DBRS Downgrades Nine, Confirms 11 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 A-J to BB (low) (sf) from BBB (sf)
-- Class A-JFL to BB (low) (sf) from BBB (sf)
-- Class A-JA to BB (low) (sf) from BBB (sf)
-- Class B to B (low) (sf) from BBB (low) (sf)
-- Class C to CCC (sf) from BB (low) (sf)
-- Class D to C (sf) from B (high) (sf)
-- Class E to C (sf) from CCC (sf)
-- Classes F to C (sf) from CCC (sf)
-- Class K to D (sf) from C (sf)

Additionally, DBRS has confirmed the ratings on the remaining classes in the transaction. The trends on Class A-M, Class A-MA and Class A-MFL were changed to Negative from Stable and the trends on Class A-J, Class A-JA, Class A-JFL and Class B were changed to Stable from Negative. The trends of Classes A-1A, A-3, A-4, X-1 and X-2 remain Stable.

The downgrades are a result of projected losses associated with loans currently in special servicing. There are 21 loans in special servicing, representing 14.2% of the current pool balance. This includes five loans, representing 3.2% of the current pool balance, which have transferred to special servicing over the past 12 months. Since issuance, 21 loans have liquidated from the trust, resulting in a realized loss of $94.2 million. DBRS projects an additional $176.8 million of loss from the 21 loans currently in special servicing. The largest additional loss is projected to come from two loans, Hilton Daytona Beach (Prospectus ID#4) and Ashtabula Mall (Prospectus ID#10), which are the primary loans of concern with this review. Each loan is highlighted in greater detail below.

The trend change on Class A-M, Class A-MFL and Class A-MA is the result of the remote chance for the potential for interest shortfalls to affect the subject classes given the additional loss expectations from the specially serviced loans and the uncertainty of the timing of advance reimbursements when specially serviced loans are liquidated from the Trust. DBRS does not view these classes to be at risk for principal loss. As to be expected, when specially serviced loans are liquidated from the trust, the master servicer will recoup its outstanding advances first from gross proceeds from the loan liquidation and if insufficient funds are available, from available interest due to the bonds. This becomes a greater concern when the master servicer deems loans non-recoverable, as in addition to outstanding advances, which must be recovered from net proceeds, accumulated interest from the non-recoverable determination date will also be recovered. Given that Ashtabula Mall was deemed non-recoverable in April 2013 based on its further deterioration in value to $6.3 million, and that current outstanding advances total $2.8 million, losses are expected to exceed 100% of the loan’s outstanding loan balance, thereby increasing the risk for a prolonged advance recovery. The potential interest shortfall issue is further complicated by the fact that the transaction has two master servicers, each of which is currently making advances on specially serviced loans in the transaction. While both master servicers, Wells Fargo and Berkadia, are experienced master servicers and do not desire to recoup interest from investment-grade rated classes, there is a potential risk that each entity could recoup interest in the same reporting period, which could cause interest shortfalls to affect the subject classes. The pooling and servicing agreement gives them the right to extend their reimbursement or take it in one lump sum. DBRS expects to receive more information on the timeliness of the liquidations from the special servicer in the upcoming months in addition to monitoring both master servicer's advances to understand the recovery strategy in order to further evaluate the potential for shortfalls to rise up to the Class A-M, Class A-MFL or Class A-MA level.

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 borrower and the lender had been negotiating a loan modification, but ultimately, the borrower agreed to a stipulated foreclosure, with the lender taking title to the property in August 2013. According to the June 2013 STR report, T12 figures have improved, with the occupancy rate at 68.55%, ADR at $131 and RevPAR at $90. While these figures are slight improvements over the same period in 2012, the property’s revenue is still below figures reported at issuance. Additionally, the property requires between $15 million and $18 million in extensive renovations in order to maintain its high property quality, according to the servicer. Included in the renovations are new roofing, external concrete work and painting, pool and spa upgrades, guest room and bathroom renovations and meeting room and banquet hall renovations. A January 2013 appraisal valued the property at $65.5 million; an increase of approximately $11.4 million over the January 2012 appraisal. While the new appraisal does take into account the cost of the needed renovations, the subject’s value remains far below the issuance appraisal of $150.3 million, suggesting a significant potential loss associated with the resolution of this loan.

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 June 2013 rent roll, the property has a physical occupancy rate of 56.9%. Kmart 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 June 2013 annualized NOI was $1.6 million compared with $4.6 million at issuance. The December 2012 servicer site inspection reported that the property was in Average condition; however, photos of the asset show there to be very little foot traffic and few cars in the parking lot at the mall. Additionally, outstanding repairs to the roofing and parking lot have yet to be completed. The property received an updated appraisal of $6.3 million in January 2013 compared with $16.2 million in February 2012, $26.6 million in January 2011 and $57.8 million at issuance. Due to the most recent appraisal, the master servicer deemed this loan non-recoverable in April 2013. DBRS expects there to be significant losses to the Trust with the resolution of this loan.

As of the August 2013 remittance report, 203 loans remain in the pool out of the original 234 loans. The top 15 loans in the pool by loan balance (excluding the three loans in special servicing) continue to exhibit stable performance, reporting a weighted-average debt service coverage ratio of 1.36x and a weighted-average debt yield of 8.6%. Approximately 17.0% of the collateral has been reduced since issuance, with 71.8% resulting from loan amortization, loan repayment and liquidation proceeds. The remaining 28.2% of collateral reduction is a result of realized losses to the Trust.

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

As of the August 2013 remittance report, there are 21 loans in special servicing and 49 loans on the servicer’s watchlist, representing14.2% and 18.1% of the current pool balance, respectively.

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 65.9% of the current pool balance.

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, specially serviced loans and loans on the servicer’s watchlist. The August 2013 Monthly CMBS 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.

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 (November 2012), which can be found on our website under Methodologies.