Morningstar DBRS Downgrades Credit Ratings on Three Classes of J.P. Morgan Chase Commercial Mortgage Securities Trust 2021-410T, Changes Trends on All Classes to Stable From Negative

DBRS Limited (Morningstar DBRS) 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 A to AA (sf) from AAA (sf)
-- Class B to BBB (sf) from AA (low) (sf)
-- Class X-A to BBB (high) (sf) from AA (sf)

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

-- Class C at BB (sf)
-- Class D at B (sf)
-- Class HRR at B (low) (sf)

Morningstar DBRS changed the trends on all classes to Stable from Negative.

With the prior credit rating action in December 2023, Morningstar DBRS downgraded its credit ratings on the three lowest-rated classes and assigned Negative trends to all classes following the early lease termination of the property's former second-largest tenant, First Republic Bank (First Republic). The loan's anticipated repayment date (ARD) is in January 2028, providing the sponsor with a fair amount of time to backfill First Republic's vacant space ahead of the ARD; however, leasing momentum at the property has been sluggish. According to the servicer, the borrower continues to market vacant space at the property with several prospective tenants showing interest; however, no new leases have been signed to date. In addition, should the loan not repay at the ARD and hyper-amortization terms kick in, the loss of First Republic's rent suggests that in-place cash flows would no longer be able to sustain a meaningful paydown of the loan's principal balance. As such, Morningstar DBRS removed the ARD credit applied in the loan-to-value ratio (LTV) sizing benchmarks at issuance. The updated Morningstar DBRS value derived as part of the December 2023 credit rating action was maintained for this review, with the resulting downward pressure implied by the LTV sizing tool further supporting the credit rating downgrades with this review. Additional details are outlined below.

The transaction is collateralized by a redeveloped Class A office and retail building in Manhattan's Hudson Yards submarket. The current sponsor, 601W Companies, acquired the property, formerly known as the Master Printers Building, for $952.5 million. The whole loan amount of $705.0 million consists of seven senior A notes totaling $408.0 million, one junior B note totaling $157.0 million, a senior mezzanine loan totaling $20.0 million, and one junior mezzanine loan totaling $120.0 million. Six of the seven senior A notes and the junior B note are securitized in the subject transaction. The trust loan is interest only (IO) throughout the ARD 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, as previously noted, should the former First Republic space remain vacant, Morningstar DBRS expects that there would be little to no excess cash flow available to pay down the loan.

Although JPMorgan Chase Bank, N.A (rated AA with a Stable trend by Morningstar DBRS) bought most of First Republic's assets in May 2023, it did not acquire the subject lease at the property. The Federal Deposit Insurance Corporation took possession of First Republic's 211,521-square-foot (sf) lease (formerly 33.5% of the property's net rentable area (NRA)) in September 2023 and ultimately negotiated a termination agreement with the landlord. The two largest remaining tenants at the property are Amazon.com, Inc. (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. The loan is currently cash managed because of First Republic's lease termination. Per the loan agreement, in the event of a major 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 (psf). Although the property continues to generate positive cash flow, even after First Republic's departure, the amount of excess cash available after fulfilling debt service obligations remains limited. According to the November 2024 reporting, reserve balances total $3.8 million ($893,202 of which is held in tenant and leasing reserves).

The servicer reported an occupancy rate of 65.1% and net cash flow (NCF) (annualized) of $28.5 million for the trailing six months ended June 30, 2024, resulting in a debt service coverage ratio (DSCR) of 1.24 times (x). In comparison, the property was 99.2% occupied and generated $49.0 million of NCF (a DSCR of 2.25x) at issuance. First Republic formerly accounted for approximately 38.0% of the base rent. The loan benefits from strong institutional sponsorship, a prime location in a premier New York office market, and the lack of significant rollover risk in the remaining tenancy during the rest of the loan term. However, the significant increase in vacancy and lack of leasing momentum at the property in the nearly 18 months since First Republic's departure; despite healthy demand within the submarket, were factors in Morningstar DBRS' conservative approach in the analysis for this review. Per Q3 2024 Reis data, Class A properties within a one-mile radius reported vacancy and average rental rates of 10.8% and $82.34 psf, respectively, compared with the subject property's average office rental rate of approximately $86.00 psf.

During the prior review, Morningstar DBRS derived an updated NCF based on the in-place tenancy and expected lease-up costs for the vacant First Republic space, concluding to a stabilized occupancy rate of 85.0%. That analysis resulted in a Morningstar DBRS value of $539.3 million, a -19.0% and -44.0% variance from the Morningstar DBRS value and appraised value derived at issuance, respectively. The Morningstar DBRS value implies an LTV 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 Morningstar DBRS value at issuance). The leverage increases substantially to an all-in Morningstar DBRS LTV of 131.0% when factoring in both the senior and junior mezzanine loans. During the prior review, Morningstar DBRS also removed the positive qualitative adjustment of 2.75% applied at issuance for low cash flow volatility but maintained positive qualitative adjustments to the LTV sizing benchmarks totaling 5.0% to account for property quality and market fundamentals. The consideration of the Morningstar DBRS property value noted above, in addition to the updates made to the LTV sizing benchmarks as part of the removal of the ARD credit and the cash flow volatility credit, resulted in significant downward pressure at the top of the capital stack, supporting the credit rating downgrades with this review. 

The credit rating assigned to the Class C certificate is higher than the result implied by the LTV sizing benchmarks by three or more notches. The variances are warranted given the mitigating factors in the conservative assumptions made as part of the derivation of the Morningstar DBRS value for the collateral property, as well as the Class A status of the property, the overall desirability of the subject's submarket, and the in-place cash flows, which suggest there remains sufficient cash flow to support the outstanding mortgage debt.

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.

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 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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

DBRS Limited
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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

-- 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.