Fitch Ratings has upgraded two and affirmed 12 classes of J.P. Morgan Chase Commercial Mortgage Securities Corp., series 2004-PNC1 commercial mortgage pass-through certificates (JPMCC 2004-PNC1). Fitch has also revised the Rating Outlook for class D to Positive from Stable. A detailed list of rating actions follows at the end of this press release.
KEY RATING DRIVERS
The upgrades reflect an increase in credit enhancement due to three loan payoffs since Fitch’s previous rating action, as well as continued amortization and paydown. Fitch has applied additional stresses in its base case scenario to reflect the increasing risk of adverse selection as the pool becomes more concentrated. Despite high credit enhancement, ratings for classes D and E are capped at ‘Asf’ and ‘BBBsf’, respectively, due to concentration risk, quality of the remaining collateral, the percentage of Fitch Loans of Concern (FLOCs, 29.6%) and significant single-tenant exposure (three loans, 48.1%). These concerns increase the pool’s exposure to single event risk, which can cause a significant loss or interest shortfall in the future.
Currently, there are only 13 loans remaining in the transaction, compared to 101 at issuance. Fitch modeled losses of 28.3% of the remaining pool; expected losses on the original pool balance total 6.5%, including $49.6 million (4.5% of the original pool balance) in realized losses to date. Fitch has designated four loans as FLOCs, including one specially serviced asset (12.2%).
As of the May 2016 distribution date, the pool’s aggregate principal balance has been reduced by 92.8% to $78.7 million from $1.1 billion at issuance. One loan (4.7%) is defeased. Interest shortfalls totaling $2.85 million are currently affecting classes H, L, M, N, P and NR.
The largest contributor to expected losses is a 146,279 square foot (sf) retail center (12.9%) located in Springdale, OH. The property is currently 57% occupied by two tenants. The former largest tenant, Dick’s Sporting Goods, which occupied 43% of the property, vacated upon lease expiration in October 2015. The two remaining tenants have extended their leases until March 2019 and January 2021, respectively, but are paying reduced rents due to co-tenancy clauses with the former Dick’s space. Historically, the borrower has been offering rent concessions in order to maintain occupancy, which has impacted property revenues. The loan has passed its anticipated repayment date (ARD) of May 2014. The final loan maturity date is May 1, 2034. The servicer-reported first quarter (1Q) 2016 debt service coverage ratio (DSCR) was 0.37x, compared to 0.94x at year-end (YE) 2015 and 1.52x at issuance.
The second largest contributor to Fitch’s modeled losses is an 180,000 sf suburban office property (12.2%) located in Farmington Hills, MI, a suburb of Detroit. The property is 100% occupied by the single tenant Jervis B. Webb Company, whose lease will expire in September 2017. The tenant is expected to vacate upon lease expiration. The loan transferred to the special servicer in October 2013 due to imminent payment default after the borrower was unable to secure refinancing proceeds prior to the April 2014 maturity date. The property was foreclosed on and became real estate owned (REO) in August 2015. The special servicer is working to identify replacement tenants.
The Positive Outlook on class D indicates that future upgrades are possible if the tenant of the largest loan in the pool exercises its renewal option in December 2018. Swiss Re Management (US) Corp. occupies 100% of the ERC Overland Park property, a 320,198 sf office property located in Overland Park, KS (43.1% of the pool). Upgrades are also possible if this loan pays off on its Anticipated Repayment Date (ARD) of May 2019, as the pool’s binary risk profile would decrease.
Fitch expects the ratings on the classes C, E and F to remain stable, and does not anticipate any near-term rating actions at this time. Further upgrades to classes E and F may be limited due to the concentrated nature of the pool. In addition, the distressed classes (rated below ‘B’) may be subject to further rating actions as losses are realized.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
Fitch has upgraded the following classes:
–$11 million class E to ‘BBBsf’ from ‘Bsf’; Outlook Stable;
–$16.5 million class F to ‘B’ from ‘CCCsf/RE100%’; Outlook Stable.
Fitch has affirmed the following classes:
–$11.7 million class C at ‘AAAsf’; Outlook Stable;
–$17.8 million class D at ‘Asf’; Outlook to Positive from Stable;
–$11 million class G at ‘CCsf’; RE 90%;
–$10.8 million class H at ‘Dsf’; RE 0%;
–$0 class J at ‘Dsf’; RE 0%;
–$0 class K at ‘Dsf’; RE 0%;
–$0 class L at ‘Dsf’; RE 0%;
–$0 class M at ‘Dsf’; RE 0%;
–$0 class N at ‘Dsf’; RE 0%;
–$0 class P at ‘Dsf’; RE 0%.
The class A-1, A-2, A-3, A-4, A-1A and B notes have paid in full. Fitch does not rate the class NR notes. Fitch has previously withdrawn the rating on the interest-only class X certificates.
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)
Criteria for Rating Caps and Limitations in Global Structured Finance Transactions (pub. 28 May 2014)
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)
U.S. and Canadian Fixed-Rate Multiborrower CMBS Surveillance and U.S. Re-REMIC Criteria (pub. 13 Nov 2015)
Dodd-Frank Rating Information Disclosure Form