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JPMorgan readies CMBS with heavy exposure to pair of luxury Seattle hotels

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Two major hotels located in Seattle’s waterfront central business district highlight a $774.1 million offering of commercial mortgage bonds from JPMorgan.

JPMCC 2019-COR4 is backed by 38 loans, the largest of which is a $77 million loan used by investor R.C. Hedreen Co. to refinance the Renaissance Hotel. Hedreen is also the sponsor of a the sixth largest asset, a $33 million loan refinancing the Grand Hyatt Seattle, according to presale reports from Kroll Bond Rating Agency and Fitch Ratings.

The two loans (making up 14.2% of the pool’s assets) are not cross-collateralized nor cross-defaulted, meaning that the sponsor has less incentive to share capital between the properties to stave off any default, according to Kroll. Hedreen received more than $71 million in equity cash-out from both loans, both of which have pari passu debt obligations outside of the trust’s holdings.

Another large-loan exposure is the $75 million first mortgage taken out by the San Francisco-area real estate developer A.J. Batt for a 145,179-square-foot office tower in San Mateo that has more than 32% of its space leased to the Chinese e-commerce conglomerate Alibaba Group.

Nineteen classes of notes will be issued in the transaction, including $586.37 million in Class A senior notes with preliminary triple-A ratings from Kroll and Fitch that benefit from 30% credit enhancement.

According to both agencies’ presale reports, the deal has an higher-than-average portfolio loan-to-value ratio. Fitch’s own 109.8% LTV level is above its 102% average for Fitch-rated conduit deals in 2018, and 101.6% in 2017.

The Kroll-derived LTV ratio applied to the portfolio was 102.2%, and was the second highest among 11 CMBS conduits rated by Kroll in the past six months that averaged 95.9%. Kroll noted 25 of the loans, or 62.5% of the pool, have LTVs in excess of 100%.

But the pool’s collateral quality was higher than recent transactions, Fitch stated, with 76.3% of the properties grading out as B+ or greater compared to its 2018 average of 50.2%.

The loans in the pool have a lower-than-average amortization schedule, with expected deleveraging of just 6.3% (Kroll’s estimate) after the expected 9.5-year remaining life of the collateral. Fitch projects a 6.1% pay-down of the maturity.

The pool’s percentage of existing pari passu debt (18%) along with one loan permitting future additional debt (2.4%) combined are below the average 27.9% of third-party external debt usually included in Kroll-rated conduits, and considered credit-neutral for the deal.

The deal also has a below average exposure to single-tenant properties (25 properties representing 20.5% of the pool, below the Kroll average of 21.7%).

Including the Hedreen hotel properties, there are three groups of loans (26.9%) with affiliated borrowers that are neither cross-collateralized or cross-defaulted. This is significantly above the average (10.7%) for the comparable set, which ranged from 2.1% to 18.1%.

JPMorgan, Deutsche Bank, Jefferies and Academy Securities are the underwriters on the transaction.

Of the 30 loans sold to the trust by LCM, five were originated externally by Deutsche or its U.S. holding company subsidiary German American Capital Corp.

LCM is majority co-owned by the Government of Singapore Investment Corp. and the Canada Pension Plan Investment Board, which acquired its share from original JV co-founder Jefferies.

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