DBRS Assigns Provisional Ratings to FREMF 2015-K51 Mortgage Trust, Series 2015-K51

DBRS, Inc. (DBRS) has today assigned provisional ratings to the following classes of Multifamily Mortgage Pass-Through Certificates, Series 2015-K51 (the Certificates), issued by FREMF 2015-K51 Mortgage Trust, Series 2015-K51. The trends are Stable.

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class X1 at AAA (sf)
-- Class X2-A at AAA (sf)
-- Class X2-B at AAA (sf)
-- Class B at A (low) (sf)
-- Class C at BBB (sf)

The collateral consists of 99 fixed-rate loans secured by 99 multifamily properties. The pool has a balance of $1,195,807,281. 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 0.01% as of July 31, 2015. This compares very favorably with the delinquency rate for commercial mortgage-backed security (CMBS) multifamily loans of approximately 4.0% for the same period. In addition, cash flow underwriting is prudent as evidenced by an average DBRS net cash flow (NCF) variance of -4.2% on the sampled loans. In general, revenue has been underwritten to levels similar to the recent trailing 12 months amount and lower than a recent annualized rent roll.

The pool is concentrated by property type, with multifamily properties representing 100.0% of the collateral; however, multifamily properties benefit from staggered lease rollover and generally low expense ratios compared with 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 81.8% of the pool that have a DBRS refinance debt service coverage ratio (DBRS Refi DSCR) below 1.00 times (x). These loans may be dependent on modest cash flow growth to refinance in a higher interest rate environment. Mitigating this risk is the fact that the weighted-average (WA) DBRS Refi DSCR is based on a weighted-average refinance constant of 9.77%, which implies an interest rate of 9.13%, amortizing on a 30-year schedule. This represents a significant stress of 4.2% over the WA contractual interest rate of the loans in the pool. Additionally, sponsors of nine of the largest 15 loans, totaling 19.7% of the pool, recently have or are in the process of investing capital to renovate the properties and are achieving rental rate premiums for renovated units, which is not fully captured in the DBRS NCFs. Excluding loans of recently constructed properties that either did not have a previous effective gross income (EGI) or had an increase of more than 20.0%, likely because of stabilization, the remainder of the pool experienced an average EGI increase of 8.3% over the prior reporting period.

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 that 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-051,” dated December 7, 2015, 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.

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

The applicable methodology is North American CMBS Rating Methodology, which can be found on our website under Methodologies.

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains the description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not require due diligence services outlined in Form-15E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

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