DBRS Morningstar Assigns Provisional Ratings to Benchmark 2021-B23

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2021-B23 to be issued by Benchmark 2021-B23 Mortgage Trust:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-4A1 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-4A2 at AAA (sf)
-- Class 360A at A (low) (sf)
-- Class 360B at BBB (low) (sf)
-- Class 360C at BB (low) (sf)
-- Class 360D at B (low) (sf)

All trends are Stable. Class A-4A2, Class 360A, 360B, 360C, and 360D will be privately placed.

The Class 360A, 360B, 360C, and 360D are non-pooled loan-specific certificates (rake bonds) collateralized by the subordinate companion note for the 360 Spear whole loan. The loan-specific certificates will only be entitled to receive distributions from, and will only incur losses with respect to, the trust subordinate companion loan. The trust subordinate companion loan is included as an asset of the issuing entity but is not part of the mortgage pool backing the pooled certificates. No class of pooled certificates will have any interest in the trust subordinate companion loan.

With regard to the Coronavirus Disease (COVID-19) pandemic, the magnitude and extent of performance stress posed to global structured finance transactions remain highly uncertain. This considers the fiscal and monetary policy measures and statutory law changes that have already been implemented or will be implemented to soften the impact of the crisis on global economies. Some regions, jurisdictions, and asset classes are, however, feeling more immediate effects. DBRS Morningstar continues to monitor the ongoing coronavirus pandemic and its impact on both the commercial real estate sector and the global fixed income markets. Accordingly, DBRS Morningstar may apply additional short-term stresses to its rating analysis, for example by front-loading default expectations and/or assessing the liquidity position of a structured finance transaction with more stressful operational risk and/or cash flow timing considerations.

The transaction consists of 53 fixed-rate loans secured by 65 commercial and multifamily properties. The transaction has a sequential-pay pass-through structure. Four loans, representing 18.4% of the pool, are shadow-rated investment grade by DBRS Morningstar. 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. When the cut-off loan balances were measured against the DBRS Morningstar net cash flow and their respective actual constants, the initial DBRS Morningstar weighted-average (WA) debt service coverage ratio (DSCR) of the pool was 2.83 times (x). One loan, representing only 0.2% of the pool, has a DBRS Morningstar DSCR below 1.29x, a threshold indicative of a higher likelihood of midterm default. The pool additionally includes three loans, composing a combined 11.4% of the pool balance, with a DBRS Morningstar loan-to-value (LTV) ratio exceeding 70.0%, a threshold generally indicative of above-average default frequency. The WA DBRS Morningstar LTV of the pool at issuance was 55.0%, and the pool is scheduled to amortize down to a WA DBRS Morningstar LTV of 53.0% at maturity. These credit metrics are based on the A note balances. Excluding the shadow-rated loans, representing 18.4% of the pool, the deal still exhibits a favorable DBRS Morningstar Issuance LTV of 58.2%.

While the pool demonstrates favorable loan metrics with WA DBRS Morningstar Issuance and Balloon LTVs of 55.0% and 53.0%, respectively, it also exhibits heavy leverage barbelling. There are four loans, accounting for 18.4% of the pool, with investment-grade shadow ratings and a WA LTV of 40.6%. There are 11 loans, constituting a combined 14.6% of the pool balance, with an issuance LTV of 65.0% or higher, a threshold historically indicative of relatively high-leverage financing and generally associated with above-average default frequency. The WA expected loss of the pool’s investment-grade component was approximately 0.3%, while the WA expected loss of the pool’s conduit component was substantially higher at approximately 3.5%, further illustrating the barbelled nature of the transaction. The WA DBRS Morningstar expected loss exhibited by the loans that have relatively high-leverage financing was 4.9%. This is higher than the conduit component’s WA expected loss of 2.9%, and the pool’s credit enhancement reflects the higher leverage of this 10-loan component with an issuance LTV exceeding 67.9%.

The pool has a relatively high concentration of loans secured by office and retail properties with 20 loans, representing 50.7% of the pool balance, secured by office or predominantly office properties and six loans, representing 10.2% of the pool, secured by retail or predominantly retail properties. The ongoing coronavirus pandemic continues to pose challenges globally, and the future demand for office and retail space is uncertain with many store closures, companies filing for bankruptcy or downsizing, and more companies extending remote-working strategies. Three of the 20 office/predominantly office loans, representing 23.4% of the office balance, are shadow-rated investment grade by DBRS Morningstar: 360 Spear, The Grace Building, and First Republic Center. Furthermore, 42.8% of the office loans are in areas with DBRS Morningstar Market Ranks of 7 or 8. Of the retail concentration, four retail loans, representing 93.1% of the retail concentration, have sponsors that DBRS Morningstar deemed to be strong. The office and retail properties exhibit favorable WA DBRS Morningstar DSCRs of 3.15x and 3.89x, respectively. Additionally, both property types exhibit favorable LTVs at 55.4% and 45.4%, respectively.

There are 34 loans, representing 77.3% of the pool balance, that are structured with full-term IO periods. An additional 13 loans, representing 18.8% of the pool balance, are structured with partial IO terms ranging from 36 months to 84 months. Of the 34 loans with full-term IO periods, nine loans, representing 45.3% of the pool by allocated loan balance, are in areas with a DBRS Morningstar Market Rank of 6, 7, or 8. These markets benefit from increased liquidity even during times of economic stress. Three of the 34 identified loans, representing 11.5% of the total pool balance, are shadow-rated investment grade by DBRS Morningstar.

There are 10 loans, representing 31.3% of the pool, that are in areas identified as DBRS Morningstar Market Ranks of 7 or 8, which are generally characterized as highly dense urbanized areas that benefit from increased liquidity driven by consistently strong investor demand, even during times of economic stress. Markets ranked 7 and 8 benefit from lower default frequencies than less-dense suburban, tertiary, and rural markets. Urban markets represented in the deal include New York; San Francisco; and Portland, Oregon. In addition, 17 loans, representing 44.3% of the pool balance, have collateral in metropolitan statistical area (MSA) Group 3, which is the best-performing group in terms of historical commercial mortgage-backed security (CMBS) default rates among the top 25 MSAs. MSA Group 3 has a historical default rate of 17.2%, which is nearly 10.8 percentage points lower than the overall CMBS historical default rate of 28.0%.

Four of the loans—360 Spear, MGM Grand & Mandalay Bay, the Grace Building, and First Republic Center—exhibit credit characteristics consistent with investment-grade shadow ratings. Combined, these loans represent 18.4% of the pool. The loan for 360 Spear has credit characteristics consistent with an A (high) shadow rating, MGM Grand & Mandalay Bay has credit characteristics consistent with a AAA shadow rating, The Grace Building has credit characteristics consistent with an “A” shadow rating, and First Republic Center has credit characteristics consistent with a AA shadow rating.

There are 27 loans, representing a combined 56.6% of the pool by allocated loan balance, that exhibit issuance LTVs of less than 60.0%, a threshold historically indicative of relatively low-leverage financing and generally associated with below-average default frequency. Even with the exclusion of the shadow-rated loans, representing 18.4% of the pool, the deal exhibits a favorable DBRS Morningstar Issuance LTV of 58.2%.

Term default risk is low, as indicated by a strong DBRS Morningstar DSCR of 2.83x. Even with the exclusion of the shadow-rated loans the deal exhibits a very favorable DBRS Morningstar DSCR of 2.51x. There are 17 loans, representing 67.4% of the DBRS Morningstar sample, that received a property quality of Average + or better. One loan, representing 5.9% of the DBRS Morningstar sample, was deemed to have Excellent quality and three loans, representing 16.7% of the DBRS Morningstar sample, to be Above Average.

There are 10 loans, five of which are within the top 15 loans, representing 30.0% of the pool, that have strong sponsorship. Furthermore, DBRS Morningstar identified only two loans, cumulatively representing 9.2% of the pool, that have sponsorship and/or loan collateral associated with a prior discounted payoff, foreclosure, loan default, historical negative credit event, sponsorship by a foreign national, and/or inadequate commercial real estate experience.

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.

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#1 – 860 Washington (7.6% of the pool)
-- Prospectus ID#2 – Millennium Corporate Park (6.9% of the pool)
-- Prospectus ID#3 – 360 Spear (6.8% of the pool)
-- Prospectus ID#4 – Phillips Point (4.9% of the pool)
-- Prospectus ID#5 – MGM Grand & Mandalay Bay (4.9% of the pool)
-- Prospectus ID#6 – Pittock Block (4.9% of the pool)
-- Prospectus ID#7 – Waterway Plaza (4.3% of the pool)
-- Prospectus ID#8 – Leonardo DRS Industrial (4.2% of the pool)
-- Prospectus ID#9 – The Grace Building (3.9% of the pool)
-- Prospectus ID#10 – Station Park & Station Park West (3.8% of the pool)
-- Prospectus ID#11 – First Central Tower (3.1% of the pool)
-- Prospectus ID#12 – Knitting Mills (2.8% of the pool)
-- Prospectus ID#13 – First Republic Center (2.7% of the pool)

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.

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodologies are North American CMBS Multi-Borrower Rating Methodology (August 7, 2020) and North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 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 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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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