DBRS Downgrades Eight, Confirms Ten 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 (the Trust):

-- Class A-M to AA (sf) from AAA (sf)
-- Class A-MFL to AA (sf) from AAA (sf)
-- Class A-MA to AA (sf) from AAA (sf)
-- Class A-J to CCC (sf) from BB (low) (sf)
-- Class A-JFL to CCC (sf) from BB (low) (sf)
-- Class A-JA to CCC (sf) from BB (low) (sf)
-- Class B to C (sf) from B (low) (sf)
-- Classes C to C (sf) from CCC (sf)

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

The downgrades are a result of projected losses associated with loans currently in special servicing. Through the August 2014 reporting period, the transaction has experienced realized losses of $101.1 million because of the liquidation of 25 loans. There are 197 loans remaining in the pool out of the original 234 loans, with collateral reduction of 18.9% since issuance, resulting from scheduled amortization, successful loan repayment and realized losses. The top 15 loans in the pool by outstanding loan balance (excluding the three loans in special servicing) continue to exhibit stable performance, reporting a YE2013 weighted-average (WA) debt service coverage ratio of 1.55 times (x) and a WA debt yield of 9.8%.

As of the August 2014 remittance, there are 23 loans in special servicing and 53 loans on the servicer’s watchlist, representing 15.5% and 18.4% of the current pool balance, respectively.

DBRS projects an additional $209.2 million of loss from the 23 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), each of which is highlighted in greater detail below.

The Hilton Daytona Beach loan is the largest loan in special servicing, representing 4.2% of the current pool balance, and is secured by a 744-key full-service hotel in Daytona Beach, Florida. The subject property was originally built in 1988 and is located on Atlantic Avenue across the street from the beach. The loan transferred to the special servicer in October 2011 for imminent payment and the lender took title of the property in August 2013 after the borrower consented to a stipulated foreclosure. According to the trailing 12 months Smith Travel Research (STR) report ending June 2014, the occupancy rate was 70.1%, the average daily rate was $128.87 and revenue per available room (RevPAR) was $90.32. All figures outperform the subject’s competitive set; however, according to the STR report, the competitors mostly consist of smaller, limited-service hotels. The subject contains over three times more guest rooms than the next highest competitor in its competitive set. While the occupancy rate and RevPAR improved 2.3% and 0.5%, respectively, over the same period in 2013, the property revenue is still below figures reported at issuance. A December 2013 appraisal valued the property at $50.8 million, a $14.7 million decline from the January 2013 appraised value of $65.5 million. The December 2013 valuation includes a Property Improvement Plan requirement of $15 million to $18 million. Items in need of full renovations include the ballroom, meeting room, boardrooms, pool and spa facilities. Rooms and roofing also need upgrades. DBRS expects the Trust to experience significant losses with the resolution of this loan.

The Ashtabula Mall loan, representing 1.9% of the current pool balance, is secured by a 750,000 square foot regional mall in Ashtabula, Ohio, located approximately 60 miles northeast of Cleveland. The loan transferred to special servicing in September 2010 because of imminent default and is now in receivership. According to the June 2014 rent roll, the property had an occupancy rate of 57.5%. Kmart and JC Penney, the two remaining anchor tenants at the property of the original five anchor tenants, have leases expiring in August 2017 and September 2017, respectively. The performance at the property continues to be well below levels at issuance as a result of vacancies and depressed sales. The YE2013 net operating income was $1.66 million compared with $4.57 million at issuance. The property received an updated appraisal of $5.15 million in December 2013, compared with $6.3 million in January 2013 and $57.8 million at issuance. The servicer deemed this loan non-recoverable in April 2013. DBRS also expects there to be significant losses to the Trust with the resolution of this loan.

DBRS shadow-rated six loans, representing 5.5% 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 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 together comprise approximately 69.1% 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 2014 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 and CMBS North American Surveillance Methodology, which can be found on our website under Methodologies.