DBRS Morningstar Changes Trends on 14 Classes of Benchmark 2019-B9 Commercial Mortgage Trust to Negative From Stable

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2019-B9 issued by Benchmark 2019-B9 Mortgage Trust as follows:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A 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 (sf)
-- Class E at BBB (low) (sf)
-- Class X-F at BB (high) (sf)
-- Class F at BB (sf)
-- Class X-G at BB (low) (sf)
-- Class G at B (high) (sf)
-- Class X-H at B (sf)
-- Class H at B (low) (sf)

In addition, DBRS Morningstar changed the trends on Classes A-S, X-A, B, X-B, C, X-D, D, E, X-F, F, X-G, G, X-H, and H to Negative from Stable. All other trends are Stable.

The trend changes reflect DBRS Morningstar’s increased concerns for the pool, including one specially serviced loan with an updated appraisal value that suggests an increased probability of loss. In addition, the pool has a high concentration of office loans, representing nearly 37.5% of the pool, some of which are exhibiting increased levels of risk since issuance; including the largest loan in the pool, 3 Park Avenue (Prospectus ID#1; 10.3% of the pool). In general, the office sector continues to face challenges, as uncertainty surrounding end-user demand places upward pressure on vacancy rates, challenging landlords’ efforts to back-fill vacant space, and, in certain instances, contributing to value declines. In its analysis for this review, DBRS Morningstar applied stressed loan-to-value ratios (LTVs) or increased probability of default (PoD) assumptions for six loans backed by office properties that are exhibiting declines in performance, resulting in a weighted-average (WA) expected loss (EL) approximately 73.8% greater than the pool average. DBRS Morningstar’s resulting expected loss for the pool is suggestive of downward ratings pressure on the junior bonds, which may lead to downgrades should performance not re-stabilize in the near to medium term. DBRS Morningstar notes mitigating factors including a $25.1 million unrated first loss piece with no losses incurred to the trust to date. In addition, the three largest loans in the pool, which are secured by office properties, benefit from low to moderate going-in LTVs and/or cash management provisions, as further described below.

As of the October 2023 reporting, 48 of the original 50 loans remained in the pool with an aggregate principal balance of $850.3 million, representing collateral reduction of 3.8% since issuance, as a result of loan amortization and loan repayments. Three loans, representing 1.5% of the pool, have been fully defeased. One loan, representing 0.9% of the pool, is in special servicing, and there are 14 loans, representing 32.9% of the pool, on the servicer’s watchlist.

The sole loan in special servicing, 735 Bedford Avenue (Prospectus ID#38, 0.9%), is secured by an 18,000-square-foot (sf) mixed-use property in Brooklyn, New York. The loan transferred to the special servicer in March 2022 for imminent monetary default and remains delinquent as of the October 2023 reporting. According to the most recent servicer commentary, the property’s title was allegedly transferred from the original sponsor to a subordinate lienholder; however, neither subordinate financing nor the transfer was approved by the lender. The special servicer has engaged counsel and is dual tracking foreclosure with workout discussions. Updated financial reporting has not been provided since September 2021, at which time the property was 100.0% occupied with a debt service coverage ratio (DSCR) slightly above break-even. Based on the June 2023 appraisal, the property was valued at $5.7 million, reflecting a 50.4% reduction from the issuance value of $11.5 million. In its analysis for this review, DBRS Morningstar liquidated the loan from the trust with an implied loss severity in excess of 50.0%.

The largest loan on the servicer’s watchlist, 3 Park Avenue, is secured by a mixed-use office and retail building located on the corner of 34th Street and Park Avenue in New York. The loan originally became delinquent in May 2020 and has subsequently faced multiple short-term periods of delinquency. As of the October 2023 reporting, loan payments are 60 days past due, with the servicer noting that collections are in process. The loan is also being monitored because of a low DSCR and occupancy rate, most recently reported at 0.82 times (x) and 54.0%, as of June 2023, respectively. The occupancy decline from 85.4% at issuance followed the loss of two tenants, TransPerfect Translation (13.7% of the net rentable area (NRA)) and Pira Energy (4.13% of the NRA). In addition, a top-five tenant, P/Kaufmann (6.9% of the NRA; lease expiry in December 2030) downsized its space in 2021.

Cash flow has declined significantly since issuance, with the trailing-six (T-6) months ended June 2023 financial reporting reflecting an annualized net cash flow (NCF) of $7.2 million. Although higher than the YE2022 figure of $4.9 million (DSCR of 0.56x), NCF remains 55.4% below the issuance figure of $16.1 million (DSCR of 1.84x). Various online news sources have noted that the sponsor, Charles Cohen, is behind on approximately $500 million in debt collateralized by multiple properties. While the decline in occupancy and cash flow is noteworthy, mitigating factors include the low-going-in LTV ratio of 36.0% (based on the whole-loan balance of $182.0 million and the issuance appraised value of $505.0 million) and the loan’s maturity date in 2028, allowing the sponsor a a fair amount of time to backfill vacant space and work toward stabilization. In its analysis, DBRS Morningstar increased the LTV and the PoD assumption for this loan, resulting in an expected loss approximately 25.0% greater than the pool average.

Another large loan of concern is Fairbridge Office Portfolio (Prospectus ID#7; 3.7% of the pool), secured by two suburban office properties in Oak Brook, Illinois, and Warrenville, Illinois. The loan was added to the servicer’s watchlist in September 2021 for a low DSCR, which has fallen to 1.0x as of June 2023. The decline is attributable to the loss of tenants over the past few years, pushing occupancy down to 63.0% as of June 2023 from 74.0% at YE2020 and 84.7% at issuance. Leases representing approximately 10.0% of the NRA have already expired or are scheduled to expire within the next 12 months. According to CBRE, the submarket reported an average office vacancy rate of 19.4% as of Q1 2023. There has been some degree of positive leasing momentum at the property, with Lewis University (7.4% of NRA) extending its lease from December 2023 to May 2029. Per the September 2023 reporting, there was approximately $0.4 million held across two reserves. Based on the annualized T-6 months ended June 2023 financial reporting, the property generated NCF of $3.0 million, below the YE2022 and issuance figures of $3.2 million and $5.0 million, respectively. At issuance, the property was valued at $64.7 million; however, given the low occupancy rate and general challenges for office properties in today’s environment, DBRS Morningstar expects that the collateral’s as-is value has likely declined. As such, DBRS Morningstar increased the LTV and PoD assumption for this loan, resulting in an expected loss approximately 2.5x greater than the pool average.

At issuance, DBRS Morningstar shadow-rated one loan–Aventura Mall (Prospectus ID#22; 1.8% of the pool) investment grade. Considering the loan’s strong credit metrics, strong sponsorship, and historically stable performance of the underlying collateral, DBRS Morningstar confirms that the characteristics of the loan remain consistent with the investment-grade shadow rating.

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, X-D, X-F, X-G, and X-H 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 credit ratings assigned to Classes A-S, B, C, D, E, F, and G materially deviate from the credit ratings implied by the predictive model. DBRS Morningstar typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit rating would consider a three-notch or more deviation from the credit rating stress(es) implied by the predictive model to be a significant factor in evaluating the credit rating. The rationale for the material deviations is uncertain loan-level event risk. The analysis for this review included stressed scenarios for several office loans given the general challenges faced in that sector. The results of that analysis suggest downward pressure through the middle and bottom of the bond stack. However, given the remaining time to maturity for these loans and considering that any term defaults resulting in liquidations would concentrate most of the risk to the lower-rated classes, the Negative trends assigned with this review are supported.

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
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 (September 22, 2023; https://www.dbrsmorningstar.com/research/420982)

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].