DBRS Upgrades Four and Confirms Two Classes of Asset-Backed Notes Issued by Selkirk 2013-1

DBRS Limited (DBRS) has today upgraded the ratings of the following classes of Asset-Backed Notes (the Certificates) issued by Selkirk 2013-1 as listed below:

-- Class B to AAA (sf) from AA (low) (sf)
-- Class C to A (high) (sf) from A (low) (sf)
-- Class D to BBB (sf) from BBB (low) (sf)
-- Class E to BB (sf) from BB (low) (sf)

DBRS has also confirmed the rating of two classes as follows:

-- Class A2 at AAA (sf)
-- Class F at B (low) (sf)

All trends are Stable. In addition, Class IO has been discontinued, as the class repaid in full with the August 2016 remittance.

The rating upgrades reflect the increased credit support to the bonds as a result of scheduled loan amortization, successful loan repayment and the overall improved performance of the pool since issuance. In the last 12 months, eight loans have been repaid from the Trust, contributing $169.2 million in principal reduction to senior bonds. At issuance, the collateral consisted of 55 seasoned, fixed-rate loans secured by 67 commercial and multifamily properties. As of the November 2016 remittance, 43 loans remain in the pool with an aggregate outstanding principal balance of $617.3 million. The top 15 loans continue to exhibit stable performance with a weighted-average (WA) debt service coverage ratio (DSCR) and debt yield of 1.83 times (x) and 13.3%, respectively, based on YE2015 reporting. The top 15 loans have experienced healthy WA net cash flow growth of 27.1% over the DBRS underwritten (UW) figures. In addition, eight loans, representing 24.5% of the current pool balance, are scheduled to mature by November 2017. Based on YE2015 financials, these loans are reporting a WA DSCR and exit debt yield of 1.57x and 11.1%, respectively, metrics indicative of a higher likelihood of being able to refinance at maturity. As of the November 2016 remittance, there are no loans in special servicing and no loans on the servicer’s watchlist. The second-largest loan in the pool is highlighted below.

The Mission Towers II loan (Prospectus ID#2, representing 6.6% of the current pool balance) is secured by a Class A office property located in Santa Clara, California. The loan was previously on the watchlist because of the largest tenant, WebEx, which represented 57.3% of the net rentable area (NRA), vacating its space upon lease expiration in December 2014. As a result of the tenant’s departure, the YE2015 DSCR declined to 0.43x compared with the DBRS UW DSCR of 1.33x and the issuance occupancy rate of 98.3%. According to the February 2016 rent roll, property occupancy improved to 67.8%, as the borrower was able to execute 60,000 square feet (sf) in new leases signed in 2015, including Malwarebytes and Connor Group, which both have lease expirations in September 2022. Both leases commenced in October 2015; Malwarebytes assumed space on the 11th and 12th floors, which are a portion of the space previously leased to WebEx. As of November 2016, CoStar is showing that Malwarebytes assumed additional space on the tenth floor in May 2016, with the tenant cumulatively representing 25.9% of the NRA. In addition, Connor Group, representing 4.5% of the NRA, has occupied the entire seventh floor. As a result of the recent leasing activity, property occupancy has rebounded to issuance levels at 95.8%, with the remaining space being marketed as available for lease, according to CoStar. Despite the elevated vacancy levels following the departure of WebEx, the loan continued to remain current. As of November 2016, CoStar reports that comparable office properties within a 0.5-mile radius of the subject are reporting rental and vacancy rates of $43.57 psf and 8.1%, respectively, compared with the subject’s asking rental rate of $42.00 psf. According to the March 2016 site inspection, the property was noted to be in overall good condition, with no deferred maintenance noted. DBRS expects the performance to stabilize, given the recent leasing momentum and the asset’s desirable location in Silicon Valley.

The ratings assigned to the Class C, D, E and F Certificates materially deviate from the higher ratings implied by the quantitative model. DBRS considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by the quantitative model that is a substantial component of a rating methodology; in this case, the rating reflects the sustainability of loan performance trends not demonstrated.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are North American CMBS Rating Methodology (March 2016) and CMBS North American Surveillance (October 2016), which can be found on our website under Methodologies.