DBRS Morningstar Downgrades Ratings on 10 Classes of Benchmark 2018-B7 Mortgage Trust

DBRS Limited (DBRS Morningstar) downgraded the ratings on 10 classes of Commercial Mortgage Pass-Through Certificates, Series 2018-B7 issued by Benchmark 2018-B7 Mortgage Trust as follows:

-- Class B to AA (sf) from AA (high) (sf)
-- Class X-B to A (high) (sf) from AA (sf)
-- Class C to A (sf) from AA (low) (sf)
-- Class D to BBB (high) (sf) from A (sf)
-- Class X-D to BBB (high) (sf) from A (low) (sf)
-- Class E to BBB (sf) from BBB (high) (sf)
-- Class X-F to BB (high) (sf) from BBB (low) (sf)
-- Class F to BB (sf) from BB (high) (sf)
-- Class G-RR to B (high) (sf) from BB (sf)
-- Class H-RR to B (low) (sf) from B (sf)

The trends on these classes are Negative. DBRS Morningstar also removed Classes E, F, G-RR, H-RR, X-D, and X-F from Under Review with Negative Implications, where they were placed on August 6, 2020.

In addition, DBRS Morningstar confirmed the ratings on the remaining classes as follows:

-- 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)

The trends on these classes are Stable.

The Negative trends and rating downgrades reflect the continued performance challenges facing the underlying collateral, much of which has been driven by the impact of the Coronavirus Disease (COVID-19) global pandemic. In addition to the four loans in special servicing, representing 6.6% of the current pool balance, as of the December 2020 remittance, DBRS Morningstar notes that the pool has a high concentration of retail and hospitality properties, representing 28.7% and 16.9% of the pool balance, respectively. The coronavirus pandemic has affected these property types most severely and, as such, those concentrations suggest increased risks for the pool, particularly at the lower rating categories, since issuance.

As of the December 2020 remittance, all 51 of the original loans remain in the pool, with a collateral reduction of 0.5% since issuance as result of loan amortization. All four loans in special servicing transferred as a result of ongoing difficulties caused by the coronavirus outbreak and are at various stages of delinquency with workout strategies yet to be determined.

Courtyard Edgewater (Prospectus ID#16, 2.5% of the current pool balance), is secured by a 156-key, limited-service hotel situated on the Hudson River in Edgewater, New Jersey. The loan transferred to special servicing in October 2020 following the borrower’s request for coronavirus relief and is 90-plus days delinquent as of the December 2020 reporting. Prior to the outbreak of the pandemic, loan performance had some volatility, primarily stemming from a minor decline in room revenue and increased operating expenses; however, as a result of a decline in corporate demand from nearby firms headquartered in Bergen County, coverage fell further to 0.85x as of Q2 2020 on an annualized basis. Based on the most recent update, the servicer continues to discuss possible alternatives to foreclosure with the borrower while simultaneously pursuing foreclosure and evaluating the loan for a potential note sale.

Aston Street (Prospectus ID#17, 2.2% of the current pool balance), secured by two Class A offices in Irvine, California, transferred to the special servicer in April 2020 for imminent default as a result of increased vacancy and rent collection issues. Occupancy has fallen to 72.2% from 93.0% following the departure of U.S. Collections (14.6% of the net rentable area (NRA)) in July 2020 and CAPS (5.2% of the NRA) in October 2020. Furthermore, the largest tenant, Spireon (57.1%), has a lease expiration in February 2022 and the servicer has indicated the tenant will not be renewing. The tenant had previously sublet a portion of its space to National General Management Corp. (26.0% of the NRA), which vacated in April 2020, increasing availability at the property. Spireon subsequently received a rental deferment of approximately $109,000 from April 2020 through June 2020, which is scheduled to be paid back over a six-month period starting in October 2020. According to a September 2020 appraisal, the property was appraised with as as-is value of $32.1 million, reflecting a 13.2% haircut to the issuance value of $37.0 million. DBRS Morningstar views the value decline and tenant rollover as significant credit risks; however, there is a window of opportunity for the property to stabilize. Both loans were analyzed with elevated probability of default levels to capture the increased credit risk to the trust.

There are also eight loans, representing 19.5% of the current pool balance, on the servicer’s watchlist, which were generally added for performance declines related to increased vacancy or rent collection issues as a result of the impact of the coronavirus. Based on the most recent reporting, these loans had a WA DSCR of 0.88x, compared with the Issuer’s figure of 1.59x. Castleton Commons & Square (Prospectus ID#15, 2.9% of the current pool balance) is secured by a retail plaza adjacent to the Castleton Square Mall in Castleton, Indiana, and was originally placed on the servicer’s watchlist in February 2020, following a year-end 2019 DSCR of 1.0x. The loan has been kept on the watchlist as performance continues to fall, most recently reporting an coverage of 0.65x, instigated by rental collection issues, which the borrower is working to resolve. In addition, Haverty’s Furniture (16.7% of the NRA) and Dave & Buster’s (12.5% of the NRA) have scheduled lease expirations in October 2020 and December 2021, respectively. DBRS Morningstar has requested a leasing update for both tenants, which have five-year extension options available to them. This loan was analyzed with an elevated probability of default given the decline in performance.

At issuance, DBRS Morningstar assigned an investment-grade shadow rating to six loans: DUMBO Heights Portfolio (Prospectus ID#1, 6.9% of the current pool balance), Moffett Towers - Buildings E,F,G (Prospectus ID#2, 4.3% of the current pool balance), Aventura Mall (Prospectus ID#3, 4.3% of the current pool balance), Aon Center (Prospectus ID#9, 3.7% of the current pool balance), Workspace (Prospectus ID#10, 3.4% of the current pool balance) and 636 11th Avenue (Prospectus ID#11, 3.4% of the current pool balance). DBRS Morningstar confirmed that the performance of these loans remains consistent with the investment-grade loan characteristics.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Classes X-A, X-B, X-D, and X-F are interest-only (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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#15 – Castleton Commons & Square (3.0% of the current pool balance)
-- Prospectus ID#16 – Courtyard Edgewater (2.5% of the current pool balance)
-- Prospectus ID#17 – Aston Street (2.2% of the current pool balance)

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 6, 2020), 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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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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