DBRS Morningstar Changes Trends on Eight Classes of Benchmark 2018-B5 Mortgage Trust to Negative from Stable and Confirms Ratings on All Classes

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2018-B5 issued by Benchmark 2018-B5 Mortgage Trust as follows:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (high) (sf)
-- Class B at AA (sf)
-- Class C at A (low) (sf)
-- Class X-D at A (low) (sf)
-- Class D at BBB (high) (sf)
-- Class E-RR at BBB (low) (sf)
-- Class F-RR at BB (low) (sf)
-- Class G-RR at B (sf)

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

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations since the prior rating action. However, there are some challenges for the pool as the third- and fourth-largest loans are in special servicing and there is a high concentration of loans secured by office properties, some of which are exhibiting performance declines given the general challenges faced in that sector. DBRS Morningstar notes mitigating factors including a sizable unrated first loss piece totaling $37.7 million with no losses incurred to the trust to date and no imminent loss projections for the loans in special servicing. Although both loans in special servicing are secured by office properties that initially had 2023 loan maturities, the borrower recently executed two- and three-year maturity extensions. The transaction also benefits from five years of amortization since issuance, in addition to loan repayments and defeasance. Furthermore, the largest loan in the pool is shadow-rated investment grade, as further described below. Given the loan-specific challenges for a number of office loans and the downward ratings pressure implied by DBRS Morningstar’s Commercial Mortgage-Backed Securities (CMBS) Insight Model’s results on the seven lowest-rated classes that are most exposed to loss, the Negative trends are warranted.

As of the August 2023 reporting, 53 of the original 55 loans remained in the pool with an aggregate principal balance of $964.5 million, representing collateral reduction of 7.2% since issuance, as a result of loan amortization and loan repayments. Four loans, representing 1.4% of the pool, have been fully defeased. There are nine loans, representing 22.3% of the pool, on the servicer’s watchlist, and two loans, representing 10.5% of the pool, in special servicing.

Excluding collateral that has been defeased, the pool is concentrated by loans that are secured by retail and office properties, which represent 35.9% and 29.8% of the pool, respectively. In general, the office sector has been challenged, given the low investor appetite for that property type and high vacancy rates in many submarkets as a result of the shift in workplace dynamics. While select office loans in the transaction continue to perform as expected, several others are exhibiting increased risk. In its analysis for this review, DBRS Morningstar applied stressed loan-to-value (LTV) ratios or increased probability of default assumptions for six loans backed by office properties that are exhibiting declines in performance, resulting in a weighted-average expected loss (EL) approximately 45.0% greater than the pool average.

The second-largest specially serviced loan, Workspace (Prospectus ID#4, 5.2% of the pool), is secured by a portfolio of 147 properties, consisting of approximately 9.9 million square feet (sf) of office and flex space. The subject loan amount of $50.0 million is part of a whole loan totaling $1.3 billion, secured across four other transaction, three of which are rated by DBRS Morningstar: JPMCC 2018-WPT (lead securitization), BMARK 2018-B6, and BMARK 2018-B7. The loan transferred to special servicing in April 2023, ahead of its July 2023 maturity date as the loan was not expected to repay. A modification was subsequently executed extending the loan term by two years, resulting in a new maturity date of July 2025. Additional details regarding the terms of the modification were requested from the servicer; however, an online article dated July 2023 noted a significant principal curtailment was made in conjunction with the loan extension.

Built between 1972 and 2013, the portfolio includes 88 office properties (6.5 million sf) and 59 flex buildings (3.4 million sf) that are located across four states (Pennsylvania, Florida, Minnesota, and Arizona), five distinct metropolitan statistical areas (MSAs), and more than 15 submarkets. The largest concentration of properties is in the Philadelphia MSA, with 69 properties totaling 40.3% of the allocated loan balance at issuance. Since issuance, only one (300-309 Lakeside Drive) has been released and the servicer has confirmed that there are no additional upcoming releases planned. The collateral is generally located in dense suburban markets that benefit from favorable accessibility and proximity to their respective central business districts.

The portfolio generated net cash flow (NCF) of $97.4 million in 2022, resulting in a debt service coverage ratio (DSCR) of 1.43 times (x), which while considered healthy, is a decline from 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 decline in NCF was predominantly because of decreases in base rent and expense reimbursements following a drop in occupancy in recent years. Servicer reporting for the subject transaction reflects a December 2022 occupancy rate of 78.2%, down from 82.6% at YE2021 and 88.6% at issuance. At issuance, the loan was shadow-rated investment grade; however, given the sponsor’s challenges with securing takeout financing, coupled with sustained declines in occupancy and cash flow, the shadow rating was removed with this review. The loan was analyzed with a stressed LTV assumption based on the DBRS Morningstar value derived with the May 2023 review for the JPMCC 2018-WPT transaction, resulting in an EL that was more than double the pool average.

The second-largest loan on the servicer’s watchlist, Aon Center (Prospectus ID#7, 4.5% of the pool), is secured by a 2.8 million-sf office tower in Chicago’s central business district. The trust asset represents the $43.0 million noncontrolling A-2 note of a larger $536.0 million whole loan. DBRS Morningstar does not rate the controlling note included in the JPMCC 2018-AON transaction; however, it does rate the three other transactions that the remaining pari passu notes are secured in: BMARK 2018-B4, BMARK 2018-B5, and BMARK 2018-B7.

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 for its upcoming July 2023 maturity, which has now passed. According to servicer commentary, there have been a few positive developments including the execution of 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 was reported at 76.0%, a decline from 89.7% at issuance. The reduction in occupancy was 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, driven by an approximately 40.0% increase in real estate taxes. As of the YE2022 financial reporting, NCF had fallen to $38.8 million (a DSCR of 1.10x), reflecting a 19.5% decline from the DBRS Morningstar figure of $48.2 million (a DSCR of 2.93x) at issuance. Despite the increased vacancy levels from issuance, however, there has been some positive leasing momentum at the property as evidenced by Aon’s renewal and the second-largest tenant, KPMG LLP, recently expanding 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 moderate with tenants representing less than 5.0% of the NRA having lease expirations. The property has an in-place rental rate of $23.0 per sf (psf), lower than the East Loop submarket, which reported effective rental, asking rental, and vacancy rates of $26.0 psf, $35.0 psf, and 13.5%, respectively. 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.

The largest loan in special servicing, eBay First Commons (Prospectus ID#3, 5.3% of the pool), is secured by a 250,056-sf office campus in San Jose, California. Situated on a 14.16-acre site, the property consists of four two-story Class B office buildings that are currently 100.0% leased to eBay Inc. (eBay) through March 2029. eBay, an investment-grade tenant, vacated the space in 2020 when it relocated its headquarters to another property in Willow Glen. However, the tenant continues to honor its rent payments and the terms of its lease. The loan transferred to special servicing in March 2023, ahead of its June 2023 maturity date as the loan was not expected to repay. A modification was subsequently executed extending the loan term by three years, resulting in a new maturity date of June 2026. The loan is expected to return to the master servicer in the near term.

The loan was structured with a cash flow sweep that was triggered when eBay went dark on more than half of its space, with excess cash being deposited into a tenant reserve account. Per the August 2023 reporting, the tenant reserve balance was $10.8 million. Although eBay’s lease extends through to 2029, the tenant has a termination option in March 2026, which requires a 12-month notice period that would allow a takeout lender to sweep cash flow for 12 months, generating approximately $35.0 psf, in addition to a $12.0 million termination fee. Given the underlying collateral is vacant and eBay may choose to exercise its early lease termination in 2026, a few months prior to loan maturity, refinance risk is elevated. As such, DBRS Morningstar removed the shadow rating for this loan and applied a stressed LTV scenario in its analysis.

At issuance, five loans, representing 29.7% of the current pool, were shadow-rated investment grade. With this review, DBRS Morningstar confirms that the performance of one of those loans—Aventura Mall (Prospectus ID#1, 10.7% of the pool)—remains consistent with investment-grade characteristics. This assessment continues to be supported by the loan’s strong credit metrics, experienced sponsorship, and the underlying collateral’s historically stable performance. In addition, with this review, DBRS Morningstar removed the investment-grade shadow rating for four loans (eBay North, Workspace, Aon Center, and 181 Fremont Street (Prospectus ID#8, 4.1% of the pool)), as noted above.

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 several 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 credit ratings assigned to Classes A-S and B 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 ratings would consider a three-notch or more deviation from the credit rating stresses implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviations is the uncertain loan-level event risk. The analysis for this review included stressed scenarios for several office loans given the general challenges facing the office sector. The results of the analysis suggest downward pressure through the middle of the bond stack, most pronounced for Classes A-S and B; however, given the most challenged loans would likely be transferred to special servicing and possibly liquidated, DBRS Morningstar believes the increased risks are most concentrated in the lower-rated classes, supporting the Negative trends assigned with this review.

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 info@dbrsmorningstar.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.

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 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 (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 info@dbrsmorningstar.com.