DBRS Morningstar Changes Trends on Six Classes and Confirms Ratings on All Classes of Benchmark 2018-B7

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

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

DBRS Morningstar changed the trends on Classes E, F, X-D, X-F, G-RR, and F-RR to Negative from Stable. The trend changes are attributed primarily to an increase in DBRS Morningstar’s expected loss for the pool, following the transfer of several loans to special servicing since the last rating action. There are now five loans representing 13.6% of the pool balance in special servicing, three of which transferred after failing to secure refinancing ahead of their respective maturity dates. There is additional concern with the pool’s high exposure to office properties, which represents 37.6% of the pool balance. Given the current challenges facing the office sector, DBRS Morningstar increased the probability of default and, in certain cases, applied stressed loan-to-value ratios (LTVs) for loans that are secured by office properties. DBRS Morningstar’s largest loans of concerns are discussed in greater detail below.

Outside of changes noted above, the transaction’s performance has been stable since issuance. Cash flows generally remain stable and are in line with issuance expectations, as evidenced by the pool’s weighted average (WA) debt service coverage ratio (DSCR) of 2.03 times (x) for loans that provided YE2022 financials, compared with the DBRS Morningstar WA Term DSCR of 1.84x. Since the last rating action, two loans have been repaid in full from the pool, both of which were previously defeased. Excluding classes with revised trends, all other trends remain Stable.

As of the August 2023 remittance, 49 of the original 51 loans remain in the pool, with an aggregate principal balance of $1.12 billion, reflecting a 4.3% collateral reduction since issuance. One loan, representing 2.3% of the pool balance, is fully defeased. There are eight loans, representing 16.6% of the pool balance, on the servicer’s watchlist and five loans, representing 13.6% of the pool, in special servicing; however, all five loans remain current. DBRS Morningstar analyzed the specially serviced loans with elevated expected losses, resulting in a WA expected loss approximately 140.0% greater than the pool average.

The largest loan in special servicing, Aon Center (Prospectus ID#9; 3.8% of the pool), is secured by a 2.8 million-square-foot (sf) office tower in Chicago’s central business district. The loan transferred to special servicing in February 2023 for an event of default following the execution of a new lease to Blue Cross Blue Shield (BCBS) 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 net rentable area (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. The loan is expected to be returned to the master servicer in the near term.

Despite the loan’s modification, DBRS Morningstar notes the loan’s underperformance relative to issuance expectations. 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 ( previously 6.9% of NRA) and Daniel J. Edelman, Inc. (previously 6.6% of NRA). As of the YE2022 financial reporting, the loan’s net cash flow (NCF) had fallen to $38.8 million (debt service coverage ratio (DSCR) of 1.10 times (x)), reflecting a 19.5% decline from the DBRS Morningstar figure of $48.2 million (DSCR of 2.93x) at issuance. Offsetting some of this is recent leasing activity, as the borrower executed a renewal with Aon, 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. This loan was assigned an investment-grade shadow-rating at issuance. As a result of decreased cash flows, and given the asset’s increased vacancy in a market with high availability, in addition to the loan’s failure to pay off at its original maturity date, DBRS Morningstar removed the shadow rating for the loan with this review and subsequently applied a stressed LTV scenario to account for increased credit risks since issuance.

The second largest loan in special servicing, Workspace (Prospectus ID#10; 3.6% of the pool), is secured by a portfolio of 146 properties, consisting of nearly 9.9 million sf of office and flex space. Built between 1972 and 2013, the portfolio includes 87 office properties (6.5 million sf) and 59 flex buildings (3.4 million sf). The subject loan amount of $40.0 million is part of a whole loan of $1.3 billion secured across four other transactions. Three of these transactions are rated by DBRS Morningstar, including JPMCC 2018-WPT (lead securitization), BMARK 2018-B5, and BMARK 2018-B6.

The loan transferred to special servicing in April 2023 in advance of its July 2023 maturity date as the loan was not expected to repay. The loan was modified with a two-year extension, resulting in a new maturity date of July 2025. Additional details regarding the terms of the modification were requested from the servicer but have not been provided. Per an online news article dated July 2023, it was reported that a significant equity participation was provided as part of the extension.

The most recent reporting for the subject transaction noted a YE2022 NCF of $92.0 million, while the reporting for JPMCC 2018-WPT noted an NCF of $97.4 million. Despite the discrepancy, this is below the YE2021 figure of $101.1 million (a DSCR of 1.57x) and the DBRS Morningstar NCF of $104.7 million derived in 2020 during the North American Single-Asset/Single-Borrower Ratings Methodology update for the JPMCC 2018-WPT transaction. The cash flow decline has predominantly been the result of decreases in base rent and expense reimbursements following a drop in occupancy in recent years. The servicer reporting indicates an occupancy rate of 80.4% at December 2022, down from 84.1% at YE2021 and 88.6% at issuance. At issuance, the loan was shadow-rated investment grade; however, given the challenges in refinancing this loan and the decline in performance from issuance, DBRS Morningstar removed the shadow rating with this review. The loan was analyzed with a stressed LTV based on the DBRS Morningstar value derived with the May 2023 review of JPMCC 2018-WPT, resulting in an expected loss that is nearly three times the pool average.

The largest loan in the pool, the DUMBO Heights Portfolio (Prospectus ID#1; 7.2% of the pool), is secured by a portfolio of four Class A office properties within the DUMBO neighborhood of Brooklyn, New York. The loan is being monitored on the servicer’s watchlist due to declines in cash flow and occupancy as well as its now past loan maturity in September 2023. Per servicer commentary, the borrower was unable to secure financing ahead of the loan’s maturity date and has submitted a five-year loan extension request. DBRS Morningstar expects the loan will soon transfer to special servicing.

Per the March 2023 rent roll, the collateral was 91.0% occupied, with the largest tenants including Etsy (29.9% of NRA, lease expires July 2026) and WeWork (21.2% of NRA, lease expires November 2031). Although WeWork is signed to a long-term lease, DBRS Morningstar does not rule out the possibility of the tenant vacating early, given WeWork’s current financial situation. The property is very well located within its submarket, situated directly between the Brooklyn and Manhattan Bridges, blocks from the waterfront, with views of the Manhattan skyline from the higher floors. Historical occupancy has been stable, as has cash flow. The loan most recently reported a YE2022 NCF of $26.0 million, representing a whole loan DSCR of 1.03x, and remaining in line with the DBRS Morningstar NCF of $24.7 million. At issuance, the loan was shadow-rated investment grade; however, given the refinancing challenges and exposure to distressed tenancy in WeWork, DBRS Morningstar removed the shadow rating with this review and analyzed the loan with a stressed LTV, resulting in an expected loss in line with the pool average.

At issuance, DBRS Morningstar assigned an investment-grade shadow rating to six loans: DUMBO Heights Portfolio Moffett Towers—Buildings E, F, G (Prospectus ID#2; 4.5% of the pool), Aventura Mall (Prospectus ID#3; 4.5% of the pool), AON Center, Workspace, and 636 11th Avenue (Prospectus ID#11; 3.6% of the pool). With this review, DBRS Morningstar removed the shadow ratings on DUMBO Heights Portfolio, AON Center, and Workspace, as outlined above, and maintained the shadow ratings on Moffett Towers—Buildings E, F, G; Aventura Mall; and 636 11th Avenue given the continued stable performance and ongoing expectations for those loans.

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 (July 4, 2023) https://www.dbrsmorningstar.com/research/416784

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 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.

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 credit ratings are monitored.

DBRS Limited
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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 v 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 (August 23, 2023; https://www.dbrsmorningstar.com/research/419592)

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/417279.

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