DBRS Morningstar Downgrades One Class and Confirms Remaining Classes of Bear Stearns Commercial Mortgage Securities Trust 2007-PWR18

DBRS Limited (DBRS Morningstar) downgraded the rating on the Commercial Mortgage Pass-Through Certificates, Series 2007-PWR18 issued by Bear Stearns Commercial Mortgage Securities Trust 2007-PWR18 as follows:

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

DBRS Morningstar also confirmed the ratings on the remaining classes as follows:

-- Class C at C (sf)
-- Class D at C (sf)

The trend on Class B remains Stable, while Class C and Class D have ratings that do not carry trends. Class D continues to carry an Interest in Arrears designation, as interest shortfalls remain outstanding with the December 2020 remittance.

The rating downgrade reflects the increased likelihood of continued and elevated performance challenges amid the Coronavirus Disease (COVID-19) pandemic for the remaining loan in the pool, Prospectus ID#6 – Marriott Houston Westchase. The pool composition has remained unchanged in the past 12 months with a collateral reduction of 97.2% since issuance as a result of successful loan repayments as well as realized losses and recovered proceeds from loans liquidated from the pool.

The remaining loan is secured by a 600-room full-service hotel located in Houston, Texas. In April 2020, following a second loan modification that was approved by the servicer in December 2019, the borrower reached out to the servicer to request relief, citing pandemic-related hardship. According to the servicer’s commentary, the borrower requested a short-term forbearance and access to cash balances and reserve funds controlled by the servicer while negotiations continued regarding a more permanent third modification to the original loan documents.

The hotel’s performance has been down for several years since the downturn in the energy markets, which led to a general disruption in the local Houston economy and difficulties for commercial real estate, particularly office and hotel properties, challenges which predate and have been exacerbated by the impacts of the pandemic. The most recently reported year-end (YE) 2019 financial statement showed that even before the pandemic, the debt service coverage ratio (DSCR) was quite low, at 0.81 times (x) compared with the YE2018 DSCR of 0.74x and YE2017 DSCR of 0.95x. Revenue per available room and the occupancy rate were reported at $83.80 and 69.5% respectively as of the YE2019 reporting.

As of the December 2020 remittance, the loan had an outstanding principal balance of $69.9 million, with current and outstanding advances of $283 thousand and $2.3 million, respectively. The current exposure of approximately $120,340 per key is high given the low DSCR and significant headwinds facing the local market and the hotel sector at large, which supports the rating downgrade. DBRS Morningstar considered a stressed cap rate on the in-place YE2019 net cash flow to determine a stressed DBRS Morningstar property value. Based on the DBRS Morningstar stressed value, DBRS Morningstar is concerned that Class B could realize a loss when the loan is resolved out of the trust. Class B has a remaining balance of $23.3 million as of the January 2020 remittance, representative of an exposure of just under $39,000 per key on the collateral.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#6 – Marriott Houston Westchase (100% of the current pool balance)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

The principal methodology is North American CMBS Surveillance Methodology (March 6, 2020), which can be found at dbrsmorningstar.com/about/methodologies. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. 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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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@dbrsmorningstar.com.

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

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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

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