DBRS Confirms All Classes of FREMF 2013-K26 Mortgage Trust, Series 2013-K26

DBRS Limited (DBRS) has today confirmed the ratings on the following Multifamily Mortgage Pass-Through Certificates, Series 2013-K26 issued by FREMF 2013-K26 Mortgage Trust, Series 2013-K26:

-- 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 AA (low) (sf)
-- Class C at A (low) (sf)

All trends are Stable. DBRS does not rate the first loss piece, Class D.

The rating confirmations reflect the overall performance of the transaction. The transaction consists of 81 fixed-rate loans secured by 81 multifamily properties. Since issuance, the transaction has experienced collateral reduction of 1.8% as a result of scheduled amortization, with all of the original 81 loans remaining in the pool. At YE2014, the weighted-average (WA) debt service coverage ratio (DSCR) was 1.76 times (x) and the WA debt yield was 9.7%, based on 99.0% of the pool reporting. At the time of this DBRS review, 70.5% of the pool was reporting 2015 cash flows (with most of them reporting a Q3 figure). The annualized WA DSCR for these loans was 1.92x with a WA debt yield of 10.6%, compared with DBRS underwritten pool-wide figures of 1.48x and 8.1%, respectively.

The second-largest loan in the pool is Prospectus ID#2 Oakwood Falls Church, representing 3.6% of the current pool balance. This loan is secured by a 576-unit mid-rise apartment complex located in Falls Church, Virginia, approximately nine miles west of Washington, D.C. The subject operates under The Oakwood Apartment brand, which markets furnished units. It was noted at issuance that the subject offers approximately 75.0% furnished units while the remaining units are rented unfurnished. The subject operates predominately as furnished corporate housing with units generally leased on shorter terms. At issuance, approximately 50.0% of the units were occupied by the U.S. Department of State, which has maintained multiple five-year contracts at the property for over 20 years. These contracts are with Oakwood Management on a corporate level, however, and are not tied to any specific property. Historically, the agency has preferred the subject given its location near its language training facility; however, occupancy has decreased over the past year.

According to the December 2015 rent roll, the property was 79.3% occupied, which represents a decrease from YE2014 occupancy of 88.4%. The unfurnished units had an average rental rate of $1,566 per unit decreasing from the January 2013 average rental rate of $1,687 per unit. The average rental rate for both furnished and unfurnished units was $2,090 per unit, which has seen a decrease from the issuance average rental rate of $2,303 per unit. As a result of the decline in occupancy and rental rates, the net cash flow (NCF) has also declined from the prior year. The annualized Q3 2015 DSCR for the loan was 1.72x. Although it has stayed in line with the YE2014 DSCR of 1.68x, it represents a decrease from the YE2013 DSCR of 2.43x and the DBRS underwritten DSCR, which was 2.43x. At issuance, this loan was shadow-rated investment grade as it was a high-quality property and a strong-performing asset. Given the decrease in performance over the last two years, DBRS has discontinued the shadow-rating for this loan.

There are no delinquent or specially serviced loans as of the February 2016 remittance; however, there are two loans on the servicer’s watchlist, representing 1.1% of the current pool balance. The largest watchlisted loan is discussed below.

Prospectus ID#57 Royal Park/University Lake Apartments, representing 0.6% of the current pool balance, is secured by two garden-style apartment complexes located in Durham, North Carolina. The two properties are located next to each other and were built in 1968 and 1973, respectively, totaling 374 units. The subject is in close proximity to the University of North Carolina and, at issuance, approximately 18.2% of the property was occupied by students at the university. This loan was added to the watchlist for a low DSCR because, according to the YE2015 financials, the loan reported a 0.77x DSCR, which has declined when compared with the YE2014 DSCR of 1.00x. The DBRS underwritten DSCR was 1.28x. According to the December 2015 rent roll, the occupancy was 79.7%, representing an increase from YE2014 of 73.0%; however, occupancy remains down from the issuance rate of 90.3%. Despite the average rental rate per unit increasing to $652 per unit according to the December 2015 rent roll from $557 per unit according to the December 2012 rent roll, NCF has decreased given the drop in occupancy. In addition, operating expenses have increased, mainly from utilities as well as payroll and benefits. According to REIS, the subject is located in the South Durham submarket with the Q4 2015 average rental rate for properties with a similar vintage at $712 per unit and an average vacancy of 7.3%.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are 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.

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

The applicable methodologies are North American CMBS Rating Methodology (March 2016) 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.