DBRS Upgrades One Class and Downgrades One Class of Morgan Stanley Capital I Trust, Series 2007-TOP27

DBRS Limited (DBRS) upgraded the rating of one class of the Commercial Mortgage Pass-Through Certificates, Series 2007-TOP27 issued by Morgan Stanley Capital I Trust, Series 2007-TOP27 as follows:

-- Class B to BBB (sf) from BB (sf)

The trend for this class is Stable.

DBRS also downgraded the rating of one class as follows:

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

This rating for this class does not carry a trend.

In addition, DBRS confirmed the ratings on the following classes:

-- Class A-J at A (low) (sf)
-- Class C at B (low) (sf)

For these two classes, DBRS has changed the trends to Positive from Stable.

The rating upgrade for one class and the assignment of Positive trends for two classes reflects DBRS’s outlook for the largest loan in the pool, 360 Park Avenue South (Prospectus ID #1, 85.5% of the pool). Due to the size of this loan, as well as the strong performance of the underlying asset, a Class B office property located in Manhattan, New York, Classes A-J and B are cushioned against losses DBRS expects will be incurred with the final resolution of the two loans currently in special servicing. The downgrade of Class D reflects the loss to that class with the resolution of the Town Square Mall loan (Prospectus ID #28), which liquidated in May 2018 with a realized loss of $23.4 million (loss severity of 99.7%), a figure that was in line with DBRS’s analyzed loss for that loan in December 2017.

In addition to the positive outlook for the largest loan in the pool, the transaction also benefits from the liquidation of a smaller loan in special servicing in late 2017 that resulted in no loss to the trust and the repayment of two performing loans thus far in 2018. As of the July 2018 remittance, four of the original 225 loans remain in the pool with a current trust balance of $251.4 million. This represents a collateral reduction of 12.2% since December 2017 and 90.8% since issuance.

The 360 Park Avenue South loan is secured by an office building in Manhattan that is fully leased to an investment-grade tenant and lease guarantor, RELX Group (formerly known as Reed Elsevier). The property is currently 100% subleased, which has been the case for several years. Performance remains stable, as the loan reported a YE2017 debt service coverage ratio (DSCR) of 1.65 times (x), compared with YE2016 DSCR and DBRS Term DSCR at issuance of 1.50x and 1.17x, respectively. RELX Group is in place through December 2021 and the loan is scheduled to mature in March 2022.

Although the lease expiry within close proximity of maturity and the fully subleased status present risk factors for this loan, the trust’s exposure at maturity of $422 per square foot (psf) is considered healthy and the stable physical occupancy rate over the last several years speaks to the desirability of the property and its Manhattan location. RELX Group is in place at an approximate gross rental rate of $60.00 psf; this figure compares well with submarket metrics as reported by CoStar, which show an average Class B and Class A rental rate of $66.61 psf and $77.03 psf, respectively, for office properties within a quarter-mile radius, with overall vacancy and availability rates of 6.6% and 7.1%, respectively, as of August 2018.

There are currently two loans in special servicing, representing 13.4% of the current pool balance. Both loans were transferred to special servicing for maturity default. The larger of the two loans, Residence Inn – Herndon (Prospectus ID #24, 10.5% of the pool), is secured by a 23-building extended-stay hotel property containing 168 rooms, located in Herndon, Virginia. The loan transferred to special servicing in June 2017 due to maturity default after the borrower was unable to secure financing to retire the existing debt. The servicer advises this was due to the $3.5 million property improvement plan renovation that was required to be completed by December 2018 as part of the Marriott franchise agreement that runs through 2023. Additionally, to obtain a ten-year franchise agreement extension, Marriott is also requiring a total of $7.0 million in immediate repairs. The property was appraised at a value of $18.64 million as of January 2018. In DBRS’s analysis for this review, DBRS assumed a loss severity in excess of 60.0%. The estimated losses for this loan and the other specially serviced loan, 207 Tradewinds Boulevard (Prospectus ID #85, 2.9% of the pool), are expected to be contained to the Class D certificates.

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

As part of this review, DBRS has provided updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID #1 – 360 Park Avenue South
-- Prospectus ID #24 – Residence Inn – Herndon
-- Prospectus ID #85 – 207 Tradewinds Boulevard

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrs.com. The platform includes issuer and servicer data for the entire CMBS universe, as well as deal and loan-level commentary for all DBRS-rated transactions.

The ratings assigned to Classes A-J and C materially deviate from the higher ratings implied by the quantitative results. 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 results that is a substantial component of a rating methodology. The deviations are warranted given uncertain loan-level event risk.

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

The principal methodology is CMBS North American Surveillance, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. Please note that not every related methodology listed under a principal Structured Finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.