347 residential and 17 commercial units in Manhattan and Brooklyn, New York. The trust debt consists of $58.5 million of Trust A Notes and $83.9 million of Trust B Notes. The Trust A Notes are pari passu with $30.0 million of companion notes that were securitized in the JPMCC 2019-COR5 transaction (not rated by Morningstar DBRS). The sponsor gradually acquired the 18-property portfolio at a total cost of $160.5 million and invested an additional $55.6 million in capital improvements for a total cost basis of $216.0 million at the time of issuance. The properties have potential for additional revenue bumps if rent-restricted units are legally vacated and converted into market-rate units. Morningstar DBRS has never given credit to this upside in its analysis. All loans had five-year, interest-only (IO) loan terms with a maturity date in January 2024 and are not cross-collateralized or cross-defaulted. Each borrower is a special-purpose entity sponsored by Icon Realty Management, LLC, a real estate investment and management firm headquartered in New York.

Despite the transfer to special servicing, aggregate portfolio cash flows have continued to increase every year since 2020, most recently being reported at $11.9 million for the trailing 12 months ended (T-12) September 30, 2023, according to servicer reporting, equating to a whole-loan debt service coverage ratio (DSCR) of 1.28 times (x). This represents an 11.9% increase over the YE2022 net cash flow (NCF) of $10.7 million and a 10.6% increase over the Morningstar DBRS cash flow derived when ratings were assigned in 2020. As of September 2023, the portfolio’s weighted average occupancy was reported to be 95.5%, up from 90.7% as of YE2022, with individual property occupancies ranging from 68.0% to 100.0%. Special servicer commentary notes that discussions are ongoing with the borrower regarding a possible two-year loan extension. As a condition to the maturity extension, it is expected that principal paydown will be necessary to satisfy certain debt yield and LTV hurdles.

Although the collateral’s performance remains in line with Morningstar DBRS’ expectations, upward pressure on interest rates and cap rates in the last year, as well as the inability of the borrower to secure takeout financing, suggests that the portfolio’s value has declined. In the analysis for this review, Morningstar DBRS updated its LTV sizing for the loan, applying a cap rate of 7.25% to the T-12 September 2023 NCF of $11.9 million. The resulting Morningstar DBRS value of $164.7 million represents a whole loan LTV of 104.5%, a 43.6% haircut to the issuance appraised value of $292.1 million, and a 4.7% haircut to the previous Morningstar DBRS value of $172.8 million derived when ratings were assigned in 2020. Morningstar DBRS maintained a positive qualitative adjustment to the LTV sizing benchmarks totaling 4.5% to account for the collateral’s lack of significant cash flow volatility, illustrated by stable reporting over the past several years, and strong market fundamentals due to the portfolio’s location throughout Manhattan and Brooklyn. Given that the portfolio is neither cross-defaulted nor cross-defaulted, to further test the durability of the ratings, Morningstar DBRS conducted a recoverability analysis based on the individual loan amounts and using the same 7.25% cap rate. Out of the 17 remaining loans, 10 loans had LTVs in excess of 100.0% based on Morningstar DBRS’ derived values. In absence of additional equity infusion, losses incurred on the weaker-performing assets may erode the first loss piece, further supporting the trend changes to Negative.

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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), at https://dbrs.morningstar.com/research/427030.

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 Morningstar DBRS.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the North American CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798.

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

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.
Morningstar DBRS 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. Morningstar DBRS’ outlooks and credit ratings are monitored.

DBRS Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

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

North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2024),
https://dbrs.morningstar.com/research/428799

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

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

North American Commercial Mortgage Servicer Rankings (August 23, 2023),
https://dbrs.morningstar.com/research/419592

Legal Criteria for U.S. Structured Finance (December 7, 2023),
https://dbrs.morningstar.com/research/425081

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279 (July 17, 2023).

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