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 C (sf) from BB (sf)

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

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

All rated classes have ratings that do not carry trends. The Interest in Arrears designation was added to Class B with this review, while Classes C and D continue to carry an Interest in Arrears designation, as interest shortfalls remain outstanding with the December 2021 remittance.

The rating downgrade reflects the elevated loss projection and increased likelihood of continued 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. To date, the pool has incurred losses above $200.0 million, with the unrated Class E certificate now the first-loss piece, which has already taken losses with previous liquidations.

This remaining loan is secured by a 600-room full-service hotel located in Houston, Texas. The loan transferred to special servicing in March 2019 for a loan modification, which closed December 2019, and the terms included extension of the maturity date to June 2023 and the establishment of a new capital improvement reserve for brand-mandated upgrades. In April 2020, the borrower reached out to the servicer to request relief, citing coronavirus-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. According to the December 2021 servicer commentary, the borrower has not yet made a comprehensive workout proposal or contributed fresh equity, and the servicer is continuing to evaluate the exercise of remedies.

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 that predate and have been exacerbated by the impacts of the pandemic. While the latest financial data is unavailable, the most recently reported YE2019 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. A May 2021 appraisal reported the value at $39.8 million, which is reflective of a 16.2% decline when compared with the July 2020 value of $47.5 million. Marriott’s franchise agreement also ends in 2023 and the status of a renewal is unknown.

As of the December 2021 remittance, the loan had an outstanding principal balance of $69.9 million, with outstanding advances of $3.6 million. The current exposure of approximately $130,767 per key is high given the low DSCR, falling as-is value in the last year, and significant headwinds facing the local market and the hotel sector at large, which supports the rating downgrade.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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 loan in the transaction:

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

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 26, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria. 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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 [email protected].

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 [email protected].

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