DBRS Ratings Limited (DBRS) confirmed its ratings of the following classes of Commercial Mortgage-Backed Floating-Rate Notes Due November 2027 (the notes) issued by Taurus 2017-2 UK DAC (the Issuer):
-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
All trends are Stable.
The confirmations reflect the transaction’s overall stable performance since issuance.
Taurus 2017-2 UK DAC is a securitisation of an interest-only senior commercial real estate loan. At issuance, the senior whole-loan had a balance of GBP 366.2 million, which following a property disposal in Q2 2018 has been reduced to GBP 364.3 million as of the August 2018 interest payment date (IPD).
The collateral consists of 126 industrial properties located in the United Kingdom with a concentration in the Greater London (40.0% of market value) and Bristol (20.1% of market value) areas. CBRE valued the portfolio at approximately GBP 547.8 million in July 2017, with no single asset being larger than 5.9% of the portfolio value. Approximately 70.0% of the assets, by market value, are considered “last mile” delivery centres (logistics properties located within 20 kilometres of cities with over 500,000 residents). Last mile logistic centres have seen an improvement in performance as they benefit greatly from the reliance on online shopping as customers’ expectations about delivery times continue to decrease. According to the Cushman & Wakefield Q3 2018 Industrial snapshot, total take-up for industrial assets during Q3 2018 was approximately 6.5 million square feet with retailers and e-retailers driving the market (contributing 45% of that take-up). Additionally, yields are at their current ten-year low in every reported market throughout the UK.
According to the Q2 2018 servicing report, the projected annual gross rental income has increased to approximately GBP 41.9 million, which is a significant increase over the GBP 34.4 million gross rental income (GRI) reported at issuance. This is unsurprising as DBRS noted at issuance that the portfolio was under rented by approximately 13.6% compared with the CBRE market rental values. The portfolio also benefits from a very granular income stream with no tenant representing more than 1.5% of GRI and the top ten tenants totalling only 10.8% of GRI. At issuance, DBRS noted that the portfolio had a relatively short average lease term of approximately 3.27 years, with approximately 33% of leases scheduled to expire by the end of 2019. To date, the asset manager has been successful in its business plan of re-signing tenants with expiring leases at market rents, with 24 new leases signed as of Q2 2018. The two largest tenants, Wolseley UK Limited and Howden Joiner Properties, have both agreed to increase their total rent at the property after re-signing leases at market rental rates. The Wolseley tenant now pays a total of GBP 634,000 in GRI, compared with GBP 563,000 at issuance and Howden Joinery Properties pays a total of GBP 634,000 in GRI, compared with GBP 549,000 at issuance. The portfolio’s overall weighted-average lease term to maturity has subsequently improved to 4.71 years from 3.27 years at issuance.
According to the loan documents, the sponsor is allowed to dispose of assets, subject to a loan prepayment of 110% of the allocated loan amount for the property sold. In August 2018, the 30-64 Pennywell Road, Bristol asset was sold; the asset had a market value of GBP 2.6 million and an allocated loan amount of GBP 1.7 million. The property was 100% occupied by Friends Life Services Ltd, which was paying an annual rent of GBP 220,000, with a lease expiration in August 2023. DBRS accounted for this disposal in its analysis.
All figures are in British pound sterling unless otherwise noted.
The principal methodology applicable to the ratings is: “European CMBS Rating and Surveillance Methodology”.
DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the surveillance section of the principal methodology.
A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.
Other methodologies referenced in this transaction are listed at the end of this press release.
These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.
For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/333487/rating-sovereign-governments.pdf.
The sources of data and information used for these ratings include CBRE Loan Services Limited and its delegates.
DBRS did not rely upon third-party due diligence in order to conduct its analysis.
At the time of the initial rating, DBRS was supplied with third-party assessments. However, this did not impact the rating analysis.
DBRS considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.
DBRS does not audit or independently verify the data or information it receives in connection with the rating process.
This is the first rating action since the Initial Rating Date.
The lead analyst responsibilities for this transaction have been transferred to Christopher Horst.
Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.
To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”):
A decrease of 10% and 20% in the DBRS NCF, derived by looking at comparable properties, market rents, market occupancies in addition to expenses ratios, capital expenditures and re-tenanting costs, would lead to the following ratings in the transaction, as noted below for each class, respectively:
Class A Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class A at AAA (sf)
-- 20% decline in DBRS NCF, expected rating of Class A at AA (sf)
Class B Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class B at A (low) (sf)
-- 20% decline in DBRS NCF, expected rating of Class B at BBB (sf)
Class C Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class C at BBB (sf)
-- 20% decline in DBRS NCF, expected rating of Class C at BB (high) (sf)
Class D Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class D at BB (sf)
-- 20% decline in DBRS NCF, expected rating of Class D at B (sf)
Class E Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class D at B (sf)
-- 20% decline in DBRS NCF, expected rating of Class D at CCC (sf)
For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.
Lead Analyst: Christopher Horst, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 15 December 2017
DBRS Ratings Limited
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.
-- European CMBS Rating and Surveillance Methodology
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.
For more information on this credit or on this industry, visit www.dbrs.com or contact us at email@example.com.