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

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

-- Class A-1A at AAA (sf)
-- Class A-4 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)

All trends are Stable, with the exception of Class C through E, which have ratings that do not carry trends.

The rating confirmations reflect the overall performance of the transaction. As of the July 2016 remittance, the pool experienced a collateral reduction of 29.9% since issuance, with 183 of the original 237 loans still outstanding. According to the YE2015 financials, the pool has a weighted-average (WA) trust debt service coverage ratio (DSCR) of 1.50 (x), a WA debt yield of 9.9% and a WA exit debt yield of 11.4%. 173 loans, representing 87.1% of the current pool balance, are scheduled to mature in 2016 and 2017, while the remaining loans are scheduled to mature between 2018 and 2027. The pool benefits from defeasance collateral as 22 loans, representing 14.4% of the current pool balance, are fully defeased.

There are ten loans that are shadow-rated as investment grade, combining to represent 17.1% of the current pool balance. DBRS has today confirmed that the performance of these loans remains consistent with investment grade loan characteristics.

As of the July 2016 remittance, there are 43 loans on the servicer’s watchlist, representing 20.3% of the current pool balance; however, a majority of the loans were flagged for upcoming maturity. In addition, five loans, representing 1.5% of the current pool balance, are in special servicing. Two loans in special servicing and a loan in the top 15 are discussed below.

The Inn at Chester Springs loan (Prospectus ID #42, 0.7% of the current pool balance) is secured by a 216-unit full-service hotel in Uwchlan Township, Pennsylvania, approximately 40 miles northwest of Philadelphia. This loan transferred to the special servicer in January 2014 due to imminent default. The property became real estate owned in January 2015 and Prism Hotels was appointed as the receiver. An auction was held in June 2016; however, DBRS was not able to confirm if the asset was successfully sold. The subject is now known as the Wyndham Garden Exton Valley Forge, operating under the Wyndham Garden flag. Financial performance has deteriorated greatly in recent years, as the YE2015 DSCR was -0.51x and the YE2014 DSCR was -0.02x. The performance of the property continues to suffer as a result of decreasing occupancy and daily rates, as well as inflated operating expenses. According to the T-12 April 2016 Smith Travel Research report, the subject reported an occupancy rate of 43.2%, an average daily rate (ADR) of $78.93 and revenue per available room (RevPAR) of $34.09. In comparison, the competitive set reported an occupancy rate of 58.4%, ADR of $103.21 and RevPAR of $60.30, greatly outpacing the subject’s performance. The strong competition in the market is one driver for the subject’s poor occupancy, as a new Hilton Garden Inn opened in 2014 and the Sheraton Great Valley Hotel completed renovations. In addition, the subject was the preferred hotel for Bridgestone; however, the company has left the market and the subject has been working toward replacing the lost business. According to the March 2016 servicer site inspection, the property was considered to be in fair condition and has been undergoing furniture, fixture and equipment improvements, as well as HVAC replacements, since 2015 at a total estimated cost of $467,000. In addition, a property improvement plan of $2.7 million is required to be completed within the next two years in order for the new buyer to maintain the Wyndham Garden flag. The property was last appraised in May 2016 at $4.9 million, up from the April 2015 appraised value of $4.6 million but down considerably from the issuance appraised value of $19.0 million. According to Real Capital Analytics, two comparable properties were sold within the past five years in close proximity of the subject, with sales prices ranging from $21,000 per key to $50,500 per key. According to the May 2016 value ($20,400 per key), the property falls at the lower end of the sales range. DBRS expects the trust to experience a loss with the resolution of this loan.

The Magnolia Pointe Shopping Center loan (Prospectus ID #114, 0.3% of the current pool balance) is secured by a 62,000 square foot (sf) retail property in Columbia, South Carolina. The property originally was anchored by a Piggly Wiggly grocer; however, the tenant vacated in July 2014 ahead of its September 2017 lease maturity. The loan transferred to the special servicer in April 2015 due to payment default. The special servicer is currently in the process of foreclosure. According to the April 2016 Asset Summary Report, Piggly Wiggly continues to pay rent, but it is uncertain whether the tenant will keep paying rent through September 2017. The most recent economic occupancy rate available dated October 2014 was 92.3%; however, the physical occupancy rate was 38.8%. The property was last appraised in February 2016 at $4.1 million, down considerably from the issuance value of $9.6 million. According to Real Capital Analytics, the sale of the most comparable property, a Food Lion grocery store, was sold in 2014 at a price equal to $44 per square foot (psf). Based on the February 2016 appraisal, the subject’s implied value is $60 psf. DBRS expects the trust to experience a loss with the resolution of this loan.

The One AT&T Center loan (Prospectus ID #2, 7.6% of the current pool balance) is secured by a 1.3 million sf Class A office property located in downtown St. Louis, Missouri. The subject is currently the global headquarters for the single tenant, AT&T, which has a lease scheduled to expire in September 2017. According to a news article by the St. Louis Post-Dispatch dated September 12, 2013, AT&T employees have gradually moved out of the subject and into other company facilities. The loan is structured with a full cash sweep in the event AT&T does not renew its lease 12 months prior to its lease expiration; however, the loan matures in January 2017 and future leasing costs to backfill the space can be expected to be significantly in excess of what is collected. As of the December 2015 rent roll, the AT&T paid a rental rate of $11.80 psf. According to the YE2015 financials, the DSCR was at 2.17x, an increase from the YE2014 DSCR of 2.13x and YE2013 DSCR of 2.10x. The loan faces significant refinance risk, considering the loan matures in January 2017, and it will be difficult for the borrower to find a new tenant to backfill the subject. To DBRS’s knowledge, the borrower has not had success in identifying and signing a potential replacement tenant(s). According to Real Capital Analytics, a 1.2 million sf office building in the central business district was sold in 2010 at a price of $18.5 million, equivalent to $16 psf, when at the time the property was 50% occupied. While there have not been any true comparable sales in the market for several years, any potential resolution process can be expected to take significant time and resources, given the size of the property and loan. As a result, DBRS modeled this loan with an elevated probability of default to account for the increased vacancy risk and uncertainty surrounding the loan’s ability to refinance.

Notes:
All figures are in U.S. dollars unless otherwise noted.

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

The applicable methodologies are North American CMBS Rating Methodology (March 2016) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.

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