Morningstar DBRS Downgrades Credit Ratings on Six Classes of Benchmark 2018-B7 Mortgage Trust, Changes Trends on Four Classes to Negative from Stable

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

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

Morningstar DBRS also confirmed its credit ratings on the remaining classes 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)

Morningstar DBRS changed the trends on Classes B, X-B, C and D to Negative from Stable. The Negative trends on Classes X-D, E, X-F, F, and G-RR were maintained. Class H-RR has a credit rating that does not typically carry a trend in commercial mortgage-backed securities (CMBS) credit ratings. The trends on Classes A-2, A-3, A-4, A-SB, A-M and X-A are Stable.

The credit rating downgrades and Negative trends reflect Morningstar DBRS’ increased loss expectations for the pool, driven by updated appraisals for DUMBO Heights Portfolio (Prospectus ID#1, 7.2% of pool balance) and Aon Center (Prospectus ID#9, 3.8% of pool balance), indicating value deterioration beyond prior expectations and the increased credit risk profile for loans backed by office properties, which is the highest property concentration comprising 37.7% of the current pool balance.

Since the last review, Aon Center and Workspace (Prospectus ID#10, 3.6% of pool balance) were returned to the master servicer as expected, following a period of monitoring after their maturity extensions, while DUMBO Heights Portfolio and Castleton Commons & Square (Prospectus ID#15, 2.9% of pool balance) were transferred to special servicing. Updated appraisals have been received for both DUMBO Heights Portfolio and Aon Center, reflecting steep declines from the issuance appraised values of 60.2% and 49.8%, respectively. While the loan pieces secured in the subject transaction are senior debt positions, both borrowers defaulted on their original scheduled maturity dates in 2023 following significant performance deterioration, which continue to persist. Another noteworthy development since the last review has been Centene Management’s (39.0% of the net rentable area (NRA)) decision to vacate the majority of their space at one of the office buildings backing the Liberty Portfolio loan (Prospectus ID#5, 4.5% of the pool). While the immediate term risk is moderate, as the tenant is signed to a long-term contract through December 2028 with no contraction or termination options, physical occupancy is expected to fall below 60%, a factor that could be noteworthy if office demand continues to be volatile.

As of the January 2024 remittance, 49 of the original 51 loans remain in the pool, with an aggregate principal balance of $1.11 billion, reflecting a 5.2% collateral reduction since issuance. One loan, representing 2.3% of the pool balance, is fully defeased. There are 12 loans, representing 23.3% of the pool balance, on the servicer’s watchlist, and four loans, representing 13.4% of the pool, in special servicing. In its analysis for this review, Morningstar DBRS analyzed two of the specially serviced loans with liquidation scenarios at a total loss of nearly $13.0 million, resulting in a partial write down of Class JRR. Morningstar DBRS also adjusted five loans backed by office properties exhibiting declines in performance with stressed loan-to-value (LTV) ratios or increased probability of default (POD) assumptions, resulting in a weighted-average (WA) expected loss (EL) for those loans that is more than double the pool’s WA figure.

DUMBO Heights Portfolio is secured by a portfolio of four Class A office properties within the DUMBO neighborhood of Brooklyn, New York. Prior to being transferred to special servicing for maturity default in September 2023, the loan had previously been monitored on the servicer’s watchlist for declines in cash flow and occupancy. According to the servicer, the lender will continue discussions with the borrower while reserving all rights under the loan documents. The loan is listed as a nonperforming matured balloon with the last loan payment received in August 2023.

Although the second-largest tenant in the portfolio, WeWork (formerly 21.2% of the total portfolio NRA, 100% of the NRA at the 81 Prospect Street property), was signed to a long-term lease through November 2031, the tenant’s parent company filed for bankruptcy in November 2023 and placed the subject lease on its rejection list. The tenant has since vacated its space, leaving 81 Prospect Street entirely unoccupied and reducing the portfolio’s occupancy to 67.2%, per the November 2023 appraisals. The largest three remaining tenants include Etsy (29.9% of the NRA, lease expires July 2026), Brooklyn Lab (10.8% of the NRA, lease expires June 2034), and 2U (10.5% of the NRA, lease expires September 2029). According to Reis, the Brooklyn CBD submarket reported a vacancy of 15.7% as of Q4 2023.

The loan has consistently reported depressed cash flows for several years, with the debt service coverage ratio (DSCR) hovering near or just below breakeven since 2021. The reported occupancy rate has ranged between 86% and 91% for the past three years, compared with 94% at issuance. Given the recent WeWork departure, Morningstar DBRS expects cash flow to decline further from issuance expectations. According to the November 2023 appraisal, the portfolio had an as-is value of $255.6 million, a steep decline from the appraised value of $640.0 million at issuance, reflecting LTV ratios on the senior loan and whole loan amounts of 70.4% and 188.2%, respectively, not including the servicer advances to date. Re-leasing 81 Prospect Street will likely be difficult and costly, with the appraiser estimating tenant improvements at $75.00 psf, with one year of free rent. Given the borrower’s inability to secure refinancing, paired with the soft market conditions, which will challenge the borrower’s ability to backfill or require a significant equity contribution, Morningstar DBRS assumed a conservative liquidation scenario based on a stress applied to the November 2023 appraised value, resulting in a projected loss severity for the trust debt approaching 10%.

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, but was returned to the master servicer in November 2023 following a modification agreement in July 2023, which included a three-year loan extension through July 2026, a lease extension for Aon Corporation (Aon; 39.6% of the NRA) through December 2028, and a cure of the mezzanine loan defaults by the mezzanine debtholder.

Despite the loan’s modification, Morningstar DBRS notes the loan’s underperformance relative to issuance expectations. As of December 2023, occupancy was reported to be 76.0%, down from 89.7% at issuance, with the drop 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 YE2023 financial reporting, the loan’s NCF had moderately improved to $40.9 million (a whole loan DSCR of 1.16x) over the YE2022 figure of $38.7 million (a whole loan DSCR of 1.10x), but was still well below the Issuer’s figure of $49.7 million (a whole loan DSCR of 1.43x). Based on the May 2023 appraisal, the property had an as-is value of $414.0 million, a significant decline from the appraised value of $780.0 million at issuance, reflecting LTV ratios on the senior loan and whole loan amounts of 80.4% and 163.6%, respectively. Given the decline in performance and value, Morningstar DBRS analyzed the loan with a stressed LTV to account for increased credit risks since issuance that resulted in an EL that was 1.5x the pool average.

With this review, DBRS Morningstar 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, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (January 23, 2024) https://dbrs.morningstar.com/research/427030

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

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

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

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

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.

Morningstar DBRS 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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The Morningstar DBRS Long-Term Obligation Rating Scale definition indicates that credit 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS’ 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://dbrs.morningstar.com/about/methodologies.

-- North American CMBS Multi-Borrower Rating Methodology (November 3, 2023)/North American CMBS Insight Model Version 1.2.0.0, https://dbrs.morningstar.com/research/422859)

-- DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023), https://dbrs.morningstar.com/research/420982)

-- North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592)

-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023), https://dbrs.morningstar.com/research/415687)

-- Legal Criteria for U.S. Structured Finance (December 7, 2023), https://dbrs.morningstar.com/research/425081)

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279.

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