Morningstar DBRS Confirms Credit Rating on One Class of J.P. Morgan Chase Commercial Mortgage Securities Trust 2017-FL11
CMBSDBRS Limited (Morningstar DBRS) confirmed its credit rating on the following class of Commercial Mortgage Pass-Through Certificates, Series 2017-FL11 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 Morningstar DBRS' recoverability expectations for the remaining loan in the pool, One Westchase Center (Prospectus ID#6), a Class A office property in Houston's Westchase submarket. Following a two-year loan extension, executed through loan modifications, the loan has now passed its October 2024 maturity date and is deemed a performing matured balloon as the borrower works to use its remaining one-year extension option. With this review, Morningstar DBRS applied a conservative liquidation scenario to test the recoverability of the loan and concluded that losses associated with the loan are likely to be contained to the unrated Class F certificate. However, given the sustained performance and value declines since issuance, coupled with soft market fundamentals and upcoming tenant rollover, Morningstar DBRS' credit rating remains reflective of the remaining asset's high credit risk.
Since Morningstar DBRS' last review, the loan returned to the master servicer with the July 2024 payment date after the loan maturity was extended to October 2024, with the borrower providing a $1.0 million principal paydown in January 2024. While the borrower retains an option to extend the loan through October 2025, the extension is subject to a debt yield test of 12.3% and a $0.5 million principal paydown. As the property's most recent trailing 12-month (T-12) cash flow suggests a debt yield well below the required threshold, Morningstar DBRS expects the loan to be transferred back to special servicing and/or be subject to further modifications, such as additional equity injection.
Although the property has reported stable cash flow and occupancy since the COVID-19 pandemic, performance remains well below issuance levels because of the departure of several tenants, as well as the widened interest rate spreads from prior loan modifications and the floating-rate nature of the loan. As of the T-12 period ended June 30, 2024, the property reported a net cash flow (NCF) of $3.9 million (reflecting a debt service coverage ratio of 0.90 times), with a debt service that was nearly double the YE2022 figure. According to the June 2024 rent roll, the property was 81.9% occupied, with a concentration of five tenants, representing 16.0% of the net rentable area (NRA), having lease expirations scheduled during the next 12 months, including the third-largest tenant, EDG Inc. (11.9% of the NRA). According to Reis, office properties in the Westheimer/Westchase submarket reported a Q2 2024 vacancy rate of 25.2% and an average asking rental rate of $26.83 per square feet, above that of the subject property.
An updated appraisal, dated December 2023, valued the property at $47.1 million, down from the issuance appraised value of $85.2 million. This value could withstand a further 54.6% value reduction (not inclusive of liquidation fees or potential advances) before losses would exceed the unrated Class F. Given the anticipated tenant rollover and soft market conditions, Morningstar DBRS also derived a stressed value of $32.6 million by applying a haircut to the T-12 NCF and assuming a capitalization rate of 9.5%, which would also insulate the rated certificate from loss.
Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.
Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.
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 Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.
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 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 info-DBRS@morningstar.com.
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.
Morningstar DBRS notes that a sensitivity analysis was not performed for this review as the transaction is in wind-down. In such cases, Morningstar DBRS credit ratings are typically based on a recoverability analysis. Factors that could contribute to credit ratings sensitivity in these cases are described in the regulatory disclosures provided in conjunction with this press release.
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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 (September 19, 2024),https://dbrs.morningstar.com/research/439699
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283
-- Legal Criteria for U.S. Structured Finance (October 28, 2024), https://dbrs.morningstar.com/research/441840
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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.