DBRS Morningstar Changes Trend on Two Classes, Confirms All Classes of JPMCC Commercial Mortgage Securities Trust 2016-JP2

DBRS Limited (DBRS Morningstar) confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-JP2 issued by JPMCC Commercial Mortgage Securities Trust 2016-JP2:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class X-C at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

With this review, DBRS Morningstar changed the trends on Classes B and X-B to Stable from Negative. Classes D, E, F, and X-C continue to carry Negative trends and all remaining Classes carry Stable trends.

The Negative trends reflect DBRS Morningstar’s continued concerns surrounding the special serviced loans, Marriott Atlanta Buckhead (Prospectus ID#4, 5.6% of the pool) and 693 Fifth Avenue (Prospectus ID#3, 6.9% of the pool), as well as the largest loan on the servicer’s watchlist, Hagerstown Premium Outlet loan (Prospectus ID#9, 3.4% of the pool). While the May 2022 reporting has the 693 Fifth Avenue loan listed on the servicer’s watchlist, the servicer has confirmed the loan’s transfer to special servicing. According to the servicer commentaries for the subject loan secured in other pari passu transactions, the loan transferred on April 22, 2022. All three loans are discussed in detail below.

The transaction features a concentration of loans backed by office and mixed use (primarily office) properties within the pool’s 15 largest loans. Collectively, loans backed by those property types represent 28.6% of the current pool balance. DBRS Morningstar notes the prolonged effects of the Coronavirus Disease (COVID-19) pandemic in limiting efforts to backfill large spaces that were vacated before and during the pandemic. Among the loans showing performance declines is the 7083 Hollywood Boulevard loan (Prospectus ID#11; 2.5% of the pool), which reported an occupancy rate of 16.4% after WeWork (previously 43.7% of the net rentable area (NRA)) vacated the property in 2021. Two additional office loans within the top 15, 700 17th Street (Prospectus ID#12; 2.3% of the pool) and Four Penn Center (Prospectus ID#13; 2.4% of the pool), are both reporting below breakeven cashflows as of the most recent financial reporting for each and are also showing upcoming lease expirations for major tenants still in place.

The rating confirmations and Stable trends reflect the otherwise overall stable performance of the transaction, which remains in line with DBRS Morningstar’s last review. As of the May 2022 reporting, 43 of the original 47 loans remain in the pool with a current trust balance of $855 million, representing a collateral reduction of 8.96% since issuance as a result of amortization and the repayment of four loans. The transaction also benefits from the five defeased loans, including the second-largest loan in the pool, Center 21 (Prospectus ID#2; 9.4% of the pool), representing 15.8% of the current trust balance. Since DBRS Morningstar’s last review of the transaction, delinquencies decreased slightly to $48.1 million as of May 2022 from $67.8 million as of the June 2021 remittance. The May 2022 reporting shows 14 loans, representing 30.3% of the pool, are on the servicer’s watchlist. These loans are being monitored for a variety of reasons, including cash flow declines and/or upcoming rollover. Of the 14 watchlisted loans, 11 are notably backed by office, retail, or mixed use property types.

The specially-serviced Marriott Atlanta Buckhead loan is secured by a 349-key, full-service hotel in Atlanta’s Buckhead neighborhood. The loan transferred to special servicing in February 2021 for payment default after the borrower requested pandemic relief and it is more than 121 days delinquent as of May 2022. Since DBRS Morningstar’s June 2021 surveillance review, there have been workout developments, including the submission of a revised workout proposal that has been agreed to by the special servicer and is in the final documentation stage, with closing pending as of the date of this press release. The terms of the modification include a provision for the borrower to fund approximately $1.2 million of equity at closing, and conversion of the loan to interest-only (IO) while deferring interest payments until the earlier occurrence of (1) the June 2023 payment date or (2) the date of which the trailing 12 months (T-12) debt service coverage ratio (DSCR) is equal to or greater than 2.0 times (x). The modification will also waive furniture, fixtures, and equipment reserves and require the establishment of two new reserves to fund property expenses and capital improvements to be funded by the borrower. The loan will also remain in cash management through the remainder of the loan term.

Although DBRS Morningstar generally views the pending loan modification as a positive development in that it suggests the sponsor remains committed to the property and the loan, a factor that is likely a product of the collateral hotel’s strong performance prior to the pandemic. However, the subject has been particularly susceptible to the impact of the pandemic as its largest demand generator since issuance has been the meeting and group segment, which remains depressed compared with pre-pandemic levels, limiting improvements to the in-place cash flows. The servicer calculated a net cash flow (NCF) of -$247,000 (with a DSCR of -0.08x) and an occupancy rate of 35.0% for the T-12 ended December 31, 2021; these figures compare with the NCF of $5.7 million (with a DSCR of 2.26x) and 69.5% occupancy rate for YE2019. The special servicer’s most recent appraisal, dated April 2021, showed an as-is value of $38.2 million, down from $78.0 million at issuance and indicative of a loan-to-value ratio above 130%. Given the sharp decline in as-is value from issuance, as well as the likelihood that performance will remain subdued through the near to medium term, DBRS Morningstar believes the risks for the loan remain significantly elevated from issuance.

Another loan of concern is the 693 Fifth Avenue loan, which is secured by a mixed-use office and retail property in Midtown Manhattan. The loan has been monitored since the property’s largest retail tenant at issuance, Valentino, which occupied approximately 15.1% of the NRA and contributed more than 80% of rental income, vacated its space and initiated legal action against the borrower in June 2020 in an attempt to nullify its lease. Valentino’s lease runs through 2029. The borrower filed suit to collect the back rents and, according to an April 2022 Real Deal article, Valentino has settled the rent dispute for an undisclosed sum, finalizing its lease termination. DBRS Morningstar has requested the terms of the settlement, but the servicer’s response is pending as of the date of this press release. According to the December 2021 financials, the property’s occupancy rate has held at 51.5% since YE2020. The 2021 reporting also shows NCF has declined significantly, to $274,000 (with a DSCR of 0.02x) from $16.1 million (with a DSCR of 1.02x) at YE2020, a consequence of tenant departures, including Valentino. Most recently, the departure of JDS Development Group (12% of NRA) in April 2021 temporarily brought the occupancy rate down to 36%.

Although the low in-place coverage and low occupancy rates are of concern, DBRS Morningstar notes the property’s appraised value of $545 million at issuance would need to drop by approximately 54% to fall below the whole loan balance of $250.0 million. In addition, the loan has remained current throughout the period since Valentino’s exit, suggesting the sponsor has continued to contribute equity out of pocket beyond the significant sum of $284.8 million in equity contributed at issuance.

Another loan of concern is Hagerstown Premium Outlets (Prospectus ID #9; 3.4% of the pool), secured by an open-air retail outlet center in Hagerstown, Maryland, approximately 70 miles northwest of Washington. The property is owned and operated by Simon Property Group (SPG). The loan previously transferred to special servicing for payment default in June 2020; however, a loan modification was executed in September 2020 and the borrower brought the loan current in December 2020. Principal payments between October 2020 and December 2020 were deferred and repaid over the first three months of 2021. The loan remains on the servicer’s watchlist because of low performance as the occupancy rate has been precipitously declining in recent years, beginning most notably with the losses of Nike Factory Store in 2019 and Wolf’s Furniture in 2020, both anchors for the outlet mall. The largest tenant at the subject is currently Gap Factory Store (1.9% of the NRA). As of the September 2021 rent roll, the property was 44.3% occupied, compared with the YE2020 occupancy rate of 51.2% and the YE2019 occupancy rate of 71.3%. According to the financials for the trailing six months ended June 30, 2021, the loan reported a DSCR of 0.87x compared with the YE2020 DSCR of 1.23x and YE2019 DSCR of 1.70x.

The low sustained occupancy rate and below breakeven cash flows suggest the sponsor could determine the subject property no longer fits the profile of its core portfolio and, if that determination were to be made, SPG could decide to walk away from the subject loan as it has from other commercial mortgage-backed security (CMBS) loans within its portfolio backed by malls. Given these factors and the likelihood that the mall’s as-is value has declined sharply from the $150.0 million appraised value at issuance, DBRS Morningstar maintains the risks for this loan have increased significantly from issuance and, given the loan size, support the Negative trends maintained with this review.

At issuance, DBRS Morningstar shadow-rated one loan, The Shops at Crystals (Prospectus ID#6; 5.8% of the pool), as investment grade. This assessment was supported by the loan’s above-average property quality and strong sponsorship. With this review, DBRS Morningstar confirms that the performance of the loan remains consistent with investment-grade characteristics.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or Governance factor(s) that had a significant or relevant effect on the credit analysis.

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/396929.

Classes X-A, X-B, and X-C 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 issuer and servicer 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 North American CMBS Surveillance Methodology (March 4, 2022), 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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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