Morningstar DBRS Downgrades Ratings on Two Classes of JPMCC Commercial Mortgage Securities Trust 2017-JP6, Changes Trends on Seven Classes to Negative

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on two classes of Commercial Mortgage Pass-Through Certificates, Series 2017-JP6 issued by JPMCC Commercial Mortgage Securities Trust 2017-JP6 as follows:

-- Class F-RR to B (low) (sf) from BB (sf)
-- Class G-RR to CCC (sf) from B (high) (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

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

Morningstar DBRS also changed the trends on Classes B, C, D, E-RR, F-RR, X-A, and X-B to Negative from Stable. Class G-RR no longer carries a trend given the CCC (sf) or lower credit rating. The trends on all remaining classes are Stable.

The credit rating downgrades reflect Morningstar DBRS’ increased loss expectations for the pool, primarily attributed to the 211 Main Street loan (Prospectus ID#2, 11.1% of the pool). Morningstar DBRS’ loss projections for this loan and two others in special servicing total nearly $26.4 million, resulting in a near full write-down of Class N-RR. The Negative trends follow the resulting implied credit deterioration relative to the remaining pool. The pool is concentrated by office properties, which is the highest property concentration comprising 55.5% of the current pool balance. Not including the specially serviced loans or 211 Main Street, Morningstar DBRS identified six loans representing 29.5% of the pool as exhibiting increased default risk and analyzed these loans with stressed loan-to-value ratios (LTVs) and/or elevated probability of default (POD) penalties, as applicable. The resulting weighted-average (WA) expected loss (EL) for these loans was nearly double the WA EL for the pool.

As of the February 2024 remittance, 34 of the original 42 loans remain in the pool, with an aggregate principal balance of $580.7 million, reflecting a 26.2% collateral reduction since issuance. Two loans, representing 2.3% of the pool balance, are fully defeased. There are two loans, representing 5.2% of the pool, in special servicing. The concentration of loans on the servicer’s watchlist has materially increased to 55% compared with 23% during Morningstar DBRS’ prior review.

As noted above, a primary driver of Morningstar DBRS’ loss projections is 211 Main street (Prospective ID#2, 11.1% of the pool), which is scheduled to mature in April 2024. The subject note is pari passu with notes securitized in JPMCC 2016-JP6 and DPJPM 2017-C6, both of which are rated by Morningstar DBRS. The collateral is a 417,266-square-foot (sf) office building constructed in 1973 and located in the heart of downtown San Francisco. At issuance, the building was 100% occupied by Charles Schwab, which maintained its global headquarters at the subject on a lease through April 2028. In 2021, the tenant moved its headquarters to the Dallas-Fort Worth area and has since vacated a significant portion of its space at the subject property. Per its most recent announcement, Charles Schwab announced its plans to further consolidate its operations and reduce its footprint at the subject to six floors from 17 floors. Charles Schwab has no termination options and Morningstar DBRS expects that all excess cash is being trapped according to the loan triggers. While the loan has remained current with a trailing 12-month debt service coverage ratio (DSCR) of 2.71 times (x) as of September 2023, as Schwab continues to honor its lease terms, Morningstar DBRS considers the loan at increased risk of maturity default, given the potential of the property going dark coupled with the loan’s near-term maturity. Morningstar DBRS also expects the property value has likely declined significantly from the issuance value of $294 million given the decline in space utilization in addition to the challenged office landscape, weakened submarket conditions, and age of the asset. According to Reis, Inc., the South Financial District submarket reported a YE2023 vacancy rate of 19.6% with asking rents of $75.96 per square foot (psf).

Morningstar DBRS believes the sponsor’s commitment could be challenged if a replacement loan (or extension of the subject loan) requires a significant equity contribution. To reflect this concern, Morningstar DBRS derived a stressed value based on the property’s in-place cash flows and a stressed cap rate of 10%. To account for the potential of the building going dark, as well as its age and property condition, Morningstar DBRS applied a 25% haircut to the stressed value in its liquidation analysis, resulting in a projected loss severity approaching 36%.

The largest loan on the servicer’s watchlist, 245 Park Avenue (Prospectus ID#1, 16.9% of the pool) is secured by a high-rise Class A office tower in Midtown Manhattan. The $1.2 billion loan, which has a pari passu structure with pieces securitized across five Morningstar DBRS-rated deals JPMDB 2017-C7, CGCMT 2017-P8, JPMCC 2017-JP7, CSAIL 2017-C8, and DBJPM 2017-C6, was previously in special servicing in November 2021 after the original sponsor filed for chapter 11 bankruptcy. According to servicer documents, SL Green Realty Corp. (SL Green) purchased the property and assumed the debt in late 2022; however, per a press release by SL Green in June 2023, SL Green sold its 50% stake to Mori Trust Co Ltd. for $1 billion that valued the collateral at $2.0 billion. Recent servicer reporting indicates the loan has exhibited declining cash flows and occupancy. According to a November 2023 rent roll, the property was 74% occupied, down from 79% at YE2022, 83% at YE2021, and 91% at YE2020. The YE2023 cash flow of $70.4 million represents a 24.4% decline from the YE2022 cash flow of $92.2 million. Additionally, there is concentrated near-term rollover risk with leases representing 27% of the net rentable area (NRA), including two of the five largest tenants, scheduled to expire in the next 24 months. To reflect its concerns with declining performance and high rollover risk, Morningstar DBRS analyzed this loan with elevated LTV and POD penalties to increase the expected loss.

ENVIRONMENTAL, SOCIAL, 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 Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030

Classes X-A and X-B are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO credit 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 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 credit ratings assigned to Classes B, C, D, and E-RR materially deviate from the credit ratings implied by the predictive model. Morningstar DBRS typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider a three-notch or more deviation from the credit rating stresses implied by the predictive model to be a significant factor in evaluating the credit ratings. The material deviations are warranted given uncertain loan-level event risk. The loans of concern in this pool increase the baseline EL, with the adjustments as outlined elsewhere in this press release compounding those factors and driving up the EL for the pool even further. As the loans in question are currently performing and have a longer runway for cash flows to stabilize given their respective maturity dates, these deviations were deemed warranted. The Negative trends placed on all of the classes in question signal the overall concerns and suggest downgrades could be made as part of future review cycles.

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 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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The Morningstar DBRS Long-Term Obligation Rating Scale definition indicates that credit 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.

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

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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 CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model v 1.2.0.0 (https://dbrs.morningstar.com/research/428797)

Rating North American CMBS Interest-Only Certificates (December 13, 2023; https://dbrs.morningstar.com/research/425261)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023; https://dbrs.morningstar.com/research/420982)

North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://dbrs.morningstar.com/research/419592)

Legal Criteria for U.S. Structured Finance (December 7, 2023;
https://dbrs.morningstar.com/research/425081)

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279. (July 17, 2023)

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.