DBRS Downgrades Five, Confirms Thirteen, and Removes Four Classes from 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 B (sf) from BB (sf)
-- Classes D and E to C (sf) from CCC (sf)
-- Class H to D (sf) from C (sf)

DBRS has also confirmed the ratings of Classes A-2, A-3, A-4, A-1A, A-AB, A-M, AM-A, X-1 and X-2 at AAA (sf), all with Stable trends. Classes F and G have been confirmed at C (sf) with no trend. Interest shortfalls on Classes G and H were repaid with the January 2012 remittance, and the Interest in Arrears designation has been removed from those classes.

In conjunction with the rating actions stated above, DBRS has removed Classes A-M, AM-A, A-J and AJ-A from Under Review with Negative Implications, where they were placed on October 5, 2012.

The rationale for the rating actions was driven by DBRS’s projection of losses on the specially serviced loans within the transaction. The largest driver in DBRS’s loss scenario is the largest loan in the pool, DRA/Colonial Office Portfolio (Prospectus ID#1, 12.2% of the current pool balance), which is also the largest loan in special servicing. The trust loan is one of three pari-passu notes with an aggregate balance of $741.9 million. The collateral for this loan is a portfolio of 19 cross-collateralized/cross-defaulted office and retail properties comprising 5.2 million sf across 43 individual buildings. The portfolio is concentrated in two markets: Lake Mary, Florida, and Birmingham, Alabama. The borrower reported that the YE2012 occupancy for the portfolio was 81%, down from 94% at issuance, but in line with the year-ago figure of 81.7% reported as of October 2011.

This loan transferred to special servicing in September 2012 due to the perceived imminent risk of default. Following the transfer, DBRS placed Classes A-M, AM-A, A-J and AJ-A Under Review with Negative Implications while additional information surrounding the collateral performance and borrower negotiations was gathered. A modification of the loan was executed in December 2012. The terms of this modification include an extension of the maturity date to July 1, 2016, and a capital injection of $15 million by the borrower into a borrower-controlled account to be used for the payment of TI/LC and capital expenditures, and to cover operating shortfalls. Each month, any excess operating cash flow from the properties is to be deposited directly into the same account. The modification also calls for the borrower’s efforts leasing the collateral properties at appropriate market values. The interest rate will not change through the extended maturity date. The borrower may elect to extend the maturity date one year further through 2017, subject to pre-determined conditions, at which time the borrower will be entitled to a 1% reduction in the interest rate. Some of the pre-determined conditions include performance under the modification, which calls for a controlled sale of the collateral over the next few years. The intent behind a modification of this nature includes a short-term pickup in leasing activity and stabilization of property values during the loan’s extended term. If the borrower performs under the terms of the modification, the pick-up in value should be sufficient to repay the loan in full, which may be optimistic, considering the substantial appraised value decline attributed to the collateral’s soft market locations and high vacancy rates. In its analysis of this loan, DBRS used a stressed modification scenario that did not give credit to stabilized property values, resulting in a projected loss to the trust based on the recently obtained appraised value. DBRS will continue to monitor this loan under such a scenario.

The second largest loan in special servicing is Southlake Mall (Prospectus ID#7, 3.3% 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, currently owned by General Growth Properties, Inc., 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. According to a June 2012 rent roll, the in-line occupancy (not including temporary tenants) was 75%, which is unchanged since the March 2012 and June 2011 rent rolls. DBRS visited the property in November 2012 and noted the interior to be bright, modern looking, and in good overall condition, with no observed deferred maintenance. This loan transferred to special servicing in June 2012 and the current workout strategy is foreclosure. Based on market cap rates and the most recently reported annual cash flow, DBRS currently projects the loss severity for this loan could reach as high as 37.5%.

As of the January 2012 remittance, a total of six loans have liquidated from the trust since DBRS’s last rating action, for a combined realized trust loss of $29.9 million. This brings the total realized trust loss in the transaction to $137.4 million. Ten loans currently remain in special servicing. As of the January 2012 remittance, the outstanding principal trust balance for these loans is $432.8 million, mostly attributed to DRA/Colonial Office Portfolio. In addition, there are 56 loans on the servicer’s watchlist, representing 44.2% of the current pool balance. The weighted-average debt-service-coverage-ratio (DSCR) and weighted-average debt yield are 1.3 times (x) and 8.9%, respectively, compared to 1.4x and 9.6% at issuance.

DBRS continues to monitor this transaction in its Monthly CMBS Surveillance Report, with additional information on the DBRS viewpoint for this transaction including details on the largest loans in the pool, the loans in special servicing and the loans on the servicer’s watchlist. The January 2013 Monthly Surveillance Report for this transaction will be published shortly. If you are interested in receiving this report, contact us at info@dbrs.com.

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

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

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