DBRS Upgrades Four Classes and Confirms Five Classes 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, Series 2004-PWR5 issued by Bear Stearns Commercial Mortgage Securities Trust 2004-PWR5 (the Trust):

-- Class J to AAA (sf) from AA (sf)
-- Class K to AAA (sf) from A (sf)
-- Class L to A (low) (sf) from BBB (low) (sf)
-- Class M to B (low) (sf) from CCC (sf)

DBRS has also confirmed the ratings on the following classes:

-- Class F at AAA (sf)
-- Class G at AAA (sf)
-- Class H at AAA (sf)
-- Class X-1 at AAA (sf)
-- Class N at C (sf)

All trends are Stable with the exception of Class N, which does not carry a trend.

The rating upgrades to Class J through Class M reflect the increased credit support to the bonds as a result of successful loan repayment, a significant amount of defeasance collateral and the strong credit metrics of the non-defeased collateral remaining within the pool. Since issuance, the pool has experienced a collateral reduction of 94.5%, with only ten of the original 130 loans remaining as at the October 2016 remittance. In the past 12 months, only one specially serviced loan, Campbell Station Shopping Center (Prospectus ID#95), left the pool, as it was liquidated in September 2016 without realized losses to the Trust. The two largest loans, representing 72.5% of the current pool balance, are fully defeased with the largest non-defeased loan representing 6.5% of the current pool balance.

Six loans, representing 81.3% of the current pool balance, are scheduled to mature in 2019, while three loans, representing 13.7% of the current pool balance, are scheduled to mature in 2024. DBRS recognizes the propensity for adverse selection over time as the pool becomes more concentrated; however, the refinance outlook for the pool overall currently appears to be strong, as the non-specially serviced and defeased loans are reporting a weighted-average debt service coverage ratio (DSCR) and debt yield of 1.93 times (x) and 54.0%, respectively.

As at the October 2016 remittance, there is one loan in special servicing, representing 5.0% of the pool balance; this REO loan is highlighted below. The smallest loan in the pool (0.4% of the pool balance) is on the servicer’s watchlist because of a large tenant vacating in June 2016, resulting in occupancy of 77.7% at the property; however, the loan is expected to remain current as the YE2015 DSCR was 4.96x.

The Pottsburg Plaza loan (Prospectus ID#69; 5.0% of the current pool balance) is secured by a 35,905-square-foot (sf) neighborhood retail plaza in Jacksonville, Florida. The loan transferred to special servicing in May 2014 as a result of maturity default. An extension and modification request was denied by the servicer, and the property was foreclosed in August 2015. As at the most recent servicer update, the property is expected to be listed for sale in the near term. The July 2016 rent roll showed the property to be 51.7% occupied, with occupancy at the subject ranging between 50% and 55% over the past five years. Reis reports an average vacancy rate of 17.3% and an average rental rate of $13.24 per square foot (psf) for retail properties in the Arlington/Baymeadows submarket of Jacksonville as at Q2 2016. The largest tenant, Walgreens (39.7% of the net rentable area), recently renegotiated its rental rate down to $13.50 psf, compared with $22.07 psf previously, in conjunction with extending its lease by five years through December 2022. The lower rental rate is a result of declining sales, which have been declining since 2011. Walgreens’ last reported full-year sales were $138 psf at YE2014, below the ten-year average of $150 psf for the location.

A July 2016 management report noted several deferred maintenance issues at the property, including sewer systems in need of repair, HVAC that needs to be replaced and significant water intrusion issues to the stucco, which needs to be waterproofed to avoid further damage. The most recent appraisal dated June 2016 valued the property at $2.7 million ($75.19 psf), down from $3.8 million ($104.44 psf) as at July 2015 and $6.2 million at issuance. The most recent valuation implies a loan-to-value ratio of 149% and is below the current total loan exposure of approximately $4.4 million as at October 2016. Given the significant value decline, historically low occupancy, negative sales trend for Walgreens and outstanding deferred maintenance concerns, DBRS expects the Trust will incur a loss with the resolution of the asset.

At issuance, DBRS shadow-rated one loan, New Castle Marketplace (Prospectus ID#19; 6.3% 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.

The ratings assigned to Classes L and M materially deviate from the higher ratings implied by the quantitative model. DBRS considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by the quantitative model that is a substantial component of a rating methodology; in this case, the rating reflects the uncertain loan-level event risk.

For more information on this transaction and supporting data, please log in to DBRS CMBS IReports found at www.ireports.dbrs.com. DBRS continues to monitor this transaction monthly, with periodic updates provided in the DBRS CMBS IReports platform.

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.

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

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