Morningstar DBRS Downgrades Seven Classes of Benchmark 2019-B12 Commercial Mortgage Trust, Changes Trends on Six Classes to Negative from Stable

DBRS Limited (Morningstar DBRS) downgraded the credit ratings on seven classes of Commercial Mortgage Pass-Through Certificates Series 2019-B12 issued by Benchmark 2019-B12 Commercial Mortgage Trust as follows:

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

In addition, Morningstar DBRS confirmed its credit ratings on the remaining classes 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 B at AA (low) (sf)
-- Class X-A at AAA (sf)

Morningstar DBRS changed the trends on Classes B, C, D, E, X-B, and X-D to Negative from Stable. All other trends are Stable with the exception of Classes F-RR and G-RR, which are assigned credit ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) credit ratings.

The credit rating downgrades reflect the increased loss expectations for the pool, primarily attributed to the largest specially serviced loan, The Zappettini Portfolio (Prospectus ID#3, 5.9% of the pool balance), and 250 Livingston (Prospectus ID#9, 4.5% of the pool balance), which is on the servicer's watchlist. Both loans are secured by office properties where vacancy has either declined or prominent tenants will be vacating the subject properties in the near term, indicating large reductions in property value when compared to issuance. With the August 2024 reporting, there are four specially serviced loans, representing 9.3% of the pool balance. With this review, two of the specially serviced loans along with 250 Livingston were analyzed with liquidation scenarios, resulting in an implied loss of $43.4 million, thereby eroding the entirety of Class J-RR and majority of Class G-RR. As such, the considerable credit erosion supports the credit rating downgrades.

The Negative trends reflect the potential for further value decline for the above-mentioned loans, as well as the high concentration of loans backed by office properties (representing about 30.0% of the pool balance), some of which exhibited performance declines from issuance. Loans that have exhibited increased credit risk from issuance were analyzed with a stressed probability of default penalty and/or stressed loan-to-value ratio (LTV) in the analysis for this review.

The credit rating confirmations on the remaining classes are reflective of the otherwise steady performance of the remaining loans in the pool as exhibited by a healthy weighted-average debt service coverage ratio (DSCR) of 2.44 times (x) based on the most recent year-end financials. As of the August 2024 remittance, 43 of the original 47 loans remain in the pool, representing a collateral reduction of 6.9% since issuance. There are 14 loans, representing 24.1% of the pool balance, on the servicer's watchlist, which are primarily being monitored for performance issues and/or upcoming maturity.

The Zappettini Portfolio is secured by a portfolio of 10 office/flex buildings in Mountain View, California. The property is within Silicon Valley and is close to Google and Microsoft campuses. The loan recently transferred to special servicing in June 2024 for maturity default with the servicer commentary noting a portfolio occupancy rate of 58%, which is a significant decline from its historical occupancy rate of 100%. The majority of the buildings are leased to one or two tenants with significant rollover risk of more than 40.0% of the net rentable area (NRA) in 2024. Based on the trailing 12-months ended (T-12) September 30, 2023, financials, the loan reported a DSCR of 1.70x. An updated appraisal is not available at this time, but the significant occupancy decline and the generally challenged office submarket suggests value has declined from the issuance appraised figure of $187.4 million. A workout has yet to be established, although the special servicer is dual tracking foreclosure as discussions continue. For this review, Morningstar DBRS took a conservative approach and liquidated the loan from the pool based on a haircut to the issuance value, resulting in a loss severity in excess of 30.0%.

250 Livingston Street, a watchlisted loan, is secured by a 370,305-square-foot (sf), mixed-use commercial and residential building in Downtown Brooklyn. The subject note is pari passu with GSMS 2019-GC40, which is also rated by Morningstar DBRS. The New York City Human Resources Administration occupies the entire office portion of the property (92.5% of the property's NRA) on a lease through August 2030. However, the tenant has exercised its termination option and plans to vacate the building in August 2025. As a result, a cash flow sweep was initiated as required by the loan documents, of which 18 months of excess cash will be trapped and used to re-lease the space. The re-leasing efforts will likely be challenging given the soft office submarket with CB Richard Ellis reporting a Q2 2024 vacancy rate of 19.1% and asking rental rate of $54.55 per sf (psf) for downtown Brooklyn.

While an updated appraisal has not yet been made available, Morningstar DBRS believes the property value has deteriorated significantly given the potential of the building going dark, as well as its age and property condition and the current office landscape. Morningstar DBRS derived a dark value based on market rental rates, market vacancy loss, tenant improvement costs of $60 psf for new leases and $30 psf for renewal leases, a stabilization period of two years, and a 9.0% stressed capitalization rate along with a 100-basis point dark value adjustment to account for the time and risk to re-tenant the space. The resulting dark value was approximately $60.0 million, reflecting an LTV of 208.3%. Morningstar DBRS liquidated the loan from the trust based on the dark value but also provided credit to the cash flow sweep of $20.0 million, resulting in a loss severity in excess of 35.0%.

The 3 Columbus Circle loan (Prospectus ID#8, 4.5% of the pool), is shadow-rated investment grade. Considering the strong historical performance as illustrated by the healthy YE2023 DSCR of 2.67x and stable occupancy rate of 97%, with this review, Morningstar DBRS confirms that the loan performance trend remains consistent with investment-grade loan characteristics.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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 Factors in Credit Ratings at https://dbrs.morningstar.com/research/437781 (August 13, 2024).

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 Morningstar DBRS.

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

The principal methodology is North American CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798

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 info-DBRS@morningstar.com.

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.

-- Rating North American CMBS Interest-Only Certificates (June 28, 2024), https://dbrs.morningstar.com/research/435294
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024), https://dbrs.morningstar.com/research/435293
-- North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592
-- Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205

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 (July 17, 2023).

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.