DBRS Morningstar Changes Trends on 12 Classes of Benchmark 2019-B11 Commercial 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 2019-B11 issued by Benchmark 2019-B11 Commercial 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-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class X-B at A (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (sf)
-- Class X-D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class X-F at BB (sf)
-- Class F at BB (low) (sf)
-- Class X-G at B (high) (sf)
-- Class G at B (sf)

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

The rating confirmations reflect DBRS Morningstar’s outlook and loss expectations for the transaction, which remain relatively unchanged from the prior rating action in November 2022. However, there are some challenges for the pool, including a defaulted specially serviced loan that is expected to incur a realized loss of nearly $12.0 million upon resolution. There is also a high concentration of loans, representing nearly 45.0% of the pool, that are secured by office properties, some of which are exhibiting increased levels of risk since issuance given the general challenges faced by that sector. DBRS Morningstar notes mitigating factors including a sizable unrated first loss piece totaling $33.9 million with no losses incurred to the trust to date. In addition, the largest loan in the pool, which is secured by an office property, is shadow-rated investment grade, as further described below. Given these loan-specific challenges and the downward ratings pressure implied by DBRS Morningstar’s Commercial Mortgage-Backed Securities (CMBS) Insight Model results on the seven lowest-rated classes that are most exposed to loss, the Negative trends are warranted.

As of the August 2023 reporting, 38 of the original 40 loans remained in the pool with an aggregate principal balance of $1.1 billion, representing collateral reduction of 3.8% since issuance, as a result of loan amortization and loan repayments. One loan, representing 1.1% of the pool, has been fully defeased. There are 14 loans, representing 33.0% of the pool, on the servicer’s watchlist; however, five of those loans (17.0% of the pool) are being monitored for life safety and/or deferred maintenance issues, which DBRS Morningstar does not deem material to the loans’ overall credit profile.

The sole loan in special servicing, The Greenleaf at Howell (Prospectus ID#15, 2.4%), is secured by a 227,045-square-foot (sf) anchored retail center in Howell, New Jersey. At issuance, the property was 100.0% occupied; however, at the beginning of the Coronavirus Disease (COVID-19) pandemic, the property’s second-largest tenant, Xscape Theatres (25.0% of the net rentable area (NRA)) closed and surrendered its space, bringing occupancy to its current rate of 74.0%. The closure significantly impaired the property’s cash flow, as reflected by the YE2022 debt service coverage ratio (DSCR) of 0.09 times (x). While the servicer indicates a loan modification is being documented, the loan is delinquent with the last debt payment made in October 2021, and a receiver is currently in place. Based on the December 2022 appraisal, the property was valued at $33.4 million, reflecting nearly a 50.0% reduction from the issuance value of $66.9 million. In its analysis for this review, DBRS Morningstar liquidated the loan from the trust with an implied loss of nearly $12.0 million or a loss severity in excess of 50.0%.

Excluding collateral that has been defeased, the pool is concentrated by loans that are secured by office and lodging properties, which represent 44.9% and 15.3% 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, including 101 California (Prospectus ID#4; 4.7% of the pool), Central Tower Office (Prospectus ID#13; 3.2% of the pool), and 57 East 11th Street (Prospectus ID#20; 1.9% of the pool), described in further detail below. In its analysis for this review, DBRS Morningstar applied stressed loan-to-value (LTV) ratios or increased probability of default (POD) assumptions for six loans backed by office properties exhibiting declines in performance, resulting in a weighted-average expected loss (EL) that was slightly above the pool average for the asset class.

The 101 California Street loan is secured by the borrower’s fee-simple interest in a 1.3 million-sf, Class A+, LEED Platinum office building in the heart of San Francisco’s financial district. Between 2012 and 2018, the sponsors invested approximately $96.3 million ($77 per sf (psf)) in capital expenditures. The property generated $49.1 million of NCF in 2022 (a DSCR of 1.58x), down from the reported NCF of $56.5 million (a DSCR of 1.81x) at YE2021 and $66.2 million (a DSCR of 2.10x) at issuance. The compression in NCF has been driven by declining occupancy and increasing operating expenses.

According to the March 2023 rent roll, the property was 75.6% occupied compared with 92.1% at the time of issuance. The former largest tenants, Merrill Lynch (previously 9.7% of NRA) and Cooley LLP (previously 8.0% of NRA), vacated the building upon their lease expirations in 2022 and 2021, respectively. In 2021, Chime Financial (Chime) executed a 200,000-sf (16.0% of the NRA) 10-year lease at an average rental rate of $54.50 psf. Chime has since subleased 36,000 sf of its space; however, its direct lease is not scheduled to expire until 2032. According to a Q1 2023 Reis report, office properties in San Francisco’s North Financial District submarket reported a vacancy rate of 14.0% compared with the Q1 2022 vacancy rate of 12.5%. Near-term rollover risk is moderate, with leases representing 9.0% of the NRA scheduled to roll over in the next 12 months. Given the decline in DSCR and cash flow coupled with soft submarket conditions, DBRS Morningstar analyzed this loan with a stressed LTV and POD assumption, resulting in an EL that was roughly 1.6x the pool average.

The Central Office Tower loan is secured by two office buildings in the Financial District of downtown San Francisco. The 21-story and six-story office buildings, which are connected, total 164,848 sf of NRA. The collateral was most recently renovated between 2015 and 2018 with the sponsor investing approximately $30.0 million toward capital expenditures. The loan is currently on the servicer’s watchlist because of a decline in occupancy, falling to 67.4% as of March 2023 from 91.0% at issuance. In addition, the largest tenant, Unity Technologies (Unity), which currently occupies 52.0% of the NRA, has a lease expiration in August 2025, prior to the loan’s maturity in 2029. Unity, a privately held video game development company is headquartered at the subject property and has one five-year renewal option remaining. The loan is structured with a cash flow sweep that will commence if the tenant fails to renew its leases 12 months prior to lease expiration, goes dark, or files for bankruptcy.

According to the YE2022 financial reporting, the property generated NCF of $6.7 million (a DSCR of 1.65x), which was 18.7% and 28.8% below the YE2021 and issuance figures, respectively. Although the remainder of the rent roll is granular with no tenant accounting for more than 3.5% of NRA, there is considerable tenant concentration risk associated with Unity. Should the tenant opt to vacate the property upon its lease expiration, backfilling the vacant space will likely prove challenging. In its analysis for this review, DBRS Morningstar analyzed this loan with a stressed LTV and POD assumption, resulting in an EL almost 2.0x higher than the pool average.

The 57 East 11th Street loan is secured by a 64,460-sf office property in the Union Square submarket of New York, that is 100.0% leased to WeWork Inc. (WeWork) through 2034. The property was built in 1903 and was most recently renovated in 2018. WeWork has faced a number of challenges the last few years, most recently announcing plans to renegotiate nearly all of its leases in an effort to stay solvent. WeWork’s lease at the property was modified in June 2021, terms of which included four months of rent abatements that began in August 2021. Although WeWork resumed making full rent payments in January 2022, NCF remains subdued, with the YE2021 and YE2022 figures 47.0% and 14.0% below the issuance figure, respectively.

WeWork’s market capitalization has fallen to $286.0 million (as of the date of this press release) from a private market peak value of $47 billion. In mid-August, the company announced a 1-for-40 reverse stock split to get its shares trading back above $1.00— a requirement for keeping its New York Stock Exchange listing. No updated appraisal has been provided since issuance, when the property was valued at $76.0 million; however, given WeWork’s operational challenges, soft submarket fundamentals, and continued uncertainty surrounding end-user demand, DBRS Morningstar notes that the collateral’s as-is value has likely declined significantly, elevating the credit risk to the trust. As such, DBRS Morningstar applied a stressed LTV ratio in its analysis, resulting in an EL that was approximately 2.3x the pool average.

At issuance, DBRS Morningstar assigned an investment-grade shadow rating to one loan, 3 Columbus Circle (Prospectus ID#8, 4.4% of the pool). With this review, DBRS Morningstar confirms that the performance of this loan remains consistent with investment-grade characteristics.

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, and X-G 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, E, and F 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 and bottom of the bond stack; 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.