DBRS Morningstar Confirms Ratings of J.P. Morgan Chase Commercial Mortgage Securities Trust 2012-HSBC

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

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations from the prior rating action. At issuance, the trust consisted of a $300 million loan secured by a first mortgage lien on the borrower’s fee interest in an 864,303-square foot (sf) office building complex in Midtown Manhattan. Three 10- to 12-storey towers were built between 1902 and 1935. In 1984, in conjunction with the construction of the fourth tower, the original three towers were fully integrated into a single Class A office property, known separately as 442/452 Fifth Avenue and One West 39th Street, or collectively as HSBC Tower. There is 50,987 sf of retail space, with frontage along Fifth Avenue on the ground and mezzanine floors that is 100% occupied by Staples, Panera Bread, and HSBC Retail Services Limited. The property also features a precious metals vault in the basement that is fully leased to HSBC Bank (HSBC).

The total financing for the asset of $400 million consists of the $300 million trust loan, plus an additional $100 million interest-only (IO) mezzanine loan, subordinate to the trust loan and coterminous with the subject loan, and is held outside the trust. The total financing package was used to refinance $240 million of existing debt; fund upfront reserves; pay closing costs; and return $104.8 million of equity to the sponsor, Property and Building Corp. Ltd. (PBC), which is the real estate affiliate of IDB Group. The trust loan is structured as a fixed-rate loan featuring a 10-year term, including an initial five-year IO period, which then amortizes on a 30-year schedule with a scheduled loan maturity date in July 2022.

As of the June 2021 remittance report, the outstanding trust balance had been reduced to $280.8 million, representing a 6.4% collateral reduction since issuance because of scheduled amortization, and the servicer reported total reserves of $1.9 million. The outstanding mezzanine debt balance remains the same from issuance.

In May 2020, the rental rate for the largest tenant, HSBC, was increased significantly as a result of a scheduled rent step, contributing to significant cash flow growth for 2020 as compared with the previous year. The servicer reported a YE2020 net cash flow (NCF) of $44.0 million and a debt service coverage ratio (DSCR) of 2.40 times (x), compared with YE2019 figures of $36.0 million and 1.96x, respectively.

As of the December 2020 rent roll, the property was 98.8% leased. The largest tenant at the property is HSBC, with leases representing 63.3% of the total net rentable area (NRA), across office (56.6% of NRA), retail (3.2% of NRA), and storage (3.6% of NRA) space types, with coterminous lease expirations in April 2025. The second-largest tenant is multinational law firm Baker McKenzie, representing 12.2% of NRA with a lease expiration in January 2028. The third-largest tenant is Man Group, one of the world’s largest hedge fund managers, representing 5.6% of NRA with a lease expiration in July 2022. HSBC, Man Group, and the retail tenant Staples each carry investment-grade credit ratings. Near-term rollover is minimal and is primarily attributable to the lease expiry for Man Group in July 2022.

HSBC first occupied the combined building complex in 1999 as its principal corporate office in the U.S. where HSBC consolidated its New York workforce. Following the Great Recession of 2008–09, HSBC, which owned the asset, sought to raise capital and entered into a sale-leaseback transaction with the sponsor. 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 as of issuance; however, in 2017, HSBC extended its lease by five years to April 2025, reducing the term risk for the loan.

It should also be noted that in February 2021, it was reported that HSBC would be exiting the mass market retail banking sector, and a May 26, 2021, press release from HSBC confirmed that the company would be exiting or winding down a majority of its 148 branches, but “will retain a small network of physical locations in existing markets which will be repurposed into 20-25 international wealth centres.” The retail branch at the subject location seems well positioned to be repurposed, as at issuance, it was noted as one of the highest deposit bank branches in the U.S.

HSBC has also been in the news over the last few years following announcements the bank would be executing large-scale layoffs across its global operations, with 35,000 job cuts announced in early 2020, a move that followed an announcement 10,000 jobs would be eliminated in 2019. In addition, reports surfaced in February 2021 that the bank expects to reduce its office footprint by as much as 40.0% worldwide in a post-pandemic environment, with the expected reduction for 2021 expected to be 20.0% as leases scheduled for rollover are not renewed. The subject location serves as the bank’s North American headquarters and, as such, is not expected to be significantly affected by these plans, which are likely to be concentrated in the bank’s locations in Europe through the near to moderate term. However, DBRS Morningstar will monitor closely for developments given the trust loan’s 2022 maturity and the proximity to the HSBC lease expiry in 2025.

The sponsor for the trust loan is PBC, one of the largest real estate groups in Israel, traded on the Tel Aviv Stock Exchange, with a current market capitalization of more than $850 million. At issuance it was noted that PBC was the real estate affiliate of IDB Group.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

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 methodology is the North American CMBS Surveillance Methodology (March 26, 2021), 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 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@dbrsmorningstar.com.

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.

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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