Benchmark 2023-B40 Mortgage Trust Annual Report: Your 2023 Investment Performance Snapshot

This annual report (Form 10-K) provides a comprehensive look at the Benchmark 2023-B40 Mortgage Trust for the fiscal year ending December 31, 2023. It offers crucial insights into how the trust's portfolio of commercial mortgage loans performed, giving you a clear picture of your investment.

Business Overview

Unlike a traditional company that sells products, this trust operates as a collection of commercial mortgage loans. When you invest, you essentially own a piece of the cash flow these loans generate. The trust acquires and holds a portfolio of commercial mortgage loans, then issues investment certificates that represent ownership interests in these assets. Its main goal is to collect payments from these loans and distribute them to certificate holders.

Who Manages This Trust?

A specialized team oversees your investment:

• The Sponsors/Depositor: Major financial institutions like J.P. Morgan Chase, Citi Real Estate Funding, Goldman Sachs Mortgage Company, and Bank of America established and initially funded the trust.
• The Administrator/Trustee: Computershare Trust Company manages the trust's overall administration. This includes maintaining accurate records and ensuring smooth operations, such as distributing payments to certificate holders.
• The Loan Managers (Servicers): Companies such as Midland Loan Services, LNR Partners, Wells Fargo Bank, and Trimont LLC handle the day-to-day management of the mortgage loans. They collect payments, address borrower inquiries, and resolve any performance issues.

What's in the Loan Portfolio?

The trust holds a diverse range of commercial mortgage loans, spanning various property types and geographic locations. As of year-end 2023, the portfolio's metrics indicated a healthy cushion for debt repayment:

• Weighted Average Loan-to-Value (LTV): Approximately 62%, meaning the loan amount averages 62% of the property's value.
• Weighted Average Debt Service Coverage Ratio (DSCR): 1.85x, indicating that the properties' net operating income is 1.85 times the debt payments.

The portfolio includes several larger loans:

• Bala Plaza Portfolio Mortgage Loan: A significant office and retail complex, representing about 7.8% of the trust's balance.
• Axis Apartments Mortgage Loan: A multifamily property, making up approximately 6.5% of the portfolio.
• 645 North Michigan Avenue Mortgage Loan: A prominent retail and office asset in a prime urban location.
• Fashion Valley Mall Mortgage Loan: A major retail center.
• Outlet Shoppes at Atlanta Mortgage Loan: A regional outlet shopping destination.
• Sugar Land Town Square Mortgage Loan: A mixed-use development.
• Philadelphia Marriott Downtown Mortgage Loan: A large hotel property.
• Arundel Mills and Marketplace Mortgage Loan: A super-regional mall and adjacent retail center.

Many of these loans are part of "pari passu" combinations. This means the trust owns a specific portion (or "note") of a larger loan, while other investors or trusts hold the remaining portions. Think of it as owning a specific slice of a much larger financial pie.

Financial Performance

Key Performance Highlights for 2023

The trust maintained stable performance throughout the year. As of December 31, 2023:

• Total Outstanding Principal Balance: The trust held approximately $785 million in commercial mortgage loans.
• Cash Flow & Distributions: The trust successfully collected interest and principal payments, distributing about $45 million to investors during the year.
• Delinquency Rate: Only 0.5% of the portfolio was 30-59 days delinquent, with no loans 60+ days delinquent or in foreclosure. This demonstrates strong payment performance from the underlying borrowers.
• Losses: The portfolio recorded no realized losses during the fiscal year.

Portfolio Change: The Nvidia Santa Clara Mortgage Loan was fully paid off during the fiscal year. This successful repayment returned its principal balance to the trust for distribution to investors.

Management Discussion (MD&A Highlights)

For a mortgage trust, management's discussion primarily focuses on the performance of the underlying loans and their impact on cash flow and certificate holders. For the fiscal year ended December 31, 2023, the trust's financial condition remained stable, driven by consistent performance of its commercial mortgage loans.

The portfolio experienced a low delinquency rate, indicating strong payment behavior from borrowers. The full payoff of the Nvidia Santa Clara Mortgage Loan during the year significantly returned principal to the trust, which was then distributed to investors. This event, while reducing the overall portfolio balance, reflects a successful loan resolution.

The weighted average LTV and DSCR metrics remained healthy, providing a cushion against potential declines in property values or cash flows. Servicing activities focused on proactive portfolio management, and the trust recorded no significant credit events or material losses. As a largely passive entity, the trust's operations and cash flows directly depend on the performance of its underlying loans, managed by designated servicers and the trustee.

Financial Health

The trust's financial health primarily reflects the performance of its underlying loans and its ability to meet obligations to certificate holders. As of December 31, 2023, the trust had various classes of commercial mortgage pass-through certificates outstanding, which represent its main liabilities. The principal balance of these certificates matches the outstanding principal balance of the mortgage loans the trust holds.

Servicers collect cash from interest and principal payments on the mortgage loans and remit these funds to the trustee. The trustee then distributes these funds to certificate holders according to the trust's pooling and servicing agreement. The trust maintains required collection and distribution accounts, ensuring timely and accurate fund transfers. As a pass-through entity, the trust does not retain significant cash balances beyond short-term operational needs and distributions, nor does it incur traditional debt beyond the issued certificates. Its liquidity is directly tied to the cash flow generated by the mortgage loans.

Diversification and Risk Mitigation

The trust's structure incorporates several features to mitigate risk:

• No Single Borrower Concentration: A key strength is its diversification. No single borrower accounts for more than 8% of the total loan balance, preventing overexposure to any one loan's performance.
• Property Type Diversification: The portfolio spreads across various property types, including office (28%), retail (25%), multifamily (20%), hotel (15%), and mixed-use (12%). This reduces reliance on any single sector.
• Geographic Diversification: Loans are located in over 15 states, with no single state representing more than 15% of the total balance.
• No External Guarantees or Complex Instruments: The trust's performance directly depends on the underlying mortgage loans. It does not rely on third-party credit enhancements (like insurance) or complex financial derivatives to boost its value, which simplifies its risk profile.
• No Significant Legal Issues: The report confirms no material legal proceedings involving the trust, indicating stability.

Understanding Key Risks

While the trust performed well, investors should understand its inherent risks:

• Interest Rate Risk: Changes in market interest rates can affect the value of the underlying loans, though the trust's cash flows are primarily fixed.
• Prepayment Risk: Borrowers may pay off their loans early (as seen with the Nvidia loan). This can impact the timing of investor distributions and the ability to reinvest at similar yields.
• Default Risk: Despite current low delinquency rates, borrowers can default. This could lead to potential losses if the underlying property's value is insufficient to cover the loan.
• Economic Downturns: A broad economic slowdown could negatively impact property values, tenant occupancy, and borrowers' ability to repay.
• Property-Specific Risks: Each commercial property faces unique risks related to its market, tenants, and management.
• Servicer Performance Risk: The trust's performance also depends on the servicers' effectiveness in managing the loan portfolio, including collection efforts and resolving distressed assets.

Future Outlook

As a static pool of commercial mortgage loans, the Benchmark 2023-B40 Mortgage Trust does not issue forward-looking guidance or engage in strategic business development in the traditional sense. Its future performance directly depends on the ongoing credit performance of the underlying mortgage loans and the broader commercial real estate market.

While the trust demonstrated stability in 2023, the outlook for commercial real estate, particularly certain sectors like office, remains subject to evolving economic conditions, interest rate fluctuations, and tenant demand. The servicers will continue to monitor loan performance, property market conditions, and borrower financial health. They will take appropriate actions to maximize recoveries and preserve collateral value should any loans experience distress. Investors should consider the inherent risks associated with commercial real estate investments and the specific characteristics of the loan portfolio when evaluating future prospects.

Competitive Position

Competitive Position: Not applicable for a mortgage trust. The trust is a passive investment vehicle holding a static pool of commercial mortgage loans and does not operate in a competitive market.

Where to Find More Detailed Information

For a mortgage trust like Benchmark 2023-B40, the 10-K focuses on its structure, asset pool, and overall performance metrics, rather than traditional corporate financial statements (like a balance sheet or income statement). You can find detailed financial performance for individual loans, property-level data, and specific servicer actions in:

• Monthly Servicer Reports: Provided by the loan servicers.
• Trustee Statements: Issued by Computershare Trust Company.
• Investor Reporting Portals: Often available through the trustee or servicer websites.

These resources offer granular data on loan payments, delinquencies, property financials, and any special servicing activities.

Overall Summary

The Benchmark 2023-B40 Mortgage Trust demonstrated solid performance in 2023. It features a well-diversified portfolio, low delinquency rates, and consistent cash flow distributions. While inherent risks in commercial real estate remain, the trust's current metrics suggest it operated as a healthy and stable investment vehicle during the past fiscal year.