Morningstar DBRS Downgrades Five Classes of JPMCC Commercial Mortgage Securities Trust 2016-JP2, Changes Trends on Seven Classes to Negative

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on five classes of Commercial Mortgage Pass-Through Certificates, Series 2016-JP2 issued by JPMCC Commercial Mortgage Securities Trust 2016-JP2 as follows:

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

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (sf)
-- Class B at AA (low) (sf)

Morningstar DBRS also changed the trends on Classes A-S, B, C, D, X-A, X-B, and X-C to Negative from Stable. Classes E and F have credit ratings that typically do not carry trends in commercial mortgage-backed securities (CMBS) credit ratings. The trends on all remaining classes are Stable.

The credit rating downgrades reflect Morningstar DBRS’ increased loss projections regarding the specially serviced loan, Hagerstown Premium Outlets (Prospectus ID#9, 3.5% of the current trust balance), which reported depressed performance for several years prior to its recent transfer to special servicing in October 2023. The loan was previously in special servicing in 2020 because of challenges arising from the coronavirus pandemic before transferring back to the master servicer in 2021. For this review, the loan was analyzed with a liquidation scenario based on a stressed haircut to the September 2020 value, resulting in a loss approaching $20.0 million and eroding the majority of the non-rated Class NR balance. The loan is further discussed below. The Negative trends are reflective of the increased credit risk profile of loans backed by office properties, which is the second-largest property concentration, comprising 26.0% of the current pool balance. In general, the office sector has been challenged, given the low investor appetite for that property type and high vacancy rates in many submarkets as a result of the shift in workplace dynamics. Office loans and other loans that have exhibited increased risk were analyzed with elevated probability of default (POD) penalties, as applicable. The resulting weighted-average (WA) expected loss for these loans was approximately 58% higher than the pool’s WA expected loss. The credit rating confirmations reflect the continued performance of the remaining loans in the transaction, which have generally experienced minimal changes since the last credit rating action and reported a WA debt service coverage ratio (DSCR) of 1.71 times (x) based on the most recent year-end financials available.

As of the March 2024 remittance, 42 of the original 47 loans remained in the trust, with an aggregate balance of $777.9 million, representing a collateral reduction of 17.2% since issuance. There are nine fully defeased loans, representing 21.0% of the current pool balance. There is one loan with the special servicer, representing 3.5% of the current pool balance, as well as eight loans on the servicer’s watchlist, representing 22.9% of the current pool balance. Since the last credit rating action, one loan that was previously in special servicing, 693 Fifth Avenue (Prospectus ID#3), was liquidated in June 2023 with no loss to the trust.

The sole loan in special servicing, Hagerstown Premium Outlets, is secured by an open-air retail outlet center in Hagerstown, Maryland, approximately 70 miles northwest of Washington, D.C. This loan is pari passu with DBJPM 2016-C1, which is also rated by Morningstar DBRS. The property is owned and operated by Simon Property Group. As previously mentioned, the loan was most recently transferred to special servicing as the loan defaulted on its September 2023 payment, with the special servicer dual-tracking foreclosure and a potential loan modification as requested by the borrower. The cash flows have been depressed for several years, with the DSCR hovering near or just below breakeven since 2021. The occupancy rate has also been precipitously declining in recent years, most notably beginning with the loss of Nike Factory Store in 2019 and Wolf’s Furniture in 2020, both anchor stores. As of the June 2023 financials, the property was 54% occupied compared with 40.4% at YE2022 and 90.4% at issuance. Near-term rollover risk is high, with leases representing 31.0% of the net rentable area (NRA) having expired or expiring in the next 12 to 18 months. In the last several reviews when the loan was with the master servicer, Morningstar DBRS liquidated the loan, based on a value considering that an outlet mall in a tertiary location that has lost major anchor tenants and has consistently underperformed has a very high likelihood of default. The transfer back to the special servicer was expected, and for this review, the loan was liquidated based on a stressed haircut to the September 2020 value, resulting in a loss severity approaching 70%.

Another loan of concern, 100 East Pratt (Prospectus ID#5, 6.2% of the current trust balance), is secured by a 662,708-square-foot LEED Gold-certified Class A office property in downtown Baltimore. The subject serves as the headquarters for the largest tenant, T. Rowe Price Associates, Inc. (71% of NRA), but several news sources have noted that the tenant is moving its newly constructed headquarters to Harbor Point in Baltimore. The tenant has a one-time lease termination option in July 2024 that requires 18 months’ notice, which is likely to be executed. In addition, the same amount of space was listed as available for lease by Cushman & Wakefield. Morningstar DBRS has requested an update from the servicer. The borrower is required to pay a $20.0 million termination fee, and a cash flow sweep would be initiated at the 18-month mark. Details on whether a cash flow sweep was initiated and the balance of the cash management reserve were requested from the servicer. Based on the YE2023 financials, the loan reported a DSCR of 2.08x; however, when accounting for the departure of T. Rowe Price Associates, Inc., Morningstar DBRS expects the figure to drop well below breakeven. Reis indicates a softening submarket as office properties within the Central Baltimore City submarket reported a Q4 2023 vacancy rate of 20.5%, up from the Q4 2023 vacancy rate of 18.8%. Considering the significant headwinds to backfilling a large vacant space in a challenging submarket, as well as the low investor demand for this property type, Morningstar DBRS analyzed this loan with an elevated POD to increase the loan’s expected loss, resulting in an expected loss that was almost double the pool’s WA expected loss.

At issuance, Morningstar DBRS shadow-rated one loan, The Shops at Crystals (Prospectus ID#6; 6.4% of the pool), as investment grade to reflect the above-average property quality and strong sponsorship. With this review, Morningstar DBRS confirms that the performance of the loan remains consistent with investment-grade characteristics.

ENVIRONMENTAL, SOCIAL, AND 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 at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

Classes X-A, X-B, and X-C 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 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 credit ratings assigned to Classes A-S and B materially deviate from the credit ratings implied by the predictive model. Morningstar DBRS 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 rating stresses implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviations is uncertain loan-level event risk. The loans of concern in this pool increase the baseline expected loss, with the adjustments as outlined elsewhere in this press release compounding those factors and driving up the expected loss for the pool even further. As the loans in question are currently performing and have a longer runway for cash flows to stabilize given their respective maturity dates, these deviations were deemed warranted. The Negative trends placed on the classes in question signal the overall concerns and suggest downgrades could occur as part of future review cycles.

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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The Morningstar DBRS 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. 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 CMBS Multi-Borrower Rating Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428797

-- North American CMBS Insight Model version 1.2.0.0 (March 1, 2024), https://dbrs.morningstar.com/research/428797

-- 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

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

-- 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.

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