DBRS Downgrades Nine, Confirms Eight, and Places Four Classes Under Review with Negative Implications in Bear Stearns Commercial Mortgage Securities Trust 2007-PWR18

DBRS has today downgraded the following classes of Bear Stearns Commercial Mortgage Securities Trust 2007-PWR18:

-- Classes A-J and AJ-A to BB (sf) from BBB (low) (sf)
-- Class B to CCC (sf) from BB (low) (sf)
-- Class C to CCC (sf) from B (sf)
-- Classes D and E to CCC (sf) from B (low) (sf)
-- Classes F and G to C (sf) from CCC (sf)
-- Class J to D (sf) from C (sf)

DBRS has also confirmed Classes A-2, A-3, A-4, A-1A, A-AB, X-1 and X-2 at AAA (sf) with Stable trends. Class H has been confirmed at C (sf), with no trend. The Interest in Arrears designation remains on Class H.

In addition to the rating actions stated above, DBRS has placed Classes A-M, AM-A, A-J and AJ-A Under Review with Negative Implications.

The downgrades are a result of a loss realized by Class J following the liquidation of one loan from the trust and an increase to the projected losses for many of the loans in special servicing. As part of its surveillance review, DBRS also addressed specific concerns surrounding the recent transfer of three loans in the original top ten to special servicing with the September 2012 remittance. The uncertainty surrounding the recent transfer of the largest loan in the transaction is the primary reason for placing several of the classes Under Review with Negative Implications.

The largest loan in special servicing is DRA/Colonial Office Portfolio (Prospectus ID#1, 11.6% of the current pool balance). This is the largest loan in the transaction and is one of three pari-passu notes with an aggregate balance of $741.8 million. The collateral for this loan is a portfolio of 19 cross-collateralized/cross-defaulted office and retail properties comprising 5.2 million square feet (sf) across 43 individual buildings. With regard to the collateral’s allocated loan balance, the portfolio is concentrated in two markets: Lake Mary, Florida, and Birmingham, Alabama, whose average Q2 2012 market vacancy rates were 12.7% and 12.1%, respectively, according to Reis. According to a rent roll dated October 2011, the portfolio’s overall occupancy was 81.7%, which is a decline from the issuer underwritten occupancy of 94%. One of the two entities involved in the joint venture, Colonial Properties Trust, recently sold its ownership interest in the assets just prior to the loan’s transfer to special servicing. DBRS is currently gathering more information from the special servicer to determine the severity of potential realized losses that may be attributable to this loan, given the loss of an equity partner coupled with exposure to soft markets and recent occupancy issues.

The second largest loan in special servicing is Southlake Mall (Prospectus ID#7, 3.2% of the current pool balance). This loan is secured by 275,000 sf of in-line space within a 1.0 million sf, two-story regional mall in Morrow, Georgia, approximately 15 miles south of the Atlanta CBD. The mall, owned and operated by GGP, has four non-collateral anchor spaces, two of which are occupied by traditional tenants. Macy’s and Sears act as the mall’s current anchors. JC Penney, previously the third anchor, vacated its space following the closure of three of its Atlanta stores. The remaining anchor space is leased to the City of Morrow as a multi-purpose event space. The lack of anchor tenants has contributed to the decline of traffic to the mall, which has negatively affected in-line tenancy at the subject. According to a March 2012 rent roll, the in-line occupancy rate was 75%. This loan transferred to special servicing in June 2012 and the current workout strategy is noted to be foreclosure. According to the servicer, an updated appraised value has not been finalized. DBRS calculated a property value by taking into account the most recently reported net cash flow figure and market cap rates. Based on this derived value, DBRS currently projects a 33% loss severity for this loan in a liquidation scenario.

There are a total of 16 loans in special servicing, representing 22.8% of the current pool balance. As of the September 2012 remittance, the outstanding principal trust balance for these loans is $488 million, mostly attributed to DRA/Colonial Office Portfolio, which alone has an outstanding trust balance of over $247 million. In addition, there are 57 loans on the servicer’s watchlist, representing 42.9% of the current pool balance. The weighted-average debt service coverage ratio (DSCR) and weighted-average debt yield are 1.3x and 8.9%, respectively, compared with 1.4x and 9.6% at issuance.

In its review of this transaction, DBRS noted the significant role played by the largest loan in special servicing in the overall stability of this deal. DBRS believes a complete analysis of DRA/Colonial Office Portfolio will require updated rent rolls and appraisals, as well as a better understanding of the special servicer’s workout strategy for the properties going forward. Given the amount of work involved for a portfolio of this size, DBRS has placed the previously mentioned classes Under Review with Negative Implications to allow the special servicer time to collect, review and distribute the information necessary for analysis. Once received, DBRS will make an appropriate determination of the impact on the ratings.

DBRS maintains an investment-grade shadow-rating on one loan, representing 0.23% of the current pool balance, which was also confirmed.

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

This rating is 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 (May 2011), which can be found on our website under Methodologies.