DBRS Confirms Ratings of Bear Stearns Commercial Mortgage Securities Trust, Series 2007-TOP26

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

-- Class A-1A 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 A-J at BB (sf)
-- Class B at B (low) (sf)
-- Class C at CCC (sf)
-- Class D at CCC (sf)
-- Class E at C (sf)
--Class X-1 at AAA (sf)
--Class X-2 at AAA (sf)

Classes A-1A, 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.

The rating confirmations taken as part of this review reflect the most recent leasing activity with respect to the largest loan in special servicing.

The largest loan in special servicing is Prospectus ID #7 (909 A Street), representing 2.8% of the pool. This loan is secured by a Class A office property that was constructed in 1988, located in downtown Tacoma, Washington. The property has excellent curb appeal and is centrally located. 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 $16.0 million to close. The property's sole tenant, Russell Investments (Russell), moved its headquarters to Seattle and vacated the property in October 2010. The Russell lease was scheduled to expire in November 2013 with the loan maturity in February 2017. As the tenant was not expected to renew their lease, DBRS previously simulated a loss on this loan using a stabilized value analysis.

Over the past few months, there has been positive leasing activity at the subject property, with a lease to State Farm Insurance for the entire building, with the borrower funding costs outside of the already collected reserves. State Farm will move into the property in phases, taking occupancy of 33.1% of the NRA on October 1, 2013, an additional 65.8% of the NRA on January 1, 2014 and is expected to be in full occupancy of the building by April 1, 2014. The new tenant's annual base rent, on a psf basis, will start at $18.7, however, contractual rent bumps will grow the annual base rent to $21.2 psf, which is in line with what the previous tenant paid. The State Farm Insurance lease has an initial five-year term, with an option to extend an additional five years with 12 months notice. DBRS has conservatively re-underwritten the cash flow for this particular loan based on the information available regarding the State Farm lease. Based on the conservatively re-underwritten DBRS NCF, the loan is expected to cover just above 1.1x during the early portion of the lease term, but DBRS considers the probability of cash flow improvement quite strong, given the contractual rent bumps associated with the State Farm lease. While DBRS expects to have a clearer picture of the property performance once State Farm has been in occupancy for some time, the outlook for this loan is certainly more favorable than the previously modeled loss. The outlook over the remaining loan term is strong; however, given the initial five-year lease term, there is still refinance risk associated with this loan.

The 909 A Street loan is expected to return to the master servicer in the near term, following the recent execution of the State Farm lease. Outside of this loan, the remaining loans in special servicing are not considered nearly as pivotal, as there are only three additional loans, representing 0.5% of the pool, in special servicing.

While the outlook for the specially serviced loans has improved significantly over the past 12 months, 63 loans, representing 27.1% of the current pool balance, remain on the servicer’s watchlist. The most pivotal loan on the servicer’s watchlist is Prospectus ID#6, Viad Corporate Center (3.3% of the current pool balance).

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 24-story high-rise was constructed in 1991, originally serving as the national headquarters for the Dial Corporation. The property includes an auditorium and conference facilities, a fitness center and a performing arts theater. The loan transferred to the special servicer in March 2009 after the borrower sent a request for relief given a perceived value decline in the subject since the loan's origination. The most recent appraisal obtained by the special servicer, dated May 2011, valued the property at $43.0 million, down from $105.5 million at issuance. In May 2011, the special servicer processed the sale of the property and loan assumption that resulted in a $9.0 million principal writedown of the outstanding $65.0 million balance on the loan. In addition, the new borrower funded a capital reserve in the amount of $8.0 million for TIs, LCs and capital repairs. Outstanding interest due in the amount of approximately $2.0 million at the time of the assumption was also forgiven as part of the transaction. A realized loss of $9.0 million for the principal writedown was applied to the Trust in June 2011, with an additional $2.0 million reimbursed to the master servicer from principal for interest advances made that were deemed nonrecoverable. 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 April 2013 rent roll shows the occupancy rate is still low, at 62.0%. The largest tenants at the property are Cavanagh Law Firm (7.9% of the NRA), Stinson Morrison Hecker, LLP (7.0% of the NRA), and Viad Corporation (5.3% of the NRA) with leases that expire in 2018, 2022 and 2021, respectively. Rollover is minimal over the next few years, with six tenants, representing 6.0% of the NRA scheduled to expire through the remainder of 2013 through 2015. There are no leases scheduled to roll in 2014 as of the April 2013 rent roll. The balance of the leasing reserve was $4.5 million as of August 2013, according to the loan level reserve report. According to CoStar, Class A office properties within a five mile radius of the subject property reported a 22.7% vacancy rate and a 23.5% availability rate, as of August 2013 data. CoStar projects the average vacancy rate within a five mile radius of the subject property to increase through YE2015. The Trust's exposure, at $118 psf (down from $136 psf prior to the principal writedown) is considered moderate. DBRS continues to monitor this loan on a monthly basis for leasing updates, given the depressed occupancy rate.

Since the last full surveillance review conducted by DBRS in August 2012, five loans have been liquidated, with $38.5 million in losses to the Trust, and fortunately, only one small loan representing 0.06% of the pool has transferred to special servicing since that time. While significant losses to the Trust have been experienced over the past 12 months, the change in the DBRS outlook for the 909 A Street loan, along with the performance of the remaining loans in the transaction, support the ratings confirmations.

The pool benefits from the overall performance of the largest loans in the pool, with a weighted-average DSCR of 2.2x at YE2012 for the nine (31.7% of the pool) loans in the top 15 that are not on the servicer’s watchlist or in special servicing and 15 loans (18.9% of the pool) that are shadow-rated investment grade. Three of the loans shadow-rated investment grade, representing 12.4% of the pool, are in the top 15.

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 2013 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.