DBRS Assigns Provisional Ratings to Benchmark 2018-B4 Mortgage Trust

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-B4 (the Certificates) to be issued by Benchmark 2018-B4 Mortgage Trust:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class X‑A at AAA (sf)
-- Class A-M at AAA (sf)
-- Class X-B at AA (high) (sf)
-- Class B at AA (sf)
-- Class C at A (high) (sf)
-- Class X-D at A (sf)
-- Class D at A (low) (sf)
-- Class E-RR at BBB (sf)
-- Class F-RR at BB (high) (sf)
-- Class G-RR at B (high) (sf)

Classes X-B, X-D, D, E-RR, F-RR and G-RR will be privately placed. The Classes X-A, X-B and X-D balances are notional.

The collateral consists of 44 fixed-rate loans secured by 60 commercial and multifamily properties. The transaction is a sequential-pay pass-through structure. The conduit pool was analyzed to determine the provisional ratings, reflecting the long-term probability of loan default within the term and its liquidity at maturity. Trust assets contributed from six loans, representing 34.1% of the pool, are shadow-rated investment grade by DBRS. Proceeds for the shadow-rated loans are floored at their respective rating within the pool. When the combined 34.1% of the pool has no proceeds assigned below the rating floor, the resulting pool subordination is diluted or reduced below that rated floor. When the cut-off loan balances were measured against the DBRS Stabilized Net Cash Flow (NCF) and their respective actual constants, two loans, representing 1.6% of the total pool, had a DBRS Term debt service coverage ratio (DSCR) below 1.15 times (x), a threshold indicative of a higher likelihood of mid-term default. Additionally, to assess refinance risk given the current low-interest-rate environment, DBRS applied its refinance constants to the balloon amounts. This resulted in 28 loans, representing 61.2% of the pool, having refinance DSCRs below 1.00x, and 17 loans, representing 44.3% of the pool, having refinance DSCRs below 0.90x. Aventura Mall, The Gateway and 65 Bay Street, which represent 17.7% of the transaction balance and are three of the pool’s loans with a DBRS Refi DSCR below 0.90x, are shadow-rated investment grade by DBRS and have a large piece of subordinate mortgage debt outside the trust.

Eleven loans, representing 30.5% of the pool, are located in urban and super-dense urban gateway markets with increased liquidity that benefit from consistent investor demand, even in times of stress. Urban markets represented in the deal include Chicago, San Francisco, New York, Jersey City, Los Angeles, Miami and Philadelphia. Six loans – Aventura Mall, 181 Fremont Street, Marina Heights State Farm, AON Center, The Gateway and 65 Bay Street – representing a combined 34.1% of the pool, exhibit credit characteristics consistent with investment-grade shadow ratings. Aventura Mall exhibits credit characteristics consistent with a BBB (high) shadow rating, 181 Fremont Street exhibits credit characteristics consistent with an AA shadow rating, Marina Heights exhibits credit characteristics consistent with an AA shadow rating, The Gateway exhibits credit characteristics consistent with an A shadow rating, AON Center exhibits credit characteristics consistent with an A (high) shadow rating, and 65 Bay Street exhibits credit characteristics consistent with an A (high) shadow rating. Term default risk is moderate, as indicated by the relatively strong DBRS Term DSCR of 1.72x, and when measured against A-note balances only, the DBRS Term DSCR increases to 1.90x. In addition, 21 loans, representing 60.8% of the pool, have a DBRS Term DSCR in excess of 1.50x. Even when excluding the six investment-grade shadow-rated loans, the deal exhibits an acceptable DBRS Term DSCR of 1.49x.

Eighteen loans, representing 53.4% of the pool, including ten of the largest 15 loans, are structured with full-term interest-only (IO) payments. An additional 15 loans, comprising 26.9% of the pool, have partial IO periods ranging from ten months to 83 months. As a result, the transaction’s scheduled amortization by maturity is only 5.9%, which is generally below other recent conduit securitizations. The DBRS Term DSCR is calculated using the amortizing debt service obligation, and the DBRS Refi DSCR is calculated considering the balloon balance and lack of amortization when determining refinance risk. DBRS determines the probability of default based on the lower of term or refinance DSCRs; therefore, loans that lack amortization are treated more punitively. Ten of the full-term IO loans, representing 27.0% of the full-IO concentration in the transaction, are located in urban markets. Additionally, all six of the loans that are shadow-rated investment grade by DBRS are full-term IO, and they represent 63.9% of the full-term IO concentration.

Eight loans, representing 22.6% of the transaction balance, are secured by properties that are either fully or primarily leased to a single tenant. This includes four of the largest 15 loans: 181 Fremont Street, Marina Heights State Farm, 636 11th Avenue and Best Buy – Sherman Oaks. Loans secured by properties occupied by single tenants have been found to suffer higher loss severities in an event of default. All four of the largest single-tenant loans are leased to tenants that are rated investment grade or have investment-grade-rated parent companies. In addition, DBRS applied a penalty for single-tenant properties that resulted in higher loan-level credit enhancement. The majority of the loans have been structured with cash flow sweeps prior to tenant expiry if the lease expires during, at, or just beyond loan maturity.

There are eight loans, totaling 16.6% of the pool, secured by hotels, which are vulnerable to having high NCF volatility because of their relatively short-term leases compared with other commercial properties, which can cause the NCF to quickly deteriorate in a declining market. Three of the largest 15 loans are secured by either hospitality or self-storage properties. Such loans exhibit a weighted-average (WA) DBRS Debt Yield and DBRS Exit Debt Yield of 10.3% and 11.6%, respectively, which compare favorably with the overall deal. Additionally, the vast majority, or 86.2%, of such loans are located in established urban or suburban markets that benefit from increased liquidity and more stable performance.

The transaction’s WA DBRS Refi DSCR is 0.94x, indicating higher refinance risk on an overall pool level. In addition, 27 loans, representing 60.0% of the pool, have DBRS Refi DSCRs below 1.00x, including four of the top ten loans and nine of the top 15 loans. Seventeen of these loans, comprising 44.3% of the pool, have DBRS Refi DSCRs less than 0.90x, including five of the top ten loans and seven of the top 15 loans. These credit metrics are based on whole-loan balances. Three of the pool’s loans with a DBRS Refi DSCR below 0.90x – Aventura Mall, The Gateway and 65 Bay Street – which represent 17.7% of the transaction balance and are three of the pool’s loans with a DBRS Refi DSCR below 0.90x, are shadow-rated investment grade by DBRS and have a large piece of subordinate mortgage debt outside the trust. Based on A-note balances only, the deal’s WA DBRS Refi DSCR improves materially to 1.03x, and the concentration of loans with DBRS Refi DSCRs below 1.00x and 0.90x reduces to 49.1% and 26.6%, respectively.

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

For more information on this transaction and supporting data, please log into www.viewpoint.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS Viewpoint platform.

The ratings assigned to Class G-RR materially deviate from the higher ratings implied by the quantitative results. DBRS considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by the quantitative results that is a substantial component of a rating methodology. The deviations are warranted given expected dispersion of loan level cash flows post issuance.

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

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains the description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not require due diligence services outlined in Form-15E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

The principal methodology is North American CMBS Multi-borrower Rating Methodology, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. 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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS 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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrs.com.

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