DBRS Downgrades Four Classes of Bear Stearns Commercial Mortgage Securities Trust, Series 2007-TOP26

DBRS has today downgraded four classes of the Bear Stearns Commercial Mortgage Securities Trust, Series 2007-TOP26 (the Trust) as follows:

-- Class A-J to BB (sf) from BBB (low) (sf)
-- Class B to B (low) (sf) from B (sf)
-- Class E to C (sf) from CCC (sf)
-- Class F to C (sf) from CCC (sf)

DBRS also has confirmed 12 classes as follows:

-- Class A-1A at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class AM at AAA (sf)
-- Class C at CCC (sf)
-- Class D at CCC (sf)
-- Class G at C (sf)
-- Class H at C (sf)
-- Class X-1 at AAA (sf)
-- Class X-2 at AAA (sf)

Classes A-1A, A-2, A-3, A-4, A-AB, AM, A-J, B, X-1 and X-2 have Stable trends. Trends are not assigned for classes rated CCC and below.

Class G and Class H remain designated as Interest in Arrears.

The rating actions taken as part of this review reflect the most recent performance of the largest loans on the servicer’s watchlist and the outlook for the remaining loans in special servicing. There are 66 loans (22.15% of the pool) on the servicer’s watchlist as of the August 2012 remittance report; three of those loans, representing 7.37% of the pool, are in the top fifteen loans in the pool. The weighted-average debt service coverage ratio (DSCR) for the 65 loans on the watchlist reporting a YE2011 net cash flow (NCF) figure (only one loan, representing 0.27% of the pool, was not reporting a YE2011 figure) was approximately 1.08 times (x), with a weighted-average debt yield of approximately 7.45%. The weighted-average NCF decline from the issuer’s underwritten figure is high for those 65 loans, at approximately -31.31%.

The largest loan on the servicer’s watchlist is Prospectus ID #6 (Viad Corporate Center), with 3.12% of the pool. This loan is secured by a Class A office property in the Midtown submarket in Phoenix, just north of McDowell Road on Central Avenue. The loan transferred to the special servicer in March 2009, and a May 2010 appraisal valued the property at $64 million ($134 per square foot (psf)), down from $105.5 million at issuance. In May 2011, the special servicer processed a sale of the property and loan assumption that resulted in a $9 million principal writedown of the outstanding $65 million balance on the loan. The loan was transferred back to the master servicer in August 2011. Although several small leases have been signed since the property was sold, the July 2012 rent roll shows the occupancy rate is still low at 61.12%. The borrower submitted a partial statement at YE2011, with property income and expenses reported for the six and half months since acquisition. Based on those figures, DBRS has calculated an annualized DSCR of 0.58x for 2011.

As of the August 2012 remittance report, ten loans have experienced losses since issuance (nine liquidations and one modification with a principal writedown) for a total loss amount of $33.33 million and losses realized through Class J. For the eight loans liquidated since issuance with a material loss, the weighted-average loss severity to date is 44.58%.

Since the last full surveillance review conducted by DBRS in August 2011, four loans have been liquidated, with $9.26 million in losses to the trust, and five loans have transferred into special servicing, representing 5.17% of the pool. DBRS is currently projecting total losses in excess of $65 million for the nine loans in special servicing that were modeled with a liquidation scenario as part of this review, with modeled losses to the trust extending through Class E. The weighted-average modeled loss severity for those nine loans is 46.64%.

The largest loan in special servicing is Prospectus ID #7 (909 A Street), with 2.67% of the pool. The loan is secured by a Class A office property that was constructed in 1988, located in downtown Tacoma, Washington. The sponsor, Ilahie Holdings, acquired the property in 2006 at a purchase price of approximately $63.7 million, with a cash equity contribution of almost $16 million to close. The property's sole tenant, Russell Investments (Russell), moved its headquarters to Seattle and vacated the property in October 2010. The lease on the building expires in November 2013 and the loan matures in February 2017. As the tenant will not be renewing the lease, the loan documents allow for the servicer to deleverage the asset with the use of a cash sweep that was triggered in December 2011. The reserve is projected to accumulate to a balance of $4.64 million ($22 psf) by the end of the Russell lease and is to be allocated to leasing costs. The current loan per unit on the asset is quite high at $228 psf and the loan is interest-only (IO).

The loan transferred to special servicing in March 2012 when the borrower advised the special servicer that debt service payments would not be funded after the lease expiry for Russell Investments; the special servicer is currently in workout negotiations with the borrower and the loan remains current as of the August 2012 remittance report. Although the servicer reports that the borrower has reported ongoing negotiations with a tenant for a portion of the building, no leases have been signed since Russell vacated in 2010. The subject was built-to-suit for a single tenant and would require significant build-out for a multi-tenant leasing strategy. Given these factors, DBRS derived an approximate as-is value of $23.60 million for the asset, based on the gross market rental rate average of $25.25 psf and submarket vacancy rate of 29.2% as reported by CoStar as of Q2 2012. Operating expenses were underwritten at the submarket average of approximately $7.00 psf, as reported by Reis for Q2 2012, tenant improvements were underwritten at $40 psf to account for the anticipated high build-out costs for new tenants and a cap rate of 9.0% was applied. The modeled loss was in excess of $30 million after deducting projected costs and fees, with a DBRS projected loss severity of approximately 63.0% for this loan.

The pool benefits from the overall performance of the largest loans in the pool, with a weighted-average DSCR of 2.08x at YE2011 for the 11 loans in the top 15 (32.51% of the pool) that are not on the servicer’s watchlist or in special servicing and 15 loans (17.80% of the pool) that are shadow-rated investment grade. Three of the loans shadow-rated investment grade, representing 11.61% of the pool, are in the top 15. These figures contribute to a relatively healthy weighted-average DSCR of 1.64x and a weighted-average debt yield of 10.19% for the 211 loans remaining in the pool as of the most recent year-end reporting available for each loan.

For additional details on the DBRS viewpoint for this transaction, and for details on the largest loans in the pool, the loans in special servicing and the loans on the servicer’s watchlist, please see the August 2012 Monthly Surveillance Report for this transaction, which will be published shortly.

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

The applicable methodologies are CMBS Rating Methodology (January 2012) and CMBS North American Surveillance Methodology (May 2011), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.