DBRS Morningstar Confirms Ratings on All Classes of JPMDB Commercial Mortgage Securities Trust 2017-C7

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2017-C7 issued by JPMDB Commercial Mortgage Securities Trust 2017-C7 (the Issuer) as follows:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (sf)
-- Class X-B at A (sf)
-- Class C at A (low) (sf)
-- Class X-D at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class E-RR at BB (low) (sf)
-- Class F-RR at B (low) (sf)

The trends on all ratings are Stable. The rating confirmations reflect the minimal changes to the overall stable performance of the underlying collateral, which remains in line with DBRS Morningstar’s expectations since the last review.

As of the July 2023 reporting, 36 of the original 41 loans remain in the pool with an aggregate principal balance of $1.01 billion, representing a collateral reduction of 8.3% since issuance as a result of loan amortization and loan repayments. Two loans, representing 1.3% of the pool balance, are fully defeased. There are 14 loans, representing 55.4% of the pool, on the servicer’s watchlist and no loans are in special servicing. Since the last review, a previously specially serviced loan, Lightstone Portfolio (2.4% of the pool), was returned to the master servicer following a significant rebound in performance with renovations ongoing.

The pool is concentrated by property type with loans secured by office, hotel, and industrial properties representing 34.9%, 19.6%, and 18.6% of the pool balance, respectively. In general, the office sector has been challenged, given the low investor appetite for the property type and high vacancy rates in many submarkets as a result of the shift in workplace dynamics. While the majority of office loans in the transaction continue to perform as expected, there were several loans that were showing declines from issuance or otherwise exhibiting increased risks from issuance. For this review, these loans were analyzed with stressed scenarios to increase expected losses (ELs) as applicable, which resulted in a weighted-average (WA) EL that was approximately 35% greater than the pool’s WA EL for office properties.

The largest watchlisted loan is Station Place III (Prospectus ID#3, 6.3% of the pool), which is secured by a Class A office building in the central business district of Washington D.C. The loan was added to the servicer’s watchlist in December 2022 because the largest tenant, SEC, which occupies 40.5% of net rentable area (NRA), gave notice that it will not extend its lease upon its September 2023 lease expiration. According to the servicer, the borrower has engaged a broker and is actively marketing the space for lease. The loan is structured with a cash flow sweep that was initiated 12 months prior to SEC’s lease expiration following the tenant’s notice of non-renewal. As of the July 2023 loan level reserve report, approximately $12.2 million has been collected, with another $6.2 million held across other reserves.

It is worth noting that the second-largest tenant, Kaiser Foundation (40.0% of NRA), recently extended its lease from June 2024 to June 2029 at a rental rate of $56.59 per square foot (psf), an increase from their former rate of $53.86 psf. According to a Q1 2023 Reis report, office properties in the submarket of Capitol Hill Washington, D.C. reported an average vacancy rate of 14.1%, an asking rental rate of $56.71 psf and an effective rental rate of $47.78 psf.

If the borrower is unable to secure a replacement tenant for SEC’s space, it would result in an implied debt service coverage ratio (DSCR) of about 1.60 times (x), compared to the YE2022 DSCR of 3.38x and DBRS Morningstar derived at issuance of 2.41x. Although the implied DSCR is below DBRS Morningstar expectations, it is still well above break even. In addition, other mitigating factors include the cash flow sweep and recent leasing momentum as the borrower was able to extend the lease for Kaiser Foundation. DBRS Morningstar took a conservative approach in its analysis by applying a stressed loan-to-value ratio (LTV) and an elevated probability of default (POD) to increase the EL of the loan, which resulted in a figure that was almost double the pool EL.

Another watchlisted loan that is secured by an office property is First Stamford Place (Prospectus ID36, 5.4% of the pool), which is secured by a Class A office complex in Stamford, Connecticut. The loan was added to the servicer’s watchlist in June 2023 for low occupancy, which, as per the March 2023 rent roll, was reported at 72.9%, a significant drop from the issuance occupancy rate of 90.8%. At issuance, the largest tenant was Legg Mason & Co., LLC, which initially occupied 17.0% of NRA on a lease expiring in September 2024. The company was acquired by Franklin Templeton Companies in 2020 and had reduced its footprint at the subject to approximately 9.0% of NRA on a lease extending to September 2035. Other large tenants at the subject include Odyssey Reinsurance Company (11.0% of NRA, lease expires in September 2033) and Partner Reinsurance Company of the US (7.0% of NRA, lease expires in January 2029). In the next 12 months, there is nominal tenant rollover. According to a Q1 2023 Reis report, office properties in the Stamford submarket reported a vacancy rate of 28.5%, compared to the Q1 2022 vacancy rate of 25.9%. According to the YE2022 financials, the loan reported a DSCR of 1.57x, down from the YE2021 DSCR of 2.13x and the DBRS Morningstar DSCR of 2.38x derived at issuance. Given the decline in performance, paired with the soft market conditions, DBRS Morningstar analyzed this loan with a stressed LTV and POD, resulting in an EL almost triple the pool average.

The Preston Plaza loan (Prospectus ID#17, 2.6% of the pool), is secured by a 259,000 sf office property located in Dallas and was added to the watchlist in July 2021 due to low DSCR and occupancy. Per the March 2023 rent roll, the property was 64% occupied and the YE2022 DSCR was reported at 0.70x. The second-largest tenant, Slater Matsil LLP (10.3% of NRA), is re-evaluating its space and had expressed an interest in downsizing. According to Reis, office properties located in the Plano/Allen submarket reported a Q1 2023 vacancy rate of 26.0%, compared to the Q1 2022 vacancy rate of 25.4%. Although the sponsor contributed $12.9 million in equity to purchase the subject at issuance, given the value of the property has likely declined, it is uncertain if the sponsor will remain committed to the subject. For this review, DBRS Morningstar applied a stressed LTV and POD to its analysis, resulting in an EL that was more than triple the pool average.

At issuance, DBRS Morningstar shadow rated Moffett Place Building 4 (Prospectus ID#1, 6.8% of the pool), Gateway Net Lease Portfolio (Prospectus ID#8, 4.9% of the pool), and General Motors Building (Prospectus ID#10, 4.5% of the pool) as investment-grade. DBRS Morningstar confirmed that the performance of these loans remains consistent with investment-grade loan characteristics.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/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/416784 (July 4, 2023)

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

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

The principal methodology is “North American CMBS Surveillance Methodology” (March 16, 2023); https://www.dbrsmorningstar.com/research/410912

Other methodologies referenced in this transaction are listed at the end of this press release.

The credit rating assigned to Class B materially deviates from the credit rating implied by the predictive model. DBRS Morningstar typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit rating would consider a three-notch or more deviation from the credit rating stress(es) implied by the predictive model to be a significant factor in evaluating the credit rating. The rationale for the material deviation is due to the uncertain loan level event risk. The analysis for this review included stressed scenarios for several office loans given the general challenges faced in that sector. Given the uncertain loan-level event risk for those loans and otherwise healthy performance metrics paired with no delinquent or specially serviced loans, the material deviation was warranted.

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 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.

DBRS Morningstar 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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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model v 1.1.0.0;
https://www.dbrsmorningstar.com/research/410913.

-- Rating North American CMBS Interest-Only Certificates (December 19, 2022); https://www.dbrsmorningstar.com/research/407577.

-- DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022); https://www.dbrsmorningstar.com/research/402646.

-- North American Commercial Mortgage Servicer Rankings (September 8, 2022); https://www.dbrsmorningstar.com/research/402499.

-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023); https://www.dbrsmorningstar.com/research/415687.

-- Legal Criteria for U.S. Structured Finance (December 7, 2022);
https://www.dbrsmorningstar.com/research/407008.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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