DBRS Downgrades Seven Classes of Morgan Stanley Capital I Trust, Series 2007-IQ16

DBRS has today downgraded the following classes of Morgan Stanley Capital I Trust, Series 2007-IQ16:

-- Class C to BB (low) (sf) from BB (high) (sf)
-- Class D to B (high) (sf) from BB (sf)
-- Class E to CCC (sf) from B (high) (sf)
-- Class F to CCC (sf) from B (sf)
-- Class G to CCC (sf) from B (low) (sf)
-- Classes H to C (sf) from CCC (sf)
-- Class J to C (sf) from CCC (sf)

Additionally, DBRS has confirmed the ratings on the remaining classes in the transaction. The trends on Class A-J through Class D were changed to Negative from Stable, as the credit quality of these classes has been negatively affected by projected losses. The trends of Class A-2 through Class A-MA, including the notional Classes X-1 and X-2, remain Stable.

The downgrades are a result of projected losses associated with loans currently in special servicing. There are 22 loans in special servicing, representing 12.2% of the current pool balance. This includes nine loans, representing 7.9% of the current pool balance, which have transferred to special servicing over the past 12 months. Since issuance, 16 loans have liquidated from the trust, resulting in a realized loss of $77.6 million. Two loans, Hilton Daytona Beach (Prospectus ID#4) and Ashtabula Mall (Prospectus ID#10), which are the primary loans of concern with this review, are highlighted below.

The Hilton Daytona Beach loan is secured by a 744-key full-service hotel in Daytona Beach, Florida, that was originally built in 1988 and last renovated in 2005. The property is located on Atlantic Avenue across the street from the beach and is considered the premier hotel in the area. The loan transferred to the special servicer in October 2011 due to imminent payment default as a result of insufficient cash flow. The last reported cash flow from YE2010 of $5.88 million was a 28.8% decline from cash flow at issuance. According to the June 2012 operating statement, the YTD occupancy rate was 71.5%, the ADR was $142 and the RevPAR was $102. While these figures are slight improvements over the same period in 2011, the property’s revenue is still below figures reported at issuance. According to the January 2012 servicer site inspection, the property requires $17 million in extensive renovation over the next two years in order to maintain its high property quality. Included in the renovations are new roofing, external concrete work and painting, guest room and bathroom renovations and meeting room and banquet hall renovations. The servicer reports that the borrower is cooperating and that the current workout strategy being pursued is a Stipulated Foreclosure Agreement or a loan modification. A January 2012 appraisal valued the property at $54.1 million, down from an issuance appraised value of $150.3 million, suggesting a significant potential loss with this loan is probable.

The Ashtabula Mall loan is secured by a 750,000 sf regional mall in Ashtabula, Ohio, which is approximately 60 miles northeast of Cleveland. The loan transferred to special servicing in September 2010 due to imminent default and is now in receivership. According to the March 2012 rent roll, the property has a physical occupancy of 49.4%. K-Mart and JC Penney are the two remaining anchor tenants at the property of the original five. Sears vacated in July 2012 after its lease expired, Steve and Barry’s vacated in December 2008 after it filed for bankruptcy and Dillard’s vacated in January 2008 shortly after securitization. Dillard’s continues to pay rent on its dark space until its lease expires in February 2014. Performance at the property continues to be well-below levels at issuance. The YE2011 reported NOI was $2.4 million compared to $4.6 million at issuance. The February 2012 servicer site inspection reported that the property was in Average condition, with $2 million needed to repair the roof and the parking lot. The property received an updated appraisal of $16.2 million in February 2012 compared to $26.6 million in January 2011 and $57.8 million at issuance. DBRS expects there to be losses to the Trust with the resolution of this loan.

As of the August 2012 remittance report, 211 loans remain in the pool out of the original 234 loans. The top 15 loans in the pool by loan balance (excluding the two loans in special servicing) continue to exhibit stable performance, reporting a weighted-average debt service coverage ratio of 1.37x and a weighted-average debt yield of 8.94%. As of the August 2012 remittance report, there are 22 loans in special servicing and 64 loans on the servicer’s watchlist, representing12.2% and 23.3% of the current pool balance, respectively. Approximately 13.6% of the collateral has been reduced since issuance.

At issuance, DBRS shadow-rated six loans, representing 5.1% of the current pool balance, as investment-grade loans. DBRS today confirmed that the performance of these loans remains consistent with investment-grade loan characteristics.

As part of its review, DBRS analyzed the top 15 loans, the specially serviced loans, the loans on the servicer’s watchlist and the shadow-rated loans, which comprise approximately 72.86% of the current pool balance.

DBRS continues to monitor this transaction in its Monthly CMBS Surveillance Report to assess any material changes at the bond or collateral level that may affect ratings. The Monthly CMBS Surveillance Report also highlights any material updates in the loans on the servicer’s watchlist and any specially serviced loans.

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

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

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.