DBRS Finalizes Provisional Ratings on FREMF 2014-K38 Mortgage Trust

DBRS has today finalized the provisional ratings on the following classes of Multifamily Mortgage Pass-Through Certificates, Series 2014-K38 (the Certificates), issued by FREMF 2014-K38 Mortgage Trust, Series 2014-K38. The trends are Stable.

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (sf)
-- Class X1 at AAA (sf)

The collateral consists of 105 fixed-rate loans secured by 105 multifamily properties. The pool has a balance of $1,240,534,938. The loans benefit from strong origination practices. Loans on Freddie Mac’s balance sheet, which are originated according to the same policies as those for securitization, have an extremely low delinquency rate of 0.04% as of March 31, 2014. This compares very favorably with the delinquency rate for CMBS multifamily loans of approximately 4.74% for the same period. In addition, cash flow underwriting is prudent, as evidenced by an average DBRS net cash flow variance of -4.0% on the sampled loans. In general, revenue has been underwritten to levels similar to the recent T-12 amount and lower than a recent annualized rent roll.

The pool is concentrated by property type, with multifamily properties representing 100% of the collateral. However, multifamily properties benefit from staggered lease rollover and generally low expense ratios compared to other property types. While revenue is quick to decline in a downturn because of the short-term nature of the leases, it is also quick to respond when the market improves. Refinance risk is elevated for the loans, representing 51.6% of the pool that have a DBRS refinance debt service coverage ratio (DBRS Refi DSCR) below 1.0 times. These loans may be dependent on modest cash flow growth in order to refinance in a higher interest rate environment. Mitigating this risk is the fact that the weighted-average DBRS Refi DSCR is based on a weighted-average refinance constant of 9.76%, which implies an interest rate of 9.12%, amortizing on a 30-year schedule. This represents a very significant stress of 4.4% over the weighted-average contractual interest rate of the loans in the pool.

Classes A-1, A-2, X1 and X3 are being purchased by Freddie Mac and conveyed into separate trust funds. Freddie Mac will offer structured pass-through certificates (SPCs) that represent pass-through interests in Classes A-1, A-2, X1 and X3. With respect to the SPCs, Freddie Mac guarantees: (1) timely payment of interest; (2) payment of related principal on the distribution date following the maturity date of each mortgage loan, to the extent such principal would have been distributed to the underlying Class A-1 and Class A-2 certificates; (3) reimbursement of any realized losses and additional trust fund expenses allocated to the Underlying Guaranteed Certificates; and (4) ultimate payment of principal by the assumed final distribution date for the underlying Class A-1 and Class A-2 certificates. Please see the press release titled “DBRS Finalizes Provisional Ratings on Freddie Mac Structured Pass-Through Certificates, Series K-038,” dated June 25, 2014, for further information on the SPCs.

The ratings assigned to the Certificates by DBRS are based exclusively on the credit provided by the transaction structure and underlying trust assets without regard to the Freddie Mac Guarantee. All classes will be subject to ongoing surveillance, upgrades or downgrades by DBRS after the date of issuance.

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

Classes B and C are privately placed pursuant to Rule 144A.

The applicable methodology is CMBS Rating Methodology (January 2012), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.
The Rule 17g-7 Report of Representations and Warranties is 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.