DBRS Morningstar Confirms All Ratings of Bear Stearns Commercial Mortgage Securities Trust 2007-PWR18

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2007-PWR18 issued by Bear Stearns Commercial Mortgage Securities Trust 2007-PWR18 as follows:

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

All rated classes have ratings that do not typically carry trends.

DBRS Morningstar’s loss expectations for the last remaining loan in the pool, Houston Marriott Westchase Westchase (Prospectus ID#6; 100% of the pool), remains unchanged from the prior review in January 2022. The loan is secured by a 600-key, full-service hotel in Houston, Texas. There has been collateral reduction of 97.2% since issuance, and to date, the pool has incurred losses in excess of $210.0 million. The unrated Class E certificate, which has a current balance of $2.8 million and has already taken losses with previous loan liquidations, is the current junior bond in the transaction.

The loan originally transferred to special servicing in March 2019 after the borrower requested a loan modification, which subsequently closed in December 2019. The terms of the modification included an 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 requested relief, citing Coronavirus Disease (COVID-19)-related hardship. The servicer noted that the borrower requested a short-term forbearance and access to cash balances and reserve funds controlled by the servicer, while negotiations regarding a third modification remained ongoing. The borrower, however, has yet to make a comprehensive workout proposal or contribute new equity and, through counsel, the special servicer is in process of drafting the necessary documents to petition the court for the appointment of a receiver. The property was inspected in June 2022 and was found to be in overall good condition with some work required to the parking lot.

The hotel’s performance has been depressed for many years, beginning with the downturn in Houston’s energy markets in 2015. According to the December 2022 Smith Travel Research report, the property reported a year-to-date occupancy rate of 49.9%, an average daily rate of $111.50, and revenue per available room of $55.69. The most recently reported property level financials is from YE2019 as the borrower has not provided operating performance information to the servicer since that time. The YE2019 financial reporting showed that even before the pandemic, the debt service coverage ratio was below breakeven, at 0.81 times. An April 2022 appraisal valued the property at $45.3 million, above the May 2021 appraisal value of $39.8 million, but below the July 2020 appraisal value of $47.5 million. Marriott’s franchise agreement also ends in 2023, and the status of a renewal is unknown. If a receiver is installed, it will likely be a top priority of the servicer to retain the Marriott flag, though the cost of any brand-mandated property updates will certainly be taken into consideration by the servicer in its decision to sign a new franchise agreement or operate the subject as an unflagged hotel.

As of the December 2022 remittance, the loan had an outstanding principal balance of $69.9 million, with outstanding advances in excess of $3.0 million. The current exposure of $138,202 per key is high, given the hotel’s sustained performance challenges, upcoming franchise agreement expiration, and location within the energy-reliant Westchase neighborhood. As a result, a potential buyer would likely not pay above the April 2022 appraised value for the asset, especially given the recent widening in capitalization rates and the general slowdown in capital markets. In its analysis, DBRS Morningstar applied a 15.0% haircut to the most recent appraisal value, resulting in a loan loss severity in excess of 60.0%.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

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/396929 (May 17, 2022).

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

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

The principal methodology is North American CMBS Surveillance Methodology (October 3, 2022), 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.

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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