DBRS Confirms All Classes of DECO 2012-MHILL Limited

DBRS, Inc. (DBRS) has today confirmed the rating of three classes of DECO 2012-MHILL Limited Commercial Mortgage-Backed Floating-Rate Notes as follows:

-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (high) (sf)

The trends are Stable.

The rating confirmations reflect the performance of the transaction. The collateral for the transaction consists of a GBP 210 million interest-only loan on the Merry Hill portfolio of properties located in the town of Brierley Hill in the West Midlands, approximately eight miles west of the Birmingham city centre. The Merry Hill portfolio is highlighted by the Merry Hill Shopping Centre, with approximately 1.3 million square feet (sf) of retail space. Additionally, the portfolio includes a number of ancillary properties, including a retail park, a business park, a leisure complex, a free-standing supermarket, an industrial estate, a trade counter park, a petrol station and approximately 47 acres of development ground. At issuance, the collateral was owned by a joint venture between The QIC Fund (QIC) and The Westfield Group (Westfield). In May 2014, Intu Properties purchased Westfield’s 50% interest in the properties for GBP 407.7 million and installed its management team as the new property management. QIC retains its 50% interest in the collateral. This transaction represents the QIC’s ownership interest only.

The Merry Hill Shopping Centre is a prime retail asset and is one of the most attractive and best-performing shopping centres in the United Kingdom, averaging over twenty million visitors annually. The mall accounts for 82.9% of the complex gross rental income (GRI) and 84.3% of market value. The mall continues to be well-occupied, at 94.8% as of the January 2015 rent roll; however, this is a decrease from the January 2014 occupancy rate of 98.3%. The centre contains approximately 300 principal leases, with a well-diversified mix of anchor and in-line tenants that serve a wide range of demographics. Since 2006, occupancy across the portfolio has been strong, ranging from 97.5% to 90.4%, and was most recently confirmed at 90.7% in January 2015. As a result of a slight decrease in occupancy, the projected 2015 net operating income is GBP 19.0, down from GBP 19.8 million in 2014. The property has additional tenant rollover exposure, with only 16.3% of the net rentable area rolling before loan maturity in July 2016.

While DBRS had previously placed Class A and Class B Under Review with Negative Implications due to an upcoming potential downgrade of a named counterparty within the transaction, possibly exposing the transaction to credit risk, DBRS has determined that the high term and refinance debt service coverage ratios of 1.97x and 2.05x, respectively, as well as the value of the collateral serve to effectively mitigate the risk, justifying the rating confirmations.

Notes:
All figures are in GBP unless otherwise noted.

The applicable methodologies are European CMBS Rating Methodology, European CMBS Surveillance Methodology, Legal Criteria for European Structured Finance Transactions and Unified Interest Rate Model, which can be found on www.dbrs.com.

This credit rating has been issued outside of the European Union (EU) and is endorsed by DBRS Ratings Limited. It may be used for regulatory purposed by financial institutions in the EU.

The sources of information used for this rating include DECO 2012-MHILL Limited and Situs Asset Management Limited. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The last rating action on this transaction took place on May 29, 2015.

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios as compared with 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 and 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 AAA (sf)

Class B Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class B at AA (high) (sf)
-- 20% decline in DBRS NCF, expected rating of Class B at A (sf)

Class C Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class C at BBB (high) (sf)
-- 20% decline in DBRS NCF, expected rating of Class C at BB (high) (sf)