DBRS Morningstar Confirms All Classes of J.P. Morgan Chase Commercial Mortgage Securities Trust 2019-ICON

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2019-ICON issued by J.P. Morgan Chase Commercial Mortgage Securities Trust 2019-ICON as follows:

-- Class A at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (high) (sf)
-- Class X-B at BBB (high) (sf)
-- Class D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the trust, which is secured by 18 separate nonrecourse, first-lien mortgage loans totaling $174.7 million. The transaction is backed by 10 multifamily properties and eight mixed-use properties with 352 residential and 17 commercial units in Manhattan and Brooklyn, New York. The collateral’s performance was greatly affected by the Coronavirus Disease (COVID-19) pandemic as all properties are concentrated in New York, which experienced multiple coronavirus outbreaks since March 2020 that resulted in rigorous lockdowns. The numbers of coronavirus cases in New York has significantly declined since January 2021, so various pandemic-related restrictions have been lifted. As of June 15, 2021, Governor Andrew Cuomo removed most restrictions with the exception of large-scale indoor events. Various reports indicate a recent migration back to the city as social events return. While the pandemic stressed the collateral’s performance in 2020, DBRS Morningstar believes demand will return in the medium term and the portfolio will return to near-issuance performance levels by loan maturity in 2024. The sponsor appears to be committed to the collateral, as 17 of the 18 loans have remained current throughout the pandemic despite low occupancy rates and debt service coverage ratios (DSCR).

The 18 loans have five-year interest-only (IO) loan terms and are not cross-collateralized or cross-defaulted. Each borrower is a special-purpose entity sponsored by Icon Realty Management, LLC, a real estate investment and management firm headquartered in New York. Per the sponsor’s website, the firm owns and manages more than 1,800 apartment units across the city’s more desirable neighborhoods. The trust consists of $60.7 million of Trust A Notes, which are pari passu with companion notes, and $83.9 million of Trust B Notes. Additionally, $30.0 million of companion notes were securitized in the JPMCC 2019-COR5 transaction (not rated by DBRS Morningstar). The properties are in desirable areas in Manhattan and Brooklyn, including East Village, Greenwich Village, the Upper East Side, Brooklyn Heights, and Williamsburg. Beginning in 2007, the sponsor gradually acquired the 18-property portfolio at a total cost of $160.5 million and invested an additional $55.6 million in capital improvements for a total cost basis of $216.0 million. The properties have potential for additional revenue bumps if rent-restricted units are legally vacated and converted into market-rate units.

Given the desirable locations, the properties exhibited high occupancy rates prior to the pandemic. A total of 109 units (31% of total units) are subject to New York’s apartment rent restrictions, which limits the amount of rent that landlords can charge as long as the current tenants remain in residence. Leverage for the trust debt is relatively high at a 101.1% loan-to-value ratio based on the DBRS Morningstar value of $172.8 million derived in July 2020. A positive qualitative adjustment was made to cash flow volatility because the 99 rent-stabilized units and 10 rent-controlled units provide sticky tenancy.

Per the June 2021 remittance report, one of the loans, 808 Lexington Avenue (5.3% of the whole loan balance), transferred to the special servicer in April 2021 because of payment default when the loan was 60 days delinquent. In addition, 14 of the 18 loans are on the servicer’s watchlist primarily because of declining occupancy rates and low DSCRs. The 14 loans were added to the servicer’s watchlist in Q4 2020 or Q1 2021, and all payments for watchlist loans have remained current through June 2021. Servicer commentary notes cash traps had been triggered for a majority of these loans after failing to meet their respective required DSCR thresholds as of September 2020.

Property financials reported in the June 2021 Investor Reporting Package showed the portfolio’s performance was severely affected by the coronavirus pandemic. Revenue and net cash flow for YE2020 declined 28.7% and 39.6%, respectively, relative to YE2019 figures. The February 2021 rent roll hinted at a possible recovery as the annual in-place pro forma rental income totaled $12.1 million, which was a 1.5% improvement over YE2020 revenue. The portfolio performance appears to be improving while New York’s coronavirus situation has also drastically improved in Q1 and Q2 2021.

February 2021 rent rolls reported that the 352 multifamily units were 78.1% occupied, compared with the 99.3% occupancy rate at issuance. At that time, occupancy rates for market units, rent-stabilized units, and rent-controlled units were 70.0%, 96.9%, and 90.9%, respectively. DBRS Morningstar believes the portfolio’s occupancy rate and in-place rents are likely greater than the February 2021 rent rolls indicated, as demand has quickly regained its footing in recent months. Reis data for the New York Metro in Q1 2021 showed that the average asking rent and average vacancy rate totaled $3,120 per unit and 4.3%, respectively. As a comparison, the Q4 2019 average asking rent and average vacancy rate were $3,555 per unit and 3.5%, respectively. The average asking rent decreased 12.1% since Q4 2019 as a result of the pandemic. Reis projects the average asking rent and average vacancy rate to return to Q4 2018 (issuance) figures by 2024.

At issuance, approximately 15% of the gross potential income was derived from the 16,700 square feet (sf) of retail space across eight properties. The February 2021 rent roll reported the retail space was 89.4% occupied with an average rent of $129 per sf (psf), compared with the 100% occupancy rate and average rent of $155 psf at issuance. Two tenants, Fig & Olive and Sunshine Body Works, vacated from their respective units at 808 Lexington Avenue and 1384 First Avenue during the pandemic.

The 808 Lexington Avenue loan (5.3% of the trust balance) is secured by a mixed-use property in the Upper East Side near the southeast corner of Central Park. The property consists of two retail units totaling 2,245 sf and two market-rate apartments. The loan transferred to the special servicer in April 2021 because of monetary default after the February 2021 loan payment was over 60 days delinquent. The property’s anchor tenant, Fig & Olive restaurant, filed Chapter 11 bankruptcy in July 2020 and vacated the property. Fig & Olive’s bankruptcy plan resulted in a settlement that netted the borrower more than $325,000, which was remitted to the servicer. Fig & Olive historically generated more than 50% of the monthly gross rent collected at the subject property. Prior to vacating, the special servicer noted the tenant paid $401 psf of annual modified gross rents. CBRE provided four lease comparables for the subject, which ranged from $106 psf to $200 psf in annual rent. The special servicer believes it is unlikely for the property to backfill the space at a rent that will generate a minimum 1.00 times DSCR. The special servicer provided a business plan report dated June 2021 that included a settlement agreement that will bring the loan current through the May 2021 payment immediately. Other terms include the waiving of default interest and late fees and the establishment of a cash lockbox. DBRS Morningstar will continue to monitor the loan for leasing updates, which will ultimately drive the outcome of the loan workout.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Classes X-A and X-B are 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 ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 26, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that 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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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