Fitch Downgrades JP Morgan Chase Commercial Mtge Securities Trust 2010-C1; Revises Outlooks
KEY RATING DRIVERS
The downgrades are primarily driven by the continued underperformance of the largest loan in the pool, the Gateway at Salt Lake City loan (30.4% of the pool), and the expected upcoming write-down of the loan balance. Additionally, the pool has become more concentrated with only 13 of the original 36 loans remaining.
As of the October 2015 distribution date, the pool's certificate balance has paid down 56.4% to $312 million from $716.3 million at issuance. Fitch believes potential losses could be approximately 6% of the original pool balance, although this loss expectation is highly dependent on the ongoing performance of the largest loan. There are only two loans of concern, representing 34.8% of the pool. The remainder of the loans have a Fitch stressed loan to value (LTV) below 81%.
The Gateway at Salt Lake City loan transferred to the special servicer in August 2015 due to imminent default following several years of declining performance. The borrower subsequently listed the property for sale. The special servicer and the borrower are currently in the process of approving a sale, which is subject to a loan assumption with reduced debt and a loan extension. The current borrower has kept the loan current. Fitch is concerned over the final resolution of this loan, as many details related to the sale are unclear, including the strength of the future sponsor, plans to stabilize the asset, and the final loan structure.
The Gateway at Salt Lake City is a 623,972 square foot (sf) retail center located in downtown Salt Lake City, UT that is anchored by Dick's Sporting Goods (lease expiring January 2017), Gateway Theaters (lease expiring October 2026) and Barnes & Noble (lease expiring January 2017). The property has suffered a steady decline in occupancy since 2012 when City Creek, a nearby retail center opened. The new development has lured away several major tenants from Gateway at Salt Lake City, notably Apple Store. As a result of the declined occupancy rate and co-tenancy clauses that allow the existing tenants to pay lower rents, the property has been generating net operating income (NOI) that is significantly below issuance expectations. Since year-end (YE) 2014, the debt service coverage ratio (DSCR) has remained blow 1.0 times (x).
The servicer reported third quarter 2015 (3Q14) occupancy rate was 76.2% occupied, compared to 78.8% at YE 2014, 83.5% at YE 2013, 85.5% at YE 2012 and 93% at YE 2011. The property was 96.4% occupied at issuance. NOI as of trailing 12 month (TTM) ending September 2015 dropped 14% from YE 2014. The servicer reported the annualized 3Q15 DSCR was 0.71x compared to 0.82x at YE 2014, 1.09x at YE 2013 and 1.36x at YE 2012.
The second contributor to modeled losses continues to be the Aquia Office Building (4.4%) loan, which is secured by a 97,990 sf office property located in Stafford, VA. The loan transferred to special servicing in March 2015 due to imminent default as the borrower indicated it would not be able to refinance the loan at the maturity in June 2015. Per the June 2015 rent roll, the property was 58.8% occupied, compared to 91.5% at YE 2014. The decline in occupancy was due to the former largest tenant, TASC, which occupied 62,184 sf (63% net rentable area [NRA]) vacated upon lease expiration in December 2014. A new tenant has taken over part of TASC's space (14,784 sf, representing 15% of NRA), effective May 2015. The borrower and the servicer have negotiated a loan modification agreement and the loan maturity date has been extended one year to June 2016.
The Negative Rating Outlooks on classes B and below represent the uncertainty surrounding the workout of the Gateway at Salt Lake City loan including the potential for ongoing interest shortfalls to the classes, and the future performance of the loan. The Rating Outlooks for classes A1 through A3 remain Stable as no rating actions are expected since the majority of the pool has maintained performance consistent with issuance and the pool will continue to delever. Ratings on distressed classes may subject to further downgrades when losses are allocated.
Fitch has downgraded the following classes as indicated:
--$14.3 million class D to 'BBsf' from at 'BBBsf'; Outlook Negative
--$16.1 million class E to 'Bsf' from 'BBB-sf'; Outlook Negative;
--$9 million class F to 'CCCsf' from 'Bsf'; RE10%;
--$7.2 million class G to 'Csf' from'CCCsf'; RE 0%;
--$6.3 million class H to 'C' from 'CCCsf'; RE 0%.
Fitch has affirmed the following classes and revised Outlooks as indicated:
--$11.8 million class A-1 at 'AAAsf'; Outlook Stable;
--$131.3 million class A-2 at 'AAAsf'; Outlook Stable;
--$61.5 million class A-3 at 'AAAsf'; Outlook Stable;
--Interest-only class X-A at 'AAAsf'; Outlook Stable;
--$16.1 million class B at 'AAsf'; Outlook to Negative from Stable;
--$26.9 million class C at 'A-sf'; Outlook to Negative from Stable.
Fitch does not rate classes NR and X-B.