DBRS Finalizes Provisional Ratings on Benchmark 2018-B7 Mortgage Trust

DBRS, Inc. (DBRS) finalized the provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-B7 issued by Benchmark 2018-B7 Mortgage Trust:

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

Classes X-B, X-D, X-F, D, E, F, G-RR and H-RR have been privately placed. The X-A, X-B, X-D and X-F balances are notional.

The collateral consists of 51 fixed-rate loans, secured by 227 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 26.0% 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 26.0% 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, seven loans, representing 9.5% 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 (refi) risk given the current low interest-rate environment, DBRS applied its refinance constants to the balloon amounts. This resulted in 34 loans, representing 69.2% of the pool, having whole-loan refinance DSCRs below 1.00x and 20 loans, representing 41.1% of the pool, having whole-loan refinance DSCRs below 0.90x. DUMBO Heights Portfolio, Aventura Mall and Workspace, three of the pool’s loans with a DBRS Refi DSCR below 0.90x, which represent 14.6% of the transaction balance, are shadow-rated investment grade by DBRS and have a large piece of subordinate mortgage debt outside the trust.

Ten loans, representing 29.6% 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; New York; Brooklyn, New York; Sunnyvale, California; and New Orleans, Louisiana. Furthermore, there is limited rural and tertiary concentration with only eight loans, representing 6.8% of the pool. Six loans — DUMBO Heights Portfolio; Moffett Towers E, F, G; Aventura Mall; Aon Center; Workspace; and 636 11th Avenue — representing a combined 26.0% of the pool, exhibit credit characteristics consistent with investment-grade shadow ratings. DUMBO Heights Portfolio exhibits credit characteristics consistent with a A (high) shadow rating, Moffett Towers E, F, G exhibits credit characteristics consistent with a BBB (low) shadow rating, Aventura Mall exhibits credit characteristics consistent with a BBB (high) shadow rating, Aon Center exhibits credit characteristics consistent with a A (high) shadow rating, Workspace exhibits credit characteristics consistent with an AA (low) shadow rating and 636 11th Avenue exhibits credit characteristics consistent with an BBB (low) shadow rating. For additional information on these six assets, please refer to pages 16, 21, 26, 56, 62 and 64 of this report, respectively.

Term default risk is moderate as indicated by the strong weighted-average (WA) DBRS Term DSCR of 1.64x. In addition, 21 loans, representing 55.4% of the pool, have a DBRS Term DSCR above 1.50x. Even when excluding the six investment-grade shadow-rated loans, the deal exhibits an acceptable WA DBRS Term DSCR of 1.53x. Only four loans, representing 6.4% of the pool, have sponsorship and/or loan collateral with a prior loan default, limited liquidity relative to loan obligation, a historical negative credit event or have a prior or pending litigation issue with the respective property. None of these loans are in the top 15 and this is a significantly smaller concentration compared with recent conduit securitizations. DBRS increased the probability of default (POD) for the loan with identified sponsorship concerns.

Twenty-two loans, representing 57.3% of the pool, including ten of the largest 15 loans, are structured with full-term interest-only (IO) payments. An additional 18 loans, comprising 23.9% of the pool, have partial-IO periods ranging from 12 months to 60 months. As a result, the transaction’s scheduled amortization by maturity is only 5.4%, 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 POD 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 51.6% of the full-IO concentration in the transaction, are located in urban or super-dense urban markets. Additionally, all six loans that are shadow-rated investment grade by DBRS are full-term IO and they represent 45.3% of the full-term IO concentration.

Nine loans, representing 12.2% of the transaction balance, are secured by properties that are either fully or primarily leased to a single tenant. This includes two of the largest 15 loans: Moffett Towers E, F, G, and 636 11th Avenue. Loans secured by properties occupied by single tenants have been found to suffer higher loss severities in an event of default. Two of the largest single-tenant loans are leased to tenants that are rated investment grade or have investment-grade-rated parent companies. This includes Moffett Towers E, F, G, which is fully leased by Amazon.com, Inc., and 636 11th Avenue, which is fully leased by The Ogilvy Group, Inc., a subsidiary of WPP plc, which backs the lease. 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 seven loans, totaling 17.0% of the pool, secured by hotels, which are vulnerable to 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. Two of the largest 15 loans, The Hotel Erwin (3.9% of the pool) and Courtyard at The Navy Yard (3.4% of the pool), are secured by hospitality properties. The concentration penalty applied to this pool incorporates property type concentration as well as concentration by loan size and geographic location. Such loans exhibit a WA DBRS Debt Yield and DBRS Exit Debt Yield of 10.7% and 12.3%, respectively, which compare favorably with the overall deal. Additionally, six of the seven loans (92.7% of the hotel concentration) are in established urban or suburban markets that benefit from increased liquidity and more stable performance.

The transaction’s WA DBRS Refi DSCR is 0.95x, indicating higher refinance risk on an overall pool level. In addition, 34 loans, representing 69.2% of the pool, have DBRS Refi DSCRs below 1.00x, including eight of the top ten loans and 11 of the top 15 loans. Twenty of these loans, comprising 41.1% of the pool, have DBRS Refi DSCRs less than 0.90x, including five of the top ten loans. These credit metrics are based on whole-loan balances. When measured against A-note balances only, the pool WA DBRS Refi DSCR rises significantly to 1.05x. Three of the pool’s loans with a DBRS Refi DSCR below 0.90x — DUMBO Heights Portfolio, Aventura Mall and Workspace, which represent 14.6% of the transaction balance — are shadow-rated investment grade by DBRS and have large pieces of subordinate mortgage debt outside the trust. The pool’s DBRS Refi DSCRs for these loans are based on a WA stressed refinance constant of 9.79%, which implies an interest rate of 9.15%, amortizing on a 30-year schedule. This represents a significant stress of 4.27% over the WA contractual interest rate of the loans in the pool.

Classes X-A, X-B, X-D, and X-F are IO certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated reference 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.

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.

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.