Morningstar DBRS Changes Trends on Three Classes of J.P. Morgan Chase Commercial Mortgage Securities Trust 2021-1440 to Stable from Negative

DBRS Limited (Morningstar DBRS) confirmed 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 at A (sf)
-- Class B at BBB (sf)
-- Class C at B (sf)
-- Class D at CCC (sf)
-- Class E at CCC (sf)
-- Class F at CCC (sf)

Morningstar DBRS changed the trends on Classes A, B, and C to Stable from Negative. Classes D, E, and F have credit ratings that do not carry a trend in commercial mortgage-backed securities (CMBS).

The $399.0 million floating rate loan is interest-only (IO) and is secured by the borrower's fee-simple interest in a 25-story, 740,387-square-foot office property in Midtown Manhattan. Since the last credit rating action, the servicer executed a loan modification, terms of which included a reduction in the note rate and an extension of the loan maturity from March 2024 to October 2025, with two one-year extension options available subject to debt yield tests. The borrower was also required to deposit $24.5 million into a lender-controlled reserve account and agree to a deed-in-lieu of foreclosure in the event of a future default. In addition, a new appraisal was completed in April 2024, valuing the property at $320.0 million. The credit rating confirmations reflect Morningstar DBRS' expectations for ultimate recoverability, with Classes A, B, and C well insulated from potential losses. Given the positive developments with the loan modification and increased certainty in recoverability of these bonds based on the most recent appraised value, Morningstar DBRS revised the trends for Classes A, B, and C to Stable from Negative.

Morningstar DBRS remains concerned with the asset's high vacancy, declined cash flow performance, and increased propensity for interest shortfalls given the change in note rate, which remain contributing factors in the confirmed credit ratings for Classes D, E, and F. The loan transferred to the special servicer in September 2023 when the borrower communicated a desire to transfer title to the lender. As previously mentioned, the loan's May 2024 modification includes a reduction in the spread, resulting in a lower note rate for the remaining term. The reduced interest payments have contributed to accumulating interest shortfalls of approximately $1.2 million per remittance period, currently totaling $7.6 million as of the October 2024 remittance. Morningstar DBRS expects these shortfalls to continue through loan maturity, the cumulative interest shortfalls are expected to total approximately $20.0 million by maturity, thereby supporting the confirmed credit ratings for Classes D, E, and F.

Morningstar DBRS' primary concern with regard to the performance of the underlying asset is tied to the departure of major tenant Macy's (previously 26.6% of the net rentable area (NRA)) after its January 2024 lease expiration and large exposure to WeWork (40.3% of the NRA). WeWork filed for bankruptcy in November 2023 and subsequently modified its lease at the subject, inclusive of a significant reduction to the rental rate. In addition, WeWork's lease term was shortened to October 2028, with an extension option available until final maturity in June 2035. There is also a one-time termination option, which can be exercised at no cost with at least four months' notice, effective May 31, 2026. Given the tenant's bankruptcy, Morningstar DBRS believes it is likely that the termination option will be exercised, and the space will become vacant in June 2026. At issuance, it was noted that approximately 92.0% of the WeWork space was being used by Pinterest and Amazon as clients of WeWork. Morningstar DBRS requested an update on the status of those contracts, but the servicer has advised the tenant is not required to provide that information.

The loan was returned to the master servicer in August 2024 and continues to perform in accordance with the modification terms; however, as per the October 2024 remittance, it is being monitored on the servicer's watchlist for a low debt service coverage ratio (DSCR), active lockbox, and delinquent insurance payments. The declined cash flow is tied to the declined vacancy as well as WeWork's rent reduction. As per the rent roll dated October 2024, the property is 58.6% occupied down from 85% at YE2023 and 93.0% at issuance. Based on the financial statement for the trailing 12 months (T-12) period ended June 30, 2024, the debt yield is 1.2%, which is well below the maturity extension threshold of 5.0%. Unless there is a meaningful uptick in occupancy and cash flow levels, Morningstar DBRS believes it is unlikely the borrower will be able to exercise its extension option at maturity in October 2025.

Offsetting some of these concerns are the considerable reserves, totaling $42.4 million as of October 2024 reporting. The loan was originally structured with a full cash flow sweep that commenced at loan closing. Morningstar DBRS has inquired as to whether the reported reserve balance is inclusive of the $24.5 million deposited by the borrower as per the loan modification; however, a response has not been received as of this writing. Additionally, the April 2024 appraised value of $320.0 million, although a 40.7% decline from the issuance appraised value of $540.0 million, implies the senior bonds are well insulated from potential losses. In the absence of an updated appraisal at the last review, Morningstar DBRS concluded a stressed value of $205.0 million in December 2023 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 81.9%. Morningstar DBRS updated its loan-to-value ratio (LTV) sizing approach for purposes of the current review, based on a stress to the most recent appraised value, and concluded a value of $256.0 million. The Morningstar DBRS LTV of 155.9% compares to the appraised value LTV of 124.7%. Morningstar DBRS maintained qualitative adjustments totaling 1.0%, inclusive of a negative adjustment to account for increased cash flow volatility, and positive adjustments for property quality and strong market fundamentals.

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, or 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; 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 01, 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.

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.

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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
-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- 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, (July 17, 2023)

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.