Fitch Downgrades Three Distressed Classes of JPMCC 2007-LDP10
KEY RATING DRIVERS
The downgrades to the distressed classes reflect a decline in credit enhancement as a result of actual realized losses, primarily from the disposal of the Solana asset, since Fitch's last rating action. The affirmations reflect sufficient credit enhancement relative to Fitch-modeled loss expectations for the pool. Although the Solana asset was disposed with better recoveries than expected, this was offset by higher modeled loss expectation on the Lafayette Property Trust loan, which transferred to special servicing after Fitch's last rating action.
Fitch modeled losses of 15.8% of the remaining pool; expected losses on the original pool balance total 17.7%, including \$485.1 million (9.1% of the original pool balance) in realized losses to date. Fitch has designated 49 loans (40% of the current pool balance) as Fitch Loans of Concern, which includes nine specially serviced assets (10.5%).
As of the May 2015 distribution date, the pool's aggregate principal balance has been reduced by 45.8% to \$2.89 billion from \$5.33 billion at issuance. According to the servicer's reporting, seven loans (3.1%) are defeased. Cumulative interest shortfalls totaling \$55.6 million are currently affecting the A-J classes through class NR.
The largest contributor to Fitch-modeled losses is the Skyline Portfolio loan (7% of pool), which is secured by a portfolio of eight office buildings totaling approximately 2.6 million square feet (sf) located in Falls Church, VA. The loan was returned to the master servicer in February 2014 after it was previously transferred to special servicing in March 2012 for imminent default and modified in October 2013. The \$203.4 million pari-passu portion in the transaction was bifurcated into a \$105 million A-note and a \$98.4 million B-note. The loan maturity was extended to February 2022 with a one-year extension option if certain performance metrics are attained. The loan continues to perform under the terms of the modification.
Portfolio performance has not exhibited improvement since the last rating action. Net operating income (NOI) for 2014 declined 12% from 2013 and overall portfolio occupancy as of April 2014 was 51.7% compared to 54% at year-end (YE) 2013 and 97% at issuance. Individual occupancies ranged from 21.4% to 100% with six of the eight underlying properties having occupancies below 50%. The buildings were primarily leased to various U.S. federal government agencies and related contractors and occupancy was significantly impacted as a result of the Base Realignment and Closure statute.
The next largest contributor to Fitch-modeled losses is the Lafayette Property Trust loan (7%). The loan is secured by a portfolio of eight office properties and a single-tenant Clyde's restaurant totaling approximately 840,000 sf and located within the Mark Center, a 350-acre master-planned community in Alexandria, VA. The loan sponsor is Lafayette Real Estate, LLC and the underlying properties are currently managed by Duke Realty Corporation.
The loan was transferred to special servicing in November 2014 due to imminent default as the borrower delivered written notice of its inability to make debt service payments and fund tenant improvements and leasing commissions (TI/LCs) after the August 2015 lease expiration of the portfolio's largest tenant, CNA Corporation (CNA). To date, the borrower has been funding TI/LCs from excess cash flow after paying debt service.
CNA vacated 162,316 sf (19% of the portfolio square footage) at the 4825 Mark Center Drive property prior to its August 2015 lease expiration. Although CNA is expected to continue to remit lease payments through the end of its lease term, it will not renew as it has moved its headquarters to another newly built-to-suit property located closer to the Metro station in the Alexandria submarket at 3001/3003 Washington Boulevard. According to the March 2015 rent roll, CNA's rent is currently 4.5% above market at \$31.66 per square foot (psf) and accounts for nearly \$5.14 million of rental income for the portfolio annually. According to REIS and as of first quarter 2015 (1Q15), the I-395 office submarket of Suburban Virginia reported a vacancy of 24.8% and asking rents of \$30.28 psf. In-place base rents for the overall portfolio was approximately \$33 psf according to the March 2015 rent roll.
Portfolio occupancy has continued to decline since the last rating action. As of the March 2015 rent roll, overall portfolio occupancy was 73.1% compared to 78.6% at YE 2013, 81.2% at YE 2012, and 93.1% at issuance. Individual property occupancies ranged from 26.6% to 100%. When CNA's lease expires, the portfolio occupancy is expected to decline below 55% and the portfolio DSCR is expected to fall below 1.0x.
The borrower had initially requested for loan modification in exchange for capital investment to re-tenant the existing vacancies, but has recently informed the special servicer they are no longer doing so; therefore, the special servicer has indicated it will proceed with either a deed-in-lieu or an uncontested foreclosure. Fitch will continue to monitor the portfolio for declining occupancy, the softening market fundamentals and the overall loan workout.
The third largest contributor to Fitch-modeled losses is the Center West loan (3.1%), which is secured by a 348,021 sf office property located in Los Angeles, CA. The property has continued to exhibit year-over-year declines in both occupancy and cash flow coupled with limited leasing momentum. NOI for 2014 declined 13.4% from 2013 and 29.1% from 2012. As of the May 2015 rent roll, the property was 49.6% occupied, which is below the REIS-reported market occupancy of 87.5% for the West Los Angeles office submarket as of 1Q15. Occupancy has declined from 58% at YE 2013, 66% at YE 2012, 67% at YE 2011, and 65% at YE 2010. An additional 17% of the property's total square footage rolls over prior to the loan's January 2017 maturity date. Further, in-place base rents are above market at approximately \$54 psf compared to asking rents of \$44.44 psf, according to REIS.
RATING SENSITIVITIES
Rating Outlooks on classes A-1A, A-3, and A-M remain Stable due to sufficient credit enhancement and expected continued paydown. Further downgrades to the distressed classes will occur as losses are realized.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
Fitch has downgraded the following classes:
--\$200.7 million class A-J to 'Csf' from 'CCsf'; RE 20%;
--\$83.1 million class A-JS to 'Csf' from 'CCsf'; RE 20%;
--\$100 million class A-JFX to 'Csf' from 'CCsf'; RE 20%.
In addition, Fitch has affirmed the following classes:
--\$413.4 million class A-1A at 'AAAsf'; Outlook Stable;
--\$1.6 billion class A-3 at 'AAAsf'; Outlook Stable;
--\$359 million class A-M at 'Bsf'; Outlook Stable;
--\$71.8 million class B at 'Csf'; RE 0%;
--\$34.8 million class B-S at 'Csf'; RE 0%;
--\$18.9 million class C at 'Dsf'; RE 0%;
--\$9.2 million class C-S at 'Dsf'; RE 0%;
--\$0 class D at 'Dsf'; RE 0%;
--\$0 class D-S at 'Dsf'; RE 0%;
--\$0 class E at 'Dsf'; RE 0%;
--\$0 class E-S at 'Dsf'; RE 0%;
--\$0 class F at 'Dsf'; RE 0%;
--\$0 class F-S at 'Dsf'; RE 0%;
--\$0 class G at 'Dsf'; RE 0%;
--\$0 class G-S at 'Dsf'; RE 0%;
--\$0 class H at 'Dsf'; RE 0%;
--\$0 class H-S 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-1S, A-2, A-2S, A-2SFX, A-2SFL, A-3S, and A-MS certificates have paid in full. Fitch does not rate the fully depleted class NR certificates. Fitch previously withdrew the rating on the interest-only class X certificates and the class A-JFL certificates.
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