DBRS Confirms All Classes of FREMF 2012-K18 Mortgage Trust, Series 2012-K18

DBRS, Inc. (DBRS) has today confirmed all classes of Multifamily Mortgage Pass-Through Certificates Series 2012-K18 issued by FREMF 2012-K18 Mortgage Trust, Series 2012-K18 as follows:

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

All trends are Stable.

The rating confirmations reflect the overall stability of the pool’s performance since issuance. The collateral consists of 74 fixed-rate loans secured by 78 multifamily properties. The transaction has experienced 5.1% of collateral reduction since issuance as a result of scheduled loan amortization and the prepayment of one loan since issuance. According to YE2015 and annualized partial-year 2015 financial reporting, the transaction has a weighted-average (WA) debt service coverage ratio (DSCR) and WA debt yield of 1.70 times (x) and 10.5%, respectively. In comparison, the WA DBRS DSCR and the WA DBRS debt yield at issuance were 1.40x and 8.6%, respectively. The largest 15 loans in the pool have experienced a WA positive cash flow growth since issuance of 32.5% over DBRS underwritten figures. The transaction also benefits from defeasance collateral as four loans, representing 3.7% of the current pool balance, are fully defeased.

There are currently five loans on the servicer’s watchlist, representing 8.5% of the pool balance. Two of the loans (5.2%) on the servicer’s watchlist, Missouri GoldOller Portfolio (Missouri) and Copper Pointe, were flagged due to casualty events, which occurred in March 2014 (hail damage) and January 2015 (fire damage), respectively. According to the servicer, insurance proceeds have been disbursed intermittently since the respective events occurred and repairs at each property are either completed or will be completed shortly. Performance at both properties has been increasing year over year as Missouri reported a Q2 2015 DSCR of 2.31x and Copper Pointe reported a Q3 2015 DSCR of 1.60x. Two of the other loans on the servicer’s watchlist are highlighted below.

The Carmichael Oaks loan (Prospectus ID#24, 1.9% of the current pool balance) is secured by an independent living facility in Carmichael, California, approximately ten miles northeast of Sacramento. The loan was added to the watchlist after the T12 ending September 30, 2015 (T-12), DSCR declined to 1.22x compared with the YE2014 DSCR of 1.69x. Since issuance, the property has reported increasing operating expenses, which on average have increased 7.3% annually or approximately $880,000 total. The largest increases in costs are attributed to Payroll, Advertising & Marketing and General & Administrative expenses. As of the T-12 reporting, the operating expense ratio for the property has increased to 73% from 59% at issuance. According to the December 2015 rent roll, the property was 89.5% occupied with an average rental rate of $3,355/unit compared with an occupancy and average rental rate of 89.8% and $3,042/unit, respectively, at issuance. While occupancy has remained stable from issuance, there was a brief period of depressed occupancy throughout 2015 as 42.5% of current tenant leases were signed in 2015. As a result, the T-12 effective gross income (EGI) declined by 7.0% over the YE2014 figure. While EGI may be expected to rebound, the current trend of increasing operating expenses is concerning.

The Envision Apartments loan (Prospectus ID#31, 1.2% of the current pool balance) is secured by a student-housing property located near the University of Akron in Akron, Ohio. The loan was added to the servicer’s watchlist for a low YE2013 DSCR 1.12x, which the borrower attributed to high turnover as the property had a high underclassmen population. The larger issue for the subject, however, was the introduction of three competing properties totaling 1,478 beds and declining enrollment at the university. Enrollment has decreased annually to 25,200 students for the fall 2015 semester from 29,700 students for the fall 2011 semester. The new supply, which offers combinations of additional community amenities than the subject (pool, media room, game room and computer room) has reportedly caused downward pressure on rental rates. As of the September 2015 rent roll, the occupancy rate was 99% occupied with an average rental rate of $564/bed. While this is an improvement over the November 2014 occupancy and average rental rate of 96.7% and $538/bed, respectively, rental rates are still below the YE2013 high of $655/bed. The subject offers the lowest rental rates compared to its four main competitors, with utilities, cable television and Internet included. Community amenities are limited to a fitness center and a tenant coffee lounge. According to Q2 2015 reporting, the DSCR was 0.99x, unchanged from the YE2014 DSCR.

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

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.

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