DBRS Downgrades Two Classes of Morgan Stanley Capital I Trust, Series 2007-TOP25

DBRS Limited (DBRS) has today downgraded the rating of the following classes of Commercial Mortgage Pass-Through Certificates, Series 2007-TOP25 (the Certificates) issued by Morgan Stanley Capital I Trust, Series 2007-TOP25 (MS 2007-TOP25 or the Trust):

-- Class C to CCC (sf) from B (low) (sf)
-- Class D to C (sf) from CCC (sf)

In addition, DBRS has confirmed Class A-1A through Class B and the notional Class X. All trends are Stable, with the exception of Class C and Class D, which have ratings that do not carry trends. Class D continues to have Interest in Arrears.

The rating downgrades to Class C and Class D are the result of an increase in the projected losses for the pool with the loans in special servicing and the performance outlook for the 34 loans on the servicer’s watchlist, as of the December 2015 remittance report. Of the loans on the watchlist, six loans representing 19.9% of the pool balance are in the top 15. Two of those six watchlisted loans in the top 15 are showing a debt service coverage ratio (DSCR) below 1.0 times (x) and four are showing negative cash flow growth as compared to the DBRS underwritten figures. Four of the loans in special servicing have been there for more than 12 months, with outstanding advances continuing to increase monthly. Since issuance, 14 loans have been liquidated from the trust at a combined realized loss of $89.8 million, with a weighted average loss severity of 68.8%.

Since issuance, the transaction has experienced collateral reduction of 31.2% as the result of scheduled loan amortization, successful loan repayments, and the principal recovered and losses realized from liquidated loans. In the next 12 months, 140 loans representing 73.7% of the current balance are scheduled to mature with a weighted-average exit debt yield of 11.5%. As of the December 2015 remittance report, 165 loans remain in the pool of the original 204 loans. In the last 12 months, six loans have left the trust, contributing to a principal paydown of $147.4 million. Two of these loans were liquidated from the trust with a combined realized loss of $253,698, with those losses contained to the defaulted Class E. There are 17 loans in the pool that are fully defeased, representing 11.2% of the current pool balance.

According to the December 2015 remittance report, there are 34 loans on the servicer’s watchlist and five loans in special servicing representing 26.6% and 3.0% of the current pool balance, respectively. Four of the five loans in special servicing that are non-performing, went through foreclosure in 2014 and have since become real estate owned. DBRS modeled losses for those loans based on recent appraisals for all four properties, with an implied loss severity ranging between 48.9% and 88.9% when accounting for projected trust expenses at liquidation. The performing specially serviced loan is highlighted below.

The Romeoville Towne Center loan (Pros ID#16, representing 1.8% of the current pool balance) is secured by an anchored retail property in the Chicago suburb of Romeoville, Illinois. The loan transferred to special servicing in March 2014 for imminent default after a previous anchor tenant, Dominick’s grocery store, which represented 57.5% of the net rentable area on a lease through 2019, retracted from the Chicago market in December 2013. Although the tenant is dark, Dominick’s parent company, Safeway, continues to make its rental payments according to the servicer. The space is marketed for lease by local brokerage firms, with Safeway negotiating those efforts directly. As of December 2015, no firm plans for the space have been communicated and it does not appear a replacement tenant has been secured. The borrower does not have the right to terminate Safeway’s lease without a default on the lease, limiting the borrower’s options through the end of the term in 2019. At issuance, the property’s value was estimated at $27.2 million; however, given the long term search for a replacement anchor tenant, the local market is likely soft and the property’s value has likely declined significantly. Despite the elevated vacancy, the loan is being kept current by the borrower. The Q2 2015 DSCR was reported at 0.99x, remaining in line with YE2014 DSCR of 1.01x. Given these low coverage ratios and the lack of an anchor tenant at the property, the refinance outlook for the 2017 maturity is bleak. To capture the increased risk and likelihood that the trust will experience a loss with this asset, DBRS modeled the loan with an increased probability of default.

Three loans are currently rated investment grade by DBRS. These loans are the London NYC Hotel Land Interest (Prospectus ID#10, representing 2.5% of the current pool balance), 24 Fifth Avenue Co-op (Prospectus ID#19, representing 1.5% of the current pool balance), and Gracie Gardens Co-op (Prospectus ID#23, representing 1.1% of the current pool balance). DBRS has today confirmed that the performance of these loans remain 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. The December 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.