DBRS Morningstar Confirms Ratings on All Classes of Benchmark 2018-B4 Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-B4 issued by Benchmark 2018-B4 Mortgage Trust as follows:

-- 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)

All trends are Stable.

The rating confirmations reflect the overall performance of the transaction. Despite the generally healthy performance of the transaction’s underlying collateral, one loan (2.7% of the pool) was recently transferred to special servicing, and DBRS Morningstar is monitoring another three loans (15.8% of the pool) secured by office properties, which have exhibited performance that suggests increased credit risk to the trust from issuance, as discussed in more detail below.

Since the last review, four loans have been repaid from the trust, contributing to a collateral reduction of 5.7%, while the collateral for one loan (0.6% of the pool) was fully defeased. Per the August 2023 reporting, 39 of the original 44 loans remain in the trust with an aggregate principal balance of $1.05 billion, reflecting a collateral reduction of 9.5% since issuance as a result of loan repayment and scheduled loan amortization. Three loans, representing 3.2% of the pool, are fully defeased. There are four loans, representing 12.1% of the pool, on the servicer’s watchlist, and one loan, representing 2.7% of the pool, in special servicing.

The specially serviced loan, JAGR Hotel Portfolio (Prospectus ID#14, 2.7% of the pool), is secured by a portfolio of three hotel properties in Mississippi, Michigan, and Maryland. The loan was transferred to special servicing for a second time in March 2023 because of payment default subsequent to receiving a loan modification in November 2021, which extended the loan’s maturity to May 2024. While discussions regarding another loan modification are ongoing, the loan is delinquent and the servicer is dual-tracking foreclosure. The most recent appraisal from May 2023 valued the property at $51.6 million, an improvement from $44.7 million in October 2020 but well below the issuance appraised value of $73.5 million. In its analysis for this review, DBRS Morningstar liquidated the loan from the trust with an implied loss greater than $5.0 million or a loss severity of nearly 20.0%.

The pool is concentrated by property type, with office and retail properties comprising 31.9% and 28.4% of the pool, respectively. In general, the office sector has been challenged, given the low investor appetite for the property type and high vacancy rates in many submarkets as a result of the shift in workplace dynamics. In the analysis for this review, DBRS Morningstar analyzed three loans, 181 Fremont Street (Prospectus ID#2, 7.6% of the pool), Aon Center (Prospectus ID#6, 4.8% of the pool), and Westbrook Corporate Center (Prospectus ID#11, 3.5% of the pool), with stressed loan-to-value (LTV) scenarios, resulting in a weighted-average (WA) expected loss that was nearly triple the pool’s WA figure. Although the office sector has seen significant challenges in the current economic environment, the majority of office properties secured in this transaction continue to perform as expected.

The Aon Center is a pari passu loan secured by a 2.8 million-square-foot (sf) office tower in Chicago’s central business district. While the trust’s reporting indicates that the loan is on the servicer’s watchlist, the lead note secured in the JPMCC 2018-AON transaction reports that the loan has been in special servicing since February 2023 for an event of default following the borrower’s decision to enter into a lease with Blue Cross Blue Shield Association (BCBS; 4.5% of net rentable area (NRA)) without lender consent. In addition, the loan was being monitored ahead of its July 2023 maturity, which has now passed. According to servicer commentary, a modification agreement has been executed, including a three-year loan extension through July 2026, a lease extension for Aon Corporation (Aon; 39.6% of NRA) through December 2028, and a cure of the mezzanine loan defaults by the mezzanine debtholder. Furthermore, the sponsor has cured the BCBS lease consent default through a cash deposit and personal guaranty for tenant improvements and leasing commissions above reserve requirements. Given the recent development, the lead note is expected to be returned to the master servicer in the near term.

As of December 2022, occupancy had fallen to 76.0% from 89.7% at issuance, largely driven by the departures of Integrys Business Support, LLC (6.9% of NRA) and Daniel J. Edelman, Inc. (6.6% of NRA). Despite the increased vacancy, however, effective gross income has remained relatively consistent when compared with the DBRS Morningstar issuance figure, while operating expenses have displayed a significant increase, namely driven by an approximately 40% increase in real estate taxes. As of the YE2022 financial reporting, the loan’s net cash flow had fallen to $38.8 million (reflecting a debt service coverage ratio (DSCR) of 1.10 times (x)) as of YE2022, reflecting a 19.5% decline from the DBRS Morningstar figure of $48.2 million (reflecting a DSCR of 2.93x) at issuance. Despite the increased vacancy levels from issuance, however, the borrower recently had some leasing success; Aon re-signed and the second-largest tenant, KPMG LLP, recently expanded its footprint at the property to approximately 11.0% of NRA on a lease expiring in August 2029.

During the next 12 months, rollover is rather moderate with tenants representing less than 5.0% of the NRA having lease expirations. The property has an in-place rental rate of $23 per sf (psf) when compared with the East Loop submarket, which reported an effective rate of $26 psf, an asking rate of $35 psf, and a vacancy rate of 13.5%. As a result of decreased cash flows and concerns with the office sector in general, however, DBRS Morningstar removed the shadow rating for the loan and subsequently applied a stressed LTV scenario to account for these risks.

At issuance, DBRS Morningstar assigned investment-grade shadow ratings on six loans. With this review, DBRS Morningstar confirms that the performance of four loans, Aventura Mall (10.9% of the current pool balance), Marina Heights State Farm (5.7%), The Gateway (4.8%), and 65 Bay Street (3.8%), remains consistent with investment-grade characteristics, and as such, DBRS Morningstar has maintained the associated shadow ratings on these loans. DBRS Morningstar also removed the shadow ratings on two loans, Aon Center and 181 Fremont Street, as the underlying credit features no longer remain consistent with investment-grade characteristics.

The second-largest loan in the pool and the largest loan on the servicer’s watchlist, 181 Fremont Street, was added to the servicer’s watchlist in July 2023 following the property’s sole tenant, Meta Platforms, Inc., listing its entire space for sublease. Given downtown San Francisco’s soft submarket fundamentals and the borrower’s inability to find tenants for sublease over the past seven months, DBRS Morningstar removed the shadow rating and applied a stressed LTV scenario in its analysis.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/416784 (July 4, 2023).

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

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

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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 [email protected].

The credit rating was initiated at the request of the rated entity.

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

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model version 1.1.0.0 (https://www.dbrsmorningstar.com/research/410913)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/410863.

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