DBRS Upgrades Five Classes and Confirms Two Classes of Asset-Backed Notes Issued by Selkirk 2013-2

DBRS Limited (DBRS) upgraded the ratings of the following classes of Asset-Backed Notes (the Certificates) issued by Selkirk 2013-2 as listed below:

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

DBRS also confirmed the rating of the following classes as follows:

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

All trends are Stable, with the exception of Class D and E, which were assigned a Positive trend.

The rating upgrades and trend changes 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 remaining collateral in the pool since issuance. Specifically, there has been an 18.6% increase in collateral reduction over the last 12 months, primarily a result of the repayment of five loans, which cumulatively totaled $84.0 million at issuance.

At issuance, the collateral consisted of 40 seasoned, fixed-rate loans secured by 57 commercial and multifamily properties. As of the November 2017 remittance, 16 loans remain in the pool with an aggregate outstanding principal balance of $115.2 million. The top 15 loans continue to exhibit stable performance with a weighted-average (WA) debt service coverage ratio (DSCR) and debt yield of 1.70 times (x) and 21.5%, respectively, based on the most recent year-end reporting available for the individual loans. The top 15 loans have experienced WA net cash flow growth of 24.8% over the DBRS issuance figures. In addition, two loans are maturing in the next 12 months, representing 8.9% of the current pool balance. Based on YE2016 financials, these loans reported a WA DSCR and WA exit debt yield of 1.97x and 21.2%, respectively, metrics indicative of loans with a higher likelihood of being able to refinance at maturity. As of the November 2017 remittance, there are no loans in special servicing and no loans on the servicer’s watchlist; however, one loan in the top 15 is reporting a year-end cash flow decline over the DBRS issuance figure, which is highlighted below.

The Heights Office Building loan (Prospectus ID#20, representing 5.6% of the current pool balance) is secured by a 104,418 square feet (sf) office property located in San Antonio, Texas. According to the March 2017 rent roll, the property was 100% occupied, with the largest three tenants representing 32.0% of the net rentable area (NRA), on leases scheduled to expire between November 2019 and August 2021. As of November 2017, CoStar was reporting vacancy rates of 13.6% and average asking rental rates of $21.73 per square foot (psf) for comparable office properties within the North Central submarket, which is below the subject’s average rental rate of $29.09 psf. In addition, CoStar reported the property as 98.9% leased as the subject’s occupancy has remained historically above 97.0% since issuance, with minimal tenant rollover anticipated through 2018. As of YE2016 reporting, the DSCR was reported at 1.73x, compared with the DBRS Term DSCR of 2.34x, reflective of a 19.4% decline in YE2016 cash flows over the DBRS issuance figure. The decline is attributed to a 28.7% increase in total operating expenses since issuance, mainly driven by increases in real estate taxes and utilities expenses. Despite the cash flow decline, the subject’s performance remains stable and the loan benefits from an experienced sponsor, with property quality remaining in overall excellent condition, according to the May 2017 site inspection.

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

The ratings assigned to Classes E, F, and G materially deviate from the higher ratings implied by the quantitative results. 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 results that is a substantial component of a rating methodology. The deviations are warranted given 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 under Related Documents or by contacting us at info@dbrs.com.

The principal methodology is CMBS North American Surveillance, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance-related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. Please note that not every related methodology listed under a principal Structured Finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

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

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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