DBRS Confirms All Classes of Morgan Stanley Capital I Trust, Series 2007-IQ16

DBRS Limited (DBRS) has today confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2007-IQ16 issued by Morgan Stanley Capital I Trust, Series 2007-IQ16 (the Trust):

-- Class A-4 at AAA (sf)
-- Class A-1A at AAA (sf)
-- Class X-1 at AAA (sf)
-- Class A-M at AA (sf)
-- Class A-MFL at AA (sf)
-- Class A-MA at AA (sf)
-- Class A-J at CCC (sf)
-- Class A-JFL at CCC (sf)
-- Class A-JA at CCC (sf)
-- Class B at C (sf)
-- Class C at C (sf)
-- Class D at C (sf)

Classes A-4, A-1A, X-1, A-M, A-MFL and A-MA have Stable trends. Trends are not assigned for classes rated CCC (sf) and below. The ratings on Classes E, F and G have been discontinued/withdrawn, as they were downgraded to D (sf) over 30 business days ago.

The rating confirmations reflect the pool’s overall performance. Since issuance the pool has experienced 34.0% of collateral reduction as a result of scheduled amortization, successful loan repayment, principal recovered from liquidated loans and realized losses from liquidated loans. There are 173 loans remaining in the pool out of the original 234 loans. The transaction benefits from defeasance collateral as 12 loans (including one in the top 15), representing 5.0% of the current loan balance, are fully defeased. Excluding the defeased loan, the top 15 loans, which represent 54.1% of the current pool balance, reported a YE2015 weighted-average (WA) debt service coverage ratio (DSCR) of 1.49 times (x) and a WA debt yield of 9.9%. The majority of the transaction — 171 loans representing 99.5% of the current pool balance — is expected to mature by the end of 2017.

Since issuance, 41 loans have been liquidated from the Trust, resulting in realized losses of $209.4 million. As of the July 2016 remittance, there are six loans in special servicing and 46 loans on the servicer’s watchlist, representing 2.4% and 27.0% of the current pool balance, respectively. Five of the loans in special servicing transferred at least one year ago. In its review of the transaction, DBRS projected that each loan in special servicing would be resolved with a realized loss to the Trust. One loan on the servicer’s watchlist and the largest loan in special servicing are highlighted below.

The Art Institute Student Housing loan (Prospectus ID#20, representing 1.4% of the current pool balance) is secured by a 147-unit student housing property located in Pittsburgh, Pennsylvania. The subject was converted from industrial to multifamily for student housing purposes in 2003. The loan was placed on the watchlist because of its upcoming lease expiration at the property in June 2017 as the subject is currently 100% leased to The Art Institute of Pittsburgh. A cash flow sweep was initiated in June 2016 as the tenant did not provide its intent to renew the lease one year prior to the expiration date. All excess cash flow is being deposited into a restricted account; however, DBRS was not able to confirm the current balance of the account. According to the site inspection report dated June 2015, the property was in Average condition; however, it was noted that three floors were vacant for the fall 2015 semester, as the enrollment rates at the school have declined. Pictures of the subject showed individual rooms and common areas to be small, dimly lit and dated. Furthermore, in May 2015, it was announced that 15 Art Institute locations were being closed; however, the Pittsburgh location was not included in the initial list. As of May 2016, there were 33 locations remaining out of the 50 locations reported in 2013. Although The Art Institute of Pittsburgh is not on the list of closures, the overall decline in occupancy for the school and the noted vacancy at the property elevate the risk that the school will not be renewing its lease for the subject student housing property.

According to YE2015 financials, the loan reported a DSCR of 1.34x, which is stable from the YE2014 DSCR of 1.31x. Loan performance is expected to continue to be stable until the potential non-renewal date of the lease. According to Reis, the current submarket of Bellefield reported a vacancy rate of 4.6% for multifamily properties with average asking rental rates of $1,119 per unit. Real Capital Analytics reported that five multifamily properties were sold since January 2015 within a 25-mile radius of the subject at an average of $107,085 per unit. The current whole-loan per unit for the loan is elevated at $162,608 per unit. It would likely take significant capital and time to transform the subject into a traditional multifamily property. Given the risk of a single tenant with a lease expiration prior to loan maturity, the loan was modelled with an elevated probability of default and loss severity to capture the risk associated with a potential maturity default.

The largest specially serviced loan, Danbrook Realty Portfolio (Prospectus ID#44, representing 0.6% of the current pool balance), is secured by two unanchored retail properties totalling 187,122 square feet (sf). Mallory Brook Plaza is located in Barkhamsted, Connecticut, with 117,038 sf and Lincoln Plaza is located in Meriden, Connecticut, with 70,084 sf. This loan transferred to special servicing in May 2012 for imminent default. An environmental issue was found at the Mallory Brook Plaza property: the treatment of waste water from the tenants was inadequate. A receiver has been appointed for the property since January 2016. Foreclosure was filed in April 2015, and the loan was placed for sale in September 2015 and October 2015 on an auction website; however, it did not trade. According to the most recent financials, the Q1 2016 DSCR for the loan was 1.30x, in line with the YE2014 DSCR of 1.31x. Based on the March 2016 rent rolls, the Mallory Brook Plaza property was 69.6% occupied and the Lincoln Plaza property was 73.1% occupied. The most recent appraisal from October 2015 valued the properties at a combined total of $5.9 million, which is an increase from the September 2014 combined value of $5.5 million but well below the issuance appraised combined value of $16.2 million. Given the outstanding loan balance of $11.2 million, the outstanding advances of $3.4 million and the uncertainty surrounding the environmental issue at the Mallory Brook property, DBRS expects this loan to be resolved with a significant loss to the Trust.

At issuance, DBRS shadow-rated four loans, representing 0.1% of the current pool balance, as investment grade. These loans include Ferrell-Duncan Clinic, Canal Studio Corp., 283 6th Ave. Corporation and Seventh Housing Corp. DBRS has today confirmed that the performance of these loans remains consistent with investment-grade loan characteristics.

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 (March 2016) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.