DBRS Downgrades One Class of Bear Stearns Commercial Mortgage Securities Trust 2007-PWR18

DBRS Limited (DBRS) has today downgraded the rating of the following class of Commercial Mortgage Pass-Through Certificates, Series 2007-PWR18 (the Certificates) issued by Bear Stearns Commercial Mortgage Securities Trust, Series 2007-PWR18 (BSCMS 2007-PWR18 or the Trust):

-- Class C to C (sf) from CCC (sf)

In addition, DBRS has confirmed the ratings of the remaining classes in the transaction as follows:

-- Class A-1A at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class X-1 at AAA (sf)
-- Class A-M at AA (low) (sf)
-- Class AM-A at AA (low) (sf)
-- Class AJ-A at CCC (sf)
-- Class A-J at CCC (sf)
-- Class B at CCC (sf)
--Class D at C (sf)

All trends are Stable, with the exception of Class AJ-A through Class D, which have ratings that do not carry trends. The Interest in Arrears designation was removed from Class C, while Class D continues to have Interest in Arrears.

The Class C rating downgrade is the result of the uncertainties surrounding the modification and subsequent collateral releases regarding the largest loan in the transaction, DRA/Colonial Office Portfolio. The increased credit concerns revolve around executed sales prices compared against allocated loan balances on individual properties that have been released from the portfolio. This loan is highlighted in detail below. Since issuance, 33 loans have been liquidated from the trust at a combined realized loss of $205.7 million.

Since issuance, the transaction has experienced collateral reduction of 43.1% from loan amortization, successful loan repayment, principal recovered from liquidated loans and realized losses from defaulted loans. As of the January 2016 remittance report, 135 loans remain out of the original loan count of 185. In the last 12 months, three loans have left the trust, contributing to a principal paydown of $98.1 million. Based on the most recent year-end reporting available for the individual loans, the pool is reporting a weighted-average debt service coverage ratio (DSCR) and debt yield of 1.30 times (x) and 9.6%, respectively. Five loans are fully defeased, representing 3.0% of the current pool balance, and five loans with a current outstanding principal balance totalling $41.2 million have maturity dates within the next 12 months. The individual DSCR and exit debt yield for these loans range from 0.31x to 2.08x, and 2.5% to 14.0%, respectively.

As of the January 2016 remittance report, there is one loan in special servicing and 43 loans on the servicer’s watchlist, representing 0.6% and 28.4% of the current pool balance, respectively. The specially serviced loan, Campus Business Park (Pros ID#69), is secured by four mixed-use properties in Federal Way, Washington. The borrower is seeking a loan modification and continues to remit monthly debt service payments. Of the loans on the servicer’s watchlist, five loans, representing 13.9% of the current pool balance, are within the Top 15. One loan on the watchlist is highlighted below.

The DRA/Colonial Office Portfolio (Pros ID#1, representing 11.4% of the current pool balance) is currently secured by 11 crossed office and retail properties concentrated in Lake Mary, Florida, and Birmingham, Alabama. The collateral originally consisted of 19 office properties. The whole loan is split pari passu among three CMBS transactions with equal principal balances of $161.0 million. The loan previously transferred to special servicing in August 2012 after DRA’s capital partner, Colonial Properties, sold its ownership interest in the assets, leaving the sponsor with limited capital and a struggling portfolio. Subsequently, the loan underwent a modification in December 2012, which extended the loan maturity by two years to July 2016 and required the sponsor to contribute $15 million into a Master Account for purposes of funding tenant improvement/leasing commission cost operating shortfalls. Additionally, the borrower has the option to extend the loan maturity to July 2017, provided certain conditions are met, including paying down the whole loan to approximately $371.0 million. Currently, the whole loan balance is $483.0 million; however, according to the servicer, the borrower plans to execute the extension option, as the loan continues to perform per the terms of the modification.

Over the last 12 months, the borrower has released three properties from the collateral, with a total of eight property releases since the loan was modified. Proceeds from the property sales have been used to pay down the loan’s outstanding principal trust balance by $86.3 million and to continue to fund the Master Account; however, as of January 2016, the loan no longer has an outstanding reserve balance. According to the servicer, none of the eight released properties have been sold below their respective release price; however, the allocated trust loan balance for these properties totals approximately $124.0 million, implying a loss of $37.7 million, which has yet to be passed through to the trust. The outstanding portfolio is 88.2% occupied, according to the September 2015 rent roll, an increase compared with YE2014 occupancy of 84.0%. The third-largest tenant across the portfolio, Deloitte & Touche LLP (Deloitte), represents 3.5% of the net rentable area (NRA) on a lease scheduled to expire in May 2024. Deloitte assumed the space previously occupied by American Pioneer, which vacated upon its September 2015 lease expiration. The subject’s performance has steadily improved following the modification, and the loan was removed from the servicer’s watchlist with a Q2 2015 DSCR of 1.15x compared with a YE2014 DSCR of 1.02x and a YE2013 DSCR of 0.98x. DBRS modeled the loan based on the most recently reported cash flow with a haircut to account for potential adverse selection and the fact that the special servicer will be due a 1.0% resolution fee when the portfolio loan ultimately pays out of the trust.

The Ingram Festival Shopping Center (Pros ID#20, representing 1.8% of the current pool balance) is secured by an anchored retail property in San Antonio, Texas. The loan has been on the servicer’s watchlist since February 2010 because of ongoing tenant rollover issues, which were compounded when the JC Penney Home (JC Penney) anchor tenant vacated its space upon lease expiration in October 2013. The tenant formerly occupied 19.0% of the NRA. Three prospective tenants have previously provided letters of intent to assume a portion of the JC Penney space; however, as of January 2016, only one of those prospects is in the process of negotiating a lease agreement. As a result of JC Penney’s departure, the occupancy has declined to 80.5% as of the August 2015 rent roll with a correspondingly low YE2014 DSCR of 0.81x. The property’s occupancy rate has remained relatively unchanged since March 2014. Both the largest tenant, Marshall’s, representing 13.8% of the NRA, and the third-largest tenant, Michaels, representing 10.4% of the NRA, have extended their respective leases by ten years with leases that are now scheduled to expire in January 2026 and February 2026, respectively. Despite the low cash flow coverage, the loan remains current, and the property remains in average condition with no deferred maintenance noted, according to the August 2015 site inspection.

DBRS maintains an investment-grade shadow rating on one loan in the pool, Stor-It Self Storage (Prospectus ID#112, 0.3% of the current pool balance). DBRS has today confirmed that the performance of this 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. The January 2016 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 (December 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.