New Issuance

Land Securities Capital Markets PLC's class A19 notes were issued in the third quarter of 2024, marking the 11th additional issuance from the existing transaction. A new transaction closed during Q3 2024, see "New Issue: Hera Financing 2024-1 DAC" and "Hera Financing 2024-1 DAC U.K. CMBS Assigned Ratings" published on Sept. 5, 2024.

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Surveillance

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The outstanding S&P Global Ratings-rated European CMBS balance decreased to £19.9 billion from £20.4 billion over the past quarter. The decrease is primarily due to the substantial prepayments of several loans. The new issuance only partially offsets the repayments.

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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 November 2024, with two one-year extension options. The servicer reports a moderate loan-to-value (LTV) ratio of 63.5% and a debt yield of 9.7x, 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 14.8% should sufficiently cover interest payments, hedged at a cap basis rate of 5.0% since the previous 3.0% rate expired in December 2023. The 59.3% LTV ratio is based on a new valuation as of March 2024, which has declined from 63.0% about 1.5 years ago in line with our expectation. This brings the LTV ratio in line with the year five cash trap threshold of 62.4%. 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 twice by one year. As a result of the loan's extension, the hedging as an interest rate swap has also been extended and the hedging rate has increased to 3.0% from 0.9%. All the properties are leased to a single tenant, Welcome Break, which has an EBITDAR of 1.6x its rent. 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 was available in December 2023, with a 3.5% decrease from the December 2022 valuation.

Taurus 2021-3 DEU DAC

The loan will mature in December 2024 with no extension options exercisable. According to the latest special notice in October 2024, the borrower has requested to extend the loan for one year and the servicer is considering the request. The loan is secured by the Squaire building complex adjoining Frankfurt Airport, comprising primarily office space and two hotels. We lowered our ratings on all classes of notes in July, driven by the worsening credit quality of the key office tenants, although the whole property's operational performance has remained relatively stable since our previous review. Also, the loan benefits from interest rate protection at a historically low rate of 0.11% plus a margin. The interest rate hedge has less than three months left, but we believe the combination of higher interest rates and anticipated declining cash flow from the office space particularly challenges this loan's refinancing prospects in case the loan would not be extended.

Viridis (European Loan Conduit No. 38) DAC

The three-year loan is set to mature in July 2024 with no extension options available. However, a further extension of six months was agreed to facilitate the refinancing of the property on a 50% LTV basis, subject to some amended conditions. China Life has approved the participation in the equity injection according to an investor notice in September 2024.

A cash trap event continues, given its reported debt yield of 5.8% (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 lowered the ratings on all classes of notes in July 2024 to reflect the property's higher expenses and vacancy.

We believe China Life's internal approval should alleviate the loan's originally high risk of defaulting due to the weak submarket for office buildings.

Starz Mortgage Securities 2021-1 DAC (Sellar loan)

The loan was scheduled to mature in July 2024 and a six-month extension to January 2025 was signed to allow for the individual sale of the hotel property, alongside other amendments. The loan is currently unhedged after the interest rate cap expired in July 2022. It has a current LTV ratio of 60.9%. 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.

Salus (European Loan Conduit No. 33) DAC

The senior loan's initial maturity date was in January 2022, and it has been extended thrice (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 commercial real estate markets. The property still struggles with an above-market vacancy rate of 18.4%. In our latest review in August 2024, we downgraded all tranches of the notes. A 12-month extension to the senior loan maturity date to January 2025 from January 2024 was granted, alongside amendments to the senior loan. Consequently, the five-year tail period has now decreased to four years. In our view, refinancing the loan has proven challenging due to higher interest rates and declining office property values, although the collateral is a well-located, good-quality office property in Central London. The weighted-average lease term to break for the remaining tenants also extends more than five years past the loan maturity date.

Berg Finance 2021 DAC

Only one loan remains in this transaction, backed by a single property (an office building in Vienna), after two were sold. The loan was extended by one year at its initial maturity in April 2024 for the first time, leaving two further extension options available. It was able to secure a new interest rate cap at 0.8% until April 2025 to qualify for the extension, lower than the previous cap at 1.75%, which should relieve the loan's interest burden. The sale of the Dutch property in January 2023 has caused loan deleveraging, and the borrower could also dispose of the remaining property before the loan maturity date, which should yield enough proceeds to fully repay the loan.

Starz Mortgage Securities 2021-1 DAC (Zamek loan)

The loan matures in April 2025 and has no extension option available. Its current LTV ratio is 69.2%, following an updated valuation in January 2024. The loan is hedged with an interest rate cap at 0.8807% until maturity, which is expected to increase upon refinancing. However, the high occupancy rate (96.9% in the August 2024 investor report) of the two secured residential properties in the U.K., as well as the strength of the residential market should support the loan's refinance prospects in 2025.

Bruegel 2021 DAC

The loan is set to mature in May 2025 after it exercised its first one-year extension option, with one more option remaining. Our S&P Value (as of June 2023) 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 remain unchanged upon loan extension. The transaction's LTV ratio of 58.3% is up slightly quarter-on-quarter (58.1%) following a new valuation in July 2024. Its debt yield of 12.4% remains healthy due to the secured commercial properties' overall good location and quality. Therefore, the loan is likely to be extended.

UNITE (USAF) II PLC

The loan is secured on 34 student accommodation buildings spread across England, Scotland, and Wales. The borrower is an indirect subsidiary of UNITE UK Student Accommodation Fund (USAF), the U.K.'s largest specialist student accommodation fund. Its solid ICR of 2.7x is backed up by the virtually full occupancy of the portfolio in the academic year 2023/2024, along with the positive demand in the U.K. student accommodation market. Moreover, the loan has a low leverage of 31%. We believe this loan is in a good position to refinance when it matures in June 2025.

Agora Securities UK 2021 DAC

The retail warehouse loan backing this transaction was extended by another one year to July 2025. New hedging was also established in the form of a cap, which remains the same rate as the first extension at 4.25%, albeit higher than 2% until the initial maturity. It has one remaining extension option of one year. The servicer reports a strong debt yield of 19.6%. The LTV ratio is only 42.2%, based on a July 2023 valuation. The weighted-average lease term to break is 5.1 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 servicer notified us that the loan has been fully prepaid on Oct. 3, 2024.

DECO 2019-RAM DAC

The loan has been extended for one year, with no extension options available. The borrower significantly prepaid the loan and note balance on the May 2023 interest payment date (IPD), which satisfied the LTV ratio and ICR covenants. The securitized loan LTV ratio has further improved to 18.1% on the July 2024 IPD from 19.3% last quarter following the increase in the market value as of July 2024 and the loan partial paydown. We believe the loan is in a very good position to refinance.

Taurus 2019-4 FIN DAC

A further one-year extension to August 2025 beyond the loan's initial extended maturity was granted, subject to certain amendments including required hedging conditions. The smaller office property was disposed in February this year and the only remaining asset is a shopping center in Finland, whose vacancy deteriorated to 12.1% on the August IPD from close to 10% before. The weighted-average lease term to break is short at 3.5 years, but the debt yield exceeds 12.1%. The considerably higher reported leverage of 68.6% since 2024 was due to the release of almost all the trapped cash. Overall, we believe this loan's refinancing prospect turns less promising, given the relatively high leverage post the release of the trapped cash.

Specially Serviced Loans

One loan is in special servicing, the same as in Q2 2024. The Maroon loan in the transaction Elizabeth Finance 2018 DAC is 100% secured by U.K. retail assets (see table 7). In October 2024, a special notice was published, confirming the renegotiated price on the sale of the property portfolio of £33.2 million, lower than £35 million as previously announced. The net sale proceeds will be distributed sequentially with only the class A notes receiving a partial repayment of the outstanding notes. The other classes of notes are not expected to be repaid. As a result, we lowered our ratings on all classes of the notes to 'CC (sf)'.

No loans have been added or removed from special servicing this quarter.

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Appendix

Notes on our data

All information is as of Sept. 30, 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. 2 PLC, and Diversity Funding No. 1 Ltd.

Loan balances of previous quarters have been revised due to the number correction of one transaction, SGS Finance PLC. The notes were partially repaid in the second quarter of 2024, with the remaining balance exchanged for new payment-in-kind notes. We lowered the ratings to 'Dp (sf)' and withdrew them at the issuer's request.

1.0 and 2.0 loans  Loans 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.

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