BAML prices profitable Devonshire Square securitisation early underscoring CMBS revival

By James Wallace - Friday, August 10, 2018 13:30

Bank of America Merrill Lynch (BAML) priced the Devonshire Square-backed securitisation yesterday afternoon at a blended coupon of 121 basis points, in a rare CMBS backed by prime central London assets.

Final pricing for the two-class £261.5m Taurus 2018-2 UK DAC transaction was as follows:

Class         Size            Exp Ratings      LTV           IPT

A                 £213.86m  AAA/AAA           36.25%     3mL+110bps

B                 £47.65m    AA-/AA               44.33%     3m£L+170bps  

Total           £261.51m

The blended coupon was 121 bps compared to a 155 bps margin, according to S&P’s presale, on the senior loan, which gives a net interest margin of 34 bps and a potential originator profit of around £4m, assuming the initial three year loan runs to its potential five year duration.

The significance of BAML’s latest CMBS deal is that for several years, as the economics of CMBS have fallen in and out of viability, even in previous fleeting positive environments, prime London assets have been priced out as balance sheet lenders have competed aggressively on pricing. This deal demonstrates that CMBS execution can, at the moment, compete with pfandbrief banks, UK clearing bank and other super prime senior lenders.

Paul Heaton, CMBS analyst at Deutsche Bank, writing in the bank’s European Asset Backed Barometer this morning, observed: “We think this is the first post crisis CMBS were the underlying loan would previously have been syndicated almost automatically. The loan’s margin of 155 bps would previously have been very challenging to accommodate in the CMBS market.”

Heaton added that the shows a broadening of the CMBS sponsor base, which he inferred may have been a factor in the four-month timeline between origination and execution.

BAML’s deal is also noteworthy because for the debut of coworking behemoth, WeWork, as tenant, which represents 46.5% of the rental income in Taurus 2018-2 UK DAC, via a revenue sharing agreement.

Heaton wrote of his scepticism of the WeWork coworking model during stressed phases of the economic cycle.

“When the business cycle turns, small tenants will reduce property obligations where they can – but the landlords cost remain the same,” he wrote. “However, we think these concerns in the transaction are assuaged by the low LTV, conservative calculation of the denominator (6.2% yield) to reflect the situation, prominent location of the building aiding ese of re-let, and ultimate pricing of the notes.”

BAML extended a £275.3m facility – comprised of a £235.3m three-year, interest-only, floating-rate senior loan and a £40m capex loan – in April, to finance the £580m acquisition of Devonshire Square from Blackstone, which closed six months earlier.  

Devonshire Square is owned 45% each by TH Real Estate and PFA Ejendomme, Denmark’s largest privately-owned insurance company, and 10% by WeWork, which occupies around one-third of the net lettable space and provides 46% of the rental income.

The campus estate near Liverpool Street comprises 12 mix-use buildings let to 40 office, retail, leisure, educational and residential tenants over a net lettable area of 639,488 sq ft, generating a total gross revenue of £34.9m, with a weighted-average lease to break (WALTB) of 13.5 years.  Of this total space, 81% is office space, with the remainder predominantly a mix of retail and leisure.

The joint venture owners of Devonshire Square entered into a 20-year agreement with WeWork to operate the WeWork-branded space at Devonshire Square estate under a revenue-share agreement between WeWork and the joint venture owners of the estate.

The appraised value of Devonshire Square, prior to securitisation, was £590m, expected to rise to £621m upon completion of refurbishment of buildings 8 and 10 within the estate. The current occupancy of the build campus is 96%.

Mount Street will be the primary servicer and special servicer. Servicer fees are 0.013%, and special servicing fees are 0.125% of the outstanding principal balance of the securitised loan per year.

James Wallace is a freelance consultant and can be reached via Linkedin or email:

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