DBRS Morningstar Confirms All Ratings on J.P. Morgan Chase Commercial Mortgage Securities Trust 2012-HSBC, Removes Under Review with Developing Implications Status

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2012-HSBC (the Certificates) issued by J.P. Morgan Chase Commercial Mortgage Securities Trust 2012-HSBC (the Issuer):

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

All trends are Stable. The ratings have been removed from Under Review with Developing Implications, where they were placed on November 14, 2019.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, on the DBRS Morningstar website at www.dbrsmorningstar.com.

Prior to the finalization of the NA SASB Methodology, the DBRS Morningstar ratings for the subject transaction and all other DBRS Morningstar-rated transactions subject to the methodology in question were previously placed Under Review with Developing Implications, as the proposed methodology changes were material.

The subject rating actions are the result of the application of the NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology,” as applicable. Qualitative adjustments were made to the final loan-to-value (LTV) sizing benchmarks used for this rating analysis.

The $300.0 million security issued in 2012 is secured by a first mortgage loan used to refinance $240 million of debt on an 864,303-square foot office building complex in Midtown Manhattan. A mezzanine loan of $100.0 million was also part of the financing package. The 10-year loan called for interest-only (IO) payments for the first five years and then amortization over a 30-year term for the remaining five years.

Collateral for the loan is a 30-story Class A office tower, which combines with three other office structures (two 10-story buildings and one 12-story building) into a complex spanning the entire block of Fifth Avenue between 39th and 40th Streets. The building combines a historic facade of an office building built in 1902 across 40th Street from the New York Public Library and Bryant Park. HSBC Bank (HSBC or the Bank) first occupied the combined building complex in 1999 as its principal corporate office in the United States where HSBC consolidated its New York workforce. Following the Great Recession of 2008–09, the Bank sought to raise capital and entered into a sale-leaseback transaction with Property and Building Corporation, Ltd., one of the largest real estate companies in Israel, and the real estate affiliate of the IDB Group, the largest diversified business group in Israel, in October 2009. Prior to the transaction, HSBC had spent $16 million on property improvements and, after the transaction, the Bank spent another $25 million to downsize and consolidate employees to floors 2 through 11 with three state-of-the-art trading floors and a retail branch operation on the ground floor. Street-front retail also includes a Staples store and a Panera Bread restaurant.

Following the HSBC consolidation, other office space in the building was leased to venture capital and investment firms such as Man Group plc as well as law firms such as Baker McKenzie, the second-largest tenant, on long-term leases. HSBC continued to lease more than 63% of the space on leases that were set to expire at the end of April 2020. The lease expiration before debt maturity was an important consideration in DBRS Morningstar’s analysis of the credit ratings on the Certificates; however, in 2019, HSBC extended its lease by five years to April 2025, thereby eliminating the uncertainty of a large space becoming vacant during the term of the loan. As of the date of this press release, the loan and security have approximately two years remaining until maturity.

The property is located in the Grand Central submarket and is a short walk from all three major commuter stations into New York—Grand Central Terminal, Penn Station, and the New Jersey Transit Authority bus terminal. The property’s location is close to multiple subway lines, Broadway theaters, world famous shopping on Fifth Avenue, Rockefeller Center, Hudson Yards, and other Class A office buildings in Midtown Manhattan. Reis, Inc. reported that the submarket showed an April 2020 vacancy of 7.7% while actual vacancy at the property was reported to be 3.4%.

The DBRS Morningstar net cash flow (NCF) derived at issuance was reanalyzed for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The resulting NCF figure was $27.5 million and a cap rate of 6.75% was applied, resulting in a DBRS Morningstar Value of $407.4 million, a variance of -37.3% from the appraised value at issuance of $650.0 million. The DBRS Morningstar Value implies an LTV of 70.4% compared with the LTV of 44.1% on the appraised value at issuance. The NCF figure applied as part of the analysis represents a -11.0% variance from the Issuer’s NCF, primarily driven by estimated annual leasing costs and the omission of the HSBC rent adjustment set to occur several years after issuance with no rent extension envisioned at that time. As of YE2019, the servicer reported a NCF figure of $29.3 million, a +6.5% variance from the reanalyzed DBRS Morningstar NCF figure, primarily a factor of estimated annual leasing costs, higher taxes, and higher base rent accompanied by higher recoveries.

The cap rate DBRS Morningstar applied is at the lower end of the DBRS Morningstar Cap Rate Ranges for office properties, reflecting the property’s location in Midtown Manhattan along Fifth Avenue, a strong and stable office market, a strong tenancy, and the extension of HSBC’s lease to April 2025—beyond loan maturity in approximately one year. In addition, the 6.75% cap rate DBRS Morningstar applied is substantially above the implied cap rate of 4.76% based on the Issuer’s underwritten NCF and appraised value and within the range of DBRS Morningstar office cap rates for similar-quality buildings in the midtown submarket.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis totaling 4.00% to account for cash flow volatility, property quality, and market fundamentals.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Classes X-A and X-B are 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 ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology and North American CMBS Surveillance Methodology, which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that 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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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