DBRS Confirms All Classes of FREMF 2012-K17 Mortgage Trust, Series 2012-K17

DBRS, Inc. (DBRS) has today confirmed all classes of Multifamily Mortgage Pass-Through Certificates Series 2012-K17 issued by FREMF 2012-K17 Mortgage Trust, Series 2012-K17, as follows:

-- Classes A-1 at AAA (sf)
-- Classes A-2 at AAA (sf)
-- Classes X1 at AAA (sf)
-- Classes X2-A at AAA (sf)
-- Class B at A (sf)

The trends on all classes are Stable.

This transaction comprises 72 fixed-rate loans secured by 76 multifamily properties. All loans were structured with ten-year terms and three loans, representing 2.0% of the pool, have defeased since issuance. No loans have been repaid and there has been collateral reduction of 4.3% since issuance. The rating confirmations reflect the overall strength of the pool’s performance since issuance, with a weighted-average debt service coverage ratio (DSCR) on the trust debt for the pool of 1.80 times (x), with weighted-average debt yield of 11.1% as of the January 2016 remittance report. These figures compare with issuance levels of 1.40x and 8.4%, respectively. The performance for the largest 15 loans has been particularly strong, with weighted-average debt yield of 11.0%, a weighted-average DSCR of 1.94x and weighted-average net cash flow (NCF) growth of 30.9% as of the YE2014 figures over DBRS underwritten figures.

There is one loan on the watchlist, Prospectus ID#49, Stillwater Flats, which represents 0.68% of the pool, and no loans in special servicing. There are challenges for the pool in its concentration by loan size, with the largest loan representing 15.6% of the pool, the largest three loans representing 25.8% of the pool and the largest ten loans representing 44.6% of the pool. In addition, six loans, representing 10.1% of the pool, are secured by non-traditional property types (independent living or senior housing and student housing). These property types typically have more cash flow volatility. Also, there are 29 loans, representing 58.2% of the current balance that were structured with partial or full-term interest only (IO) structures, including the largest loan, which is fully IO. These challenges are mitigated by the Issuer’s strong origination practices, with a historically low delinquency and default rate for Freddie Mac loans. The Issuer’s underwriting is generally conservative, with a weighted-average variance of just -2.4% between the Issuer’s NCF figure and the DBRS figure. Additionally, approximately 85% of the pool is located in urban or suburban locations, which typically means a lower default rate for those loans.

The largest loan in the pool is Prospectus ID#1, Park Newport, which represents 15.6% of the pool and is secured by a 1,306-unit garden-style complex located in Newport Beach, California. The property is well located with expansive views of Newport Bay and the Pacific Ocean in an upper-middle class community. According to Reis, the property’s submarket had an overall submarket vacancy of 1.4% at YE2015, with average asking rents $2,424. As of Q3 2015, the property’s average rental rate was $2,080 per unit, with occupancy at 90% and the loan had a DSCR of 2.59x, compared to the DBRS underwritten (UW) DSCR of 1.96x and YE2014 DSCR of 2.45x, respectively, with NCF growth of 32% over the DBRS underwritten figure for the period. The increase in NCF over the underwritten figures is attributable to an increase of 13% in EGI that is the result of an increase in rental rates and the in-place tax rate that is much lower than the DBRS underwritten figure. The underwritten figure was based on the appraiser’s estimate, but due to tax laws in the state of California, the actual tax amount is restricted to 2% annual growth unless the property changes ownership.

Prospectus ID#14, Waterford Ranch Apartments, represents 1.75% of the pool and is secured by a 300-unit garden-style apartment complex located in Midland, Texas. The sponsor purchased the subject for $30 million in 2011 and retained $8.0 million of cash equity in the property at closing. The subject was built in 2008. The previous owner was a non-profit organization that leased units at discounted rental rates to participate in a Community Housing Development Organization. The current owner opted not to participate in this program, thus allowing the subject to achieve full market rents. Leasing units at discounted rates ended on July 31, 2011, and all discounted leases were phased out by August 1, 2012. The Q3 2015 DSCR was reported at 1.80x, as compared to the DBRS UW DSCR of 1.51x and YE2014 DSCR of 2.72x. The occupancy rate for the period was 92.3%; occupancy levels have fallen by 5% since YE2014 and have historically hovered near 97%. This area of Texas is heavily reliant on the oil industry and it appears that the recent downturn has affected the property and occupancy rates for the submarket, as well. According to Reis, the Midland submarket had an overall vacancy rate of 10.4% at Q2 2015, up from the YE2014 vacancy rate of 6.1%. DBRS will continue to monitor the loan for developments — to mitigate the risk associated with the decline in vacancy in the past year, the loan was modeled on the DBRS UW NCF figure.

The only loan on the servicer’s watchlist is Prospectus ID#49, Stillwater Flats, which represents 0.68% of the pool and is secured by a student housing property constructed in 2009 in Stillwater, Oklahoma, serving the students of Oklahoma State University (OSU). The loan is on the watchlist for the low amortizing DSCR at YE2013, YE2014 and Q3 2015 of 1.01x, 0.94x and 1.04x, respectively. The historical cash flow issues have been caused by increased expenses (particularly in repairs and maintenance) and lower occupancy rates for the property as compared to the underwritten levels in 2013 and 2015. The property has been impacted by new supply in the area, but benefits from a location within walking distance of the OSU campus. DBRS will continue to monitor the loan for developments.

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 methodologies are North American CMBS Rating Methodology (June 2015) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.