New Issuance

Land Securities Capital Markets PLC's class A18 notes were issued during the first quarter of 2024, the 10th additional issuance from the existing transaction.

Table 1

Table 2

Surveillance

Table 3

The outstanding S&P Global Ratings-rated European CMBS balance decreased to £22.2 billion from £23.1 billion over the past quarter. The decrease in the note balance is primarily due to the full repayment of two loans in this quarter and substantial prepayment of one loan. The new transaction only partially offsets the repayments.

Table 4

Chart 1

Chart 2

Table 5

Table 6

Taurus 2021-5 UK DAC

This loan is a vertical slice of a larger senior loan (11%), and the LTV ratio (58.9%) applies to both the securitized loan and the whole senior loan as the market value is allocated in proportion to the loan amount. In the third quarter of 2023, it was extended for the second time to May 2024, with the same hedging conditions and one more contractual extension option left for one year. A portfolio of student accommodation properties secures this interest-only loan, and its LTV ratio (based on a valuation in October 2022) fluctuates due to the capital expenditure (capex) facility being drawn. The operator has gradually increased occupancy at the properties. We believe the loan maturity will be extended again this year.

Bruegel 2021 DAC

The loan is set to mature in May 2024 and has two one-year extension options. Our S&P Value is 8.7% higher than at closing, underpinned by sustainable rental income generated and relatively low vacancy of the assets (predominantly office buildings) located in the Netherlands. However, we are cautious about the negative effects on office space demand due to the hybrid working trend and economic downturn. The loan benefits from a low interest rate burden based on a 1.5% interest rate cap, which we expect to increase upon loan extension. The transaction's LTV ratio of 57.3% is based on an August 2023 valuation. Its debt yield of 13.2% remains healthy due to the secured commercial properties' overall good location and quality. Therefore, the loan is likely to be extended.

Agora Securities UK 2021 DAC

The retail warehouse loan backing this transaction was extended by one year beyond its initial maturity date in the fourth quarter of 2023. New hedging was also established in the form of a cap, which is now 4.25% compared to previously, when the cap rate was 2.00%. It has two remaining extension options of one year each. The servicer reports a strong debt yield of 19.5%. The LTV ratio is only 42.2%, based on a July 2022 valuation. The weighted-average lease term to break is 5.4 years and occupancy at the properties has steadily increased since closing. The annual contractual rental income covers the interest paid by about 3x (the servicer does not report a net operating income). The loan maturity will likely be extended again.

Viridis (European Loan Conduit No. 38) DAC

The three-year loan is set to mature in July 2024 with no extension options available. A cash trap event continues, given its reported debt yield of 6.2% (threshold 8%), although it benefits from a low interest cap rate of 1.0%. The increased LTV ratio of 73.9% due to a lower valuation figure (-13.3%) reported in October 2023 has triggered another cash trap event (threshold 70%). We believe this loan has a high risk of defaulting, despite the relatively good asset quality.

Starz Mortgage Securities 2021-1 DAC (Sellar loan)

The loan matures in July 2024 and is currently unhedged after the interest rate cap expired in July 2022. It has a current LTV ratio of 61.6%. The servicer amended the loan in June 2023 by waiving LTV and interest coverage ratio (ICR) covenants until its maturity. In addition, the interest reserve became unavailable for debt service, with the sponsor managing any shortfalls. The interest reserve will be used to amortize the loan, which will accelerate its deleveraging. A portfolio of three U.K. hotel properties secures the loan. Because the properties' net operating income has steadily increased since the COVID-19 pandemic, we expect the loan to repay at maturity.

DECO 2019-RAM DAC

The loan has no extension options available and is within its last year of a five-year term. The borrower significantly prepaid the loan and note balance on the May 2023 IPD, which satisfied the LTV ratio and ICR covenants. The securitized loan LTV ratio is 21.4%. We believe the loan is in a very good position to refinance.

Oranje (European Loan Conduit No. 32) DAC (Phoenix loan)

The last remaining loan has been extended for one year beyond its final maturity, subject to several changed conditions. The newly agreed interest rate cap (3.5%) and loan margin were significantly higher, partially offset by the minor prepayment from an equity injection. We believe this will weigh on the loan's ICR, which should reach about 2x based on the projected net rental income according to the most recent investor report. Despite high structural vacancy in the underlying office portfolio in the Netherlands, the annual contractual rent has increased slightly since November 2022. The 47.9% LTV ratio is based on an April 2023 valuation. As the new loan maturity has been extended until August 2024, this now results in a four-year tail period. According to our criteria, this is shorter than our expected minimum tail period of five years for a 'AAA' rating. We therefore lowered our ratings on the class A and B notes to 'AA (sf)'. Overall, we believe this loan has a moderate risk of refinancing.

Taurus 2019-4 FIN DAC

The borrower used its last extension option in third-quarter 2023. The smaller office property was disposed in February this year and the only remaining asset is a shopping center in Finland, whose vacancy has improved to about 7.5% from more than 10% before. The weighted-average lease term to break is short at 3.6 years, but the debt yield exceeds 14% when including trapped cash. The cash trap event has been cured as the debt yield now meets the threshold without trapped cash. Overall, we believe this loan is in a good position to refinance.

Starz Mortgage Securities 2021-1 DAC (Node loan)

The loan matured on Oct. 15, 2023, and is unhedged. The borrower and the loan facility agent, amongst others, amended and restated the loan agreement in October 2023. Subject to satisfying the conditions precedent and meeting milestones, the loan maturity date is extended to latest October 2024. However, a low ICR of about 1.3x means headroom is limited to account for a higher interest burden under a replacement loan. Interest could exceed the income from the property as the debt yield is only 6.4%. Moreover, the LTV ratio of 69.9% is relatively high. The collateral is a multifamily property in Dublin, which is a notoriously competitive market. The scarcity of residential supply may help with the refinancing.

Frost CMBS 2021-1 DAC

The loan (denominated in British pound sterling and euro) is secured on three cold-storage facilities in England, Germany, and France. It is set to mature in December 2024 and is structured with two one-year extension options. The servicer reports a moderate LTV ratio of 64.0% and a debt yield of 10.0x, respectively. We believe that the special tenant needs for such properties will support the loan's extension, although the current interest rate cap of 2% will probably rise at loan extension.

Helios (European Loan Conduit No. 37) DAC

This is one of two rated transactions secured by a U.K. hotel portfolio, whose revenue suffered from COVID-19 lockdowns but has rebounded to pre-pandemic levels since 2023. The maturity of the loan is in December 2024, with no extension options. The robust debt yield of 14.5% should sufficiently cover interest payments, hedged at a cap basis rate of 5.00% since the previous 3.00% rate expired in December 2023. The 63.2% LTV ratio is based on a December 2022 valuation, which could decline when a new valuation is confirmed. We consider the loan's refinancing prospects to be good.

Highways 2021 PLC

This is the first transaction backed by U.K. motorway service stations that we have rated. The loan has been extended on its initial maturity date and can be further extended two times by one year each. As a result of the loan being extended, the hedging has also been extended and the hedging rate has increased to 3.0% compared to 0.9% previously. The properties are all leased to a single tenant, Welcome Break, which has EBITDAR that covers its rent by 1.7x. An interest rate swap renewed with the loan extension in December 2023 protects the current interest due. Given the underlying tenant's stable performance and the EBITDAR, we believe the loan will be extended again. A new valuation of the underlying properties is available which showed a value decrease of 3.5% from the December 2022 valuation.

Magenta 2020 PLC

The loan secured by a portfolio of U.K. hotels has an initial two-year term with three one-year extension options. At original loan maturity in December 2021, the loan did not meet the extension conditions and was restructured. Part of the restructuring was to extend the senior loan maturity date to December 2024. The hotels' operational performance has recovered well post-COVID-19, and the debt yield has improved to 10.9% on the latest IPD. In our view, the loan will be fully repaid at loan maturity.

Taurus 2021-3 DEU DAC

The loan will mature in December 2024 with no extension options exercisable. It is secured by the Squaire building complex adjoining Frankfurt Airport, comprising primarily office space and two hotels. We believe the office component could be subject to a longer vacancy, above the submarket's average and requiring capex to be spent to attract and retain tenants. Nevertheless, the hotels' operational performance and cash flows have stabilized after years of COVID-19 pressures. Also, the loan benefits from interest rate protection at a historically low rate of 0.11% plus a margin. At current rates, our forecasted annual net cash flow would not cover interest. There is less than one year left under the interest rate hedge, but we believe the combination of higher interest rates and a moderate debt yield of 7.5% particularly challenges this loan's refinancing prospects.

Salus (European Loan Conduit No. 33) DAC

The senior loan's initial maturity date was in January 2022, and it has been extended twice (by one year each time) in line with the loan agreement. Based on the most recent valuation, which is from March 2023, the collateralized property value is 14% lower than two years ago, and the LTV ratio is consequently higher, at 54.9%, given changes in the CRE markets. We lowered our rating on the class B notes in this transaction in October 2023, as the notes were unable to withstand the cash flow stress caused by rising interest rates at a higher rating level. The property still struggles with an above-market vacancy rate of 17.6%, although this has improved gradually.

At the same time, we affirmed our ratings on all other classes of notes, given the stable credit quality of the collateral overall. The weighted-average lease term to break for the remaining tenants also extends more than five years past the loan maturity date. The senior borrower requested a 12-month extension to the senior loan maturity date from Jan. 20, 2024, to Jan. 20, 2025, which was granted, alongside amendments to the senior loan. Due to the 12-month extension being granted, the five-year tail period has now been decreased to four years. However, we still believe that the refinancing prospects for this loan are good, as the collateral is a well-located, good-quality office property in Central London.

Specially Serviced Loans

There is one loan in special servicing, the same as in Q4 2024. The loan is 100% secured by U.K. retail assets (see table 7). No loans have been added or removed from special servicing this quarter.

Table 7

Chart 4

Chart 5

Appendix

Notes on our data

All information is as of March 31, 2024, unless stated otherwise.

The figure for the loans in European CMBS transactions that we rate excludes the loans in small-loan transactions Dutch property Finance 2022-CMBS1 B.V., Pembroke Property Finance 2 DAC, Sandwell Commercial Finance No. 1 PLC, Sandwell Commercial Finance No. 2 PLC, and Diversity Funding No. 1 Ltd.

1.0 and 2.0 loans  Loans that were originated from the year 2009 onward are classified as 2.0 loans. All other loans originated before this period are defined as 1.0 loans.

Currency  Starting from Q1 2023, we changed the reporting currency to British pound sterling given U.K. transactions represent a majority share of our rated European CMBS transactions.

Table 8