Morningstar DBRS Downgrades Credit Ratings on Seven Classes of JPMCC Commercial Mortgage Securities Trust 2015-JP1, Changes Trends on Four Classes to Negative from Stable

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on seven classes of Commercial Mortgage Pass-Through Certificates, Series 2015-JP1 issued by JPMCC Commercial Mortgage Securities Trust 2015-JP1 as follows:

-- Class X-C to BBB (high) (sf) from A (high) (sf)
-- Class C to BBB (sf) from A (sf)
-- Class X-D to BBB (low) (sf) from BBB (high) (sf)
-- Class D to BB (high) (sf) from BBB (sf)
-- Class X-E to B (high) (sf) from BB (high) (sf)
-- Class E to B (sf) from BB (sf)
-- Class F to C (sf) from CCC (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

-- 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 X-B at AA (high) (sf)
-- Class B at AA (sf)

Morningstar DBRS changed the trends on Classes A-S, X-A, X-B, and B to Negative from Stable, and maintained the Negative trends on Classes X-C, C, X-D, D, X-E, and E. Classes A-4, A5, and A-SB continue to carry Stable trends. There is no trend for Class F, which has a credit rating that does not typically carry a trend in commercial mortgage-backed securities (CMBS).

The credit rating downgrades reflect Morningstar DBRS' increased loss expectations for the pool, primarily driven by the largest loan in the pool, 32 Avenue of the Americas (Prospectus ID#1, 19.5% of the pool), along with six other loans Morningstar DBRS identified as being at increased risk of maturity default, given observed performance declines, concentrated upcoming tenant roll, and other refinance concerns, as all loans are scheduled to mature in Q4 2025. In a wind-down scenario where performing loans successfully repay from the pool, the potential for an adverse selection is significant given that Morningstar DBRS' loans of concern represent 55.7% of the pool balance. While all loans are current as of the May 2024 reporting, updated value projections for these seven loans of concern indicate sizable value deficiencies, most notably for loans secured by office properties, including 32 Avenue of the Americas, 7700 Parmer (Prospectus ID#2, 14.6% of the pool), and Heinz 57 Center (Prospectus ID#3, 8.3% of the pool). Where applicable, Morningstar DBRS increased the probability of default (POD) penalties and/or increased loan-to-value (LTV) ratios to reflect the increased risk of maturity default. These adjusted loans had a weighted-average (WA) expected loss (EL) that was nearly 1.5 times (x) the pool's elevated WA EL. Given the loan-specific challenges for some of the office loans and the downward pressure implied by the CMBS Insight Model results, the Negative trends for the five lowest-rated classes most exposed to loss were warranted. Should performance of these loans fail to stabilize or deteriorate further, or should future defaults occur, these classes may be subject to credit rating downgrades as part of future review cycles.

As part of its June 2023 credit rating action, Morningstar DBRS downgraded Classes D, E, and F as a result of the loss expectations for the three cross-collateralized/cross-defaulted Franklin Ridge loans (Prospectus ID#13, #14, and #15; the Franklin Ridge Loans) and changed the trends on Classes C, D, and E to Negative because of the continued credit erosion and increased concerns about the concentration of loans secured by office properties. In March 2024, the Franklin Ridge Loans were liquidated from the trust at a realized loss of $10.3 million, higher than the Morningstar DBRS projected loss. To date, seven loans have been liquidated from the trust with a cumulative loss of approximately $44.3 million. The loss resulted in a complete writedown of the unrated Class HR piece and partial writedown to Class G. Morningstar DBRS subsequently downgraded the credit rating on Class G and simultaneously discontinued and withdrew the credit rating.

As of the May 2024 reporting, 34 of the original 51 loans remain in the pool, with an aggregate trust balance of $513.5 million, representing a collateral reduction of approximately 35.8% since issuance. Eight loans, representing 15.8% of the pool, are fully defeased. The pool is extremely concentrated by loan size, as the largest loan in the pool accounts for 19.5% of the deal balance, while the top five loans represent 54.0% of the deal balance. By property type, excluding defeasance, the pool is most concentrated by office properties, which represent 42.4% of the pool, followed by retail and multifamily properties, which represent 12.2% and 12.0% of the pool, respectively. Seven loans, representing 38.1% of the pool, are on the servicer's watchlist, primarily for occupancy and debt service coverage ratio (DSCR) declines.

The largest loan in the pool is 32 Avenue of the Americas, which is secured by a 1.2 million square foot (sf) dual office and data center property in Manhattan's Tribeca district. The 10-year interest-only (IO) loan is scheduled to mature in November 2025. It is one of five pari passu pieces of a $425.0 million whole loan, with other senior portions securitized in JPMCC 2015-C33 and COMM 2016-CCRE28, which are also rated by Morningstar DBRS. The loan was added to the servicer's watchlist in April 2023 because of occupancy decline. Occupancy has trended downward year over year for the past several years. As per the December 2023 rent roll, the property was 60.5% occupied, down from 70.0% at YE2022, 75.6% at YE2021, and 95.0% at issuance. Consequently, the loan's DSCR has also been declining, with the YE2023 DSCR reported at 1.03x, compared with the YE2022 DSCR of 1.78x and YE2021 DSCR of 1.96x. The loan is equipped with a cash management account, which will be activated at a DSCR trigger of 1.15x for two consecutive quarters. However, given the loan's coverage, it is unlikely that a meaningful amount of cash can be swept.

The performance declines can be attributed to the downsizing and departures of prominent tenants at the subject. Former largest tenant AMFM Operating Inc., part of iHeartMedia, vacated at lease expiry in December 2022. At issuance, the tenant occupied 14.6% of the net rentable area (NRA) but had downsized to 8.1% of the NRA prior to vacating. The current largest tenants are TELX (12.6% of the NRA, lease expiry in July 2033), Dentsu Holdings USA Inc. (Dentsu; 6.0% of the NRA, lease expiry in August 2025), and Cedar Cares Inc. (5.7% of the NRA, lease expiry in August 2027). At issuance, TELX occupied 22.5% of the NRA, and Dentsu occupied 14.5% of the NRA. However, both tenants began slowly giving back their space over the years, eventually downsizing to their current footprints at the subject. Moreover, as per the servicer commentary, Cedar Cares Inc. is looking to sublease some space as it has not grown as expected. There is also approximately 25% rollover risk prior to loan maturity, which would further exacerbate the property's performance since issuance and elevate refinancing risk.

The sponsor, Rudin Management, is currently advertising 41.6% of the NRA as available for leasing at an average rental rate of $73.79 per sf (psf), which is slightly higher than the current average in-place rental rate of $71.74 psf according to the December 2023 rent roll. As per Reis, office properties in the South Broadway submarket reported a YE2023 vacancy rate of 14.1% with an average asking rental rate of $72.52 psf, up from the YE2022 vacancy rate of 10.7% and average asking rental rate of $70.10 psf. Although the subject is a prominent telecom building in Manhattan, with infrastructure that has historically made it a popular location for data center and telecom tenants, media sources indicate the sponsor is exploring options to convert some space to retail use in the hopes of attracting leasing activity. However, given that the sponsor recently spent approximately $100 million renovating a nearby asset at 80 Pine Street with little notable impact on occupancy or value, combined with observed challenges in the current office landscape, the building's age, consistently declining occupancy, and a history of tenant departures/downsizing, Morningstar DBRS remains pessimistic about the property's near-term leasing prospects. Morningstar DBRS expects the borrower to face challenges in securing refinancing at loan maturity next year. Based on these factors, Morningstar DBRS analyzed this loan with an elevated LTV ratio and a POD adjustment to increase the expected loss to nearly 1.75x the WA EL of the pool.

Another loan with which Morningstar DBRS has refinance concerns is Heinz 57 Centre. The loan is secured by a 699,610 sf, 14-story, Class A, office building in Pittsburgh. The property was originally constructed in 1913, with substantial renovations in 1999, and has approximately 172,000 sf of retail space. The loan has historically performed in line with expectations, most recently reporting a YE2023 occupancy of 95.0% and a DSCR of 1.35x; however, occupancy is expected to fall significantly to 65.0% by August 2025, six months prior to loan maturity in December 2025, which will likely complicate takeout financing. In March 2024, the second-largest tenant, Burlington Coat Factory (20.8% of the NRA) vacated the retail portion of the property, while the fourth-largest tenant, BDO Seilman LLP (9.% of the NRA), has indicated it will vacate upon lease expiry in August 2025. While the largest tenant, Heinz North America (Heinz, 44.3% of the NRA), continues to honour the terms of its lease agreement, the tenant vacated and has subleased portions of its space since 2014, to the University of Pittsburgh Medical Center and to Grant Street Group, with all leases coterminously expiring six months after loan maturity in July 2026, indicating occupancy could fall below 25% with no leasing momentum. The Pittsburgh Central Business District office submarket remains soft, with Reis reporting a vacancy rate of 19.6% for Class A properties, with an average asking rental rate of $33.16 psf, compared to the subject's in-place rate of $17.6 psf. While Heinz was required to established a $6.2 million tenant reserve, which was reported at $7.8 million as of May 2024, re-leasing the property to market will require significant capital from the borrower. Considering the significant headwinds to backfilling a large vacant space in a challenging submarket, as well as the low investor demand for this property type, Morningstar DBRS analyzed this loan with a stressed LTV in excess of 125% and increased the POD, resulting in an expected loss that was nearly 1.5x the WA EL of the pool.

ENVIRONMENTAL, SOCIAL, AND 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 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, X-B, X-C, X-D, and X-E 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 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 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 credit 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 credit ratings assigned to Classes A-S and B 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 rationale for the material deviations is uncertain loan-level event risk. The loans of concern in this pool increase the baseline expected loss, with the adjustments as outlined elsewhere in this press release compounding those factors and driving up the expected loss for the pool even further. As the loans in question are currently performing with nearly 18 months to stabilize cash flows prior to maturity, these deviations were deemed warranted. The Negative trends placed on the five lowest-rated classes most exposed to loss signal the overall concerns and suggest downgrades could occur as part of future review cycles.

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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
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://dbrs.morningstar.com/about/methodologies.

-- North American CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model version 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 (April 15, 2024), https://dbrs.morningstar.com/research/431205

A description of how Morningstar DBRS analyzes 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.