DBRS Upgrades Six Classes, Discontinues One Class and Confirms Four Others of Bear Stearns Commercial Mortgage Securities Trust 2004-PWR5

DBRS Limited (DBRS) has today upgraded the ratings on the following classes of Commercial Mortgage Pass-Through Certificates (the Certificates), Series 2004-PWR5, issued by BSCMS 2004-PWR5.

-- Class F to AAA (sf) from A (sf)
-- Class G to AAA (sf) from BBB (high) (sf)
-- Class H to AAA (sf) from BBB (low) (sf)
-- Class J to AA (sf) from BB (high) (sf)
-- Class K to A (sf) from BB (sf)
-- Class L to BBB (low) (sf) from B (sf)

DBRS has also confirmed the ratings on the following classes:

-- Class E at AAA (sf)
-- Class M at CCC (sf)
-- Class N at C (sf)
-- Class X-1 at AAA (sf)

In addition to the above noted ratings actions, DBRS has also discontinued and withdrawn the rating for Class P, as that class has defaulted. All trends are Stable, with the exception of Classes M and N, which carry no trends.

The rating upgrades to Class F through L reflect the increased credit support to the bonds as a result of loan repayment, continued amortization, a high percentage of defeasance within the remaining pool balance, and the strong credit metrics of the performing loans that remain within the pool. Since issuance, the pool has experienced collateral reduction of 93.9%, with just 11 of the original 130 loans outstanding as of the October 2015 remittance report. In the last twelve months, three loans have been fully repaid from the trust and one loan was liquidated from the trust with a realized loss of $2.6 million in January 2015, eliminating the remaining balance for the unrated first loss piece and reducing the balance on Class P by 65.5%. Two loans, representing 68.4% of the current pool balance, are fully defeased with the largest non-defeased loan representing 7.4% of the current pool balance.

Six loans representing 78.8% of the current pool balance are scheduled to mature in 2019, and three loans representing 13.6% of the current pool balance are scheduled to mature in 2024. DBRS recognizes the propensity for adverse selection as the pool becomes more concentrated; however, the refinance outlook for the pool overall currently appears to be strong as the non-specially serviced loans are reporting a weighted-average DSCR and debt yield of 1.97 times (x) and 42.8%, respectively. These strengths are somewhat offset by the second-tier and tertiary locations for many of the remaining properties, but the historical performance for most has been very strong, with weighted-average NCF growth of 36.7% over the DBRS UW figure for the seven performing loans.

As of the October 2015 remittance, there were two loans in special servicing, representing 7.7% of the current pool balance. Both are non-performing matured balloon loans that show updated appraised values indicating a weighted-average property value decline of 41.0%. These two loans are highlighted below.

Pottsburg Plaza (Prospectus ID#69, 4.7% of the current pool balance) is secured by a 35,905 sf neighborhood retail center in Jacksonville, Florida. The loan transferred to special servicing in May 2014 as the borrower was unable to secure replacement financing ahead of the May 1, 2015, maturity date. An extension and modification request was denied by the servicer and the property foreclosed in August 2015, with the servicer reporting an REO sale expected to take place by Q3 2016. The property has hovered at approximately 50.0% occupancy for the past few years. Reis shows an average vacancy rate of 12.7% for the North Jacksonville submarket as of Q2 2015. Walgreens is the largest remaining tenant and represents 38.7% of the NRA on a lease that is scheduled to expire in June 2017, according to the October 2015 rent roll. The YE2014 Walgreen sales report indicates a downwards trend in sales for the past few years, as the YE2014 sales of $1.93 million ($138.48 psf) fell below the ten-year average of $2.01 million ($150.18 psf). Due to the elevated vacancy levels at the property, the DSCR has held steady below break-even, hovering near 0.85x since YE2013. A July 2015 appraisal valued the property at $3.8 million ($104 psf), a $2.5 million decline from the issuance value of $6.2 million, implying a loan-to-value of 95% and a value well below that of the outstanding loan balance and advances of approximately $4.0 million at October 2015. Given the value decline, the historically low occupancy and the sales trends for Walgreens, the resolution outlook is weak and DBRS expects the trust will incur a loss with the liquidation of the asset.

Campbell Station Shopping Center (Prospectus ID#95, 3.0% of the current pool balance) is secured by a 28,000 sf retail property in Spring Hill, Tennessee, which is located approximately 35 miles south of Nashville. The loan transferred to special servicing in May 2014 for maturity default as the borrower was unable to obtain refinancing due to the property’s low occupancy rate and correspondingly low DSCR, which was 1.06x as of Q2 2014, according to the most recent reporting period available. The servicer denied the borrower’s request for an extension on the loan term and the property was foreclosed in February 2015. Since foreclosure, the property’s occupancy rate has improved, as the September 2015 rent roll shows the property was 66.6% occupied with an average rental rate of $12.56 psf, an increase from the June 2015 occupancy rate of 53.2%. A marketing proposal provided by the servicer and dated October 2015 indicates that the property’s occupancy rate has increased further to 76%, with one vacant space remaining. Reis reports an average vacancy rate of 7.1% at Q2 2015 for unanchored retail centers in the subject’s South/Southwest Nashville submarket. A September 2015 appraisal indicates a value of $2.4 million ($84 psf) for the property, which is reflective of a 41.5% decline from the issuance value of $4.1 million. Additionally, the value represents 97.0% of the outstanding balance and advances as of the October 2015 remittance, indicating that a trust loss is likely with the resolution of this asset.

At issuance, DBRS shadow-rated one loan, New Castle Marketplace (Pros ID#19, representing 7.4% of the current pool balance) as investment grade. DBRS has today confirmed that the performance of this individual loan remains consistent with investment-grade loan characteristics.

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 and specially serviced loans. The October 2015 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.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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

The applicable methodologies are North American CMBS Rating Methodology (June 2015) and CMBS North American Surveillance (January 2015), which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.