DBRS Confirms Ratings of FREMF 2014-K38 Mortgage Trust, Series 2014-K38

DBRS Limited (DBRS) has today confirmed the 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.

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

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

The rating confirmations reflect the current performance of the pool, which is stable from issuance, with cash flows remaining generally in line with the DBRS underwritten (UW) levels. The collateral consists of 105 fixed-rate loans secured by 105 multifamily properties. At issuance, the transaction had a DBRS weighted-average (WA) debt service coverage ratio (DSCR) and a DBRS WA debt yield of 1.44 times (x) and 8.8%, respectively. As of the March 2016 remittance, 72 loans (59.5% of the pool) reported partial-year 2015 (mostly Q3 2015) cash flows while 31 loans (39.0% of the pool) reported YE2015 cash flows. The remainder of the loans that did not report 2015 cash flows did report YE2014 figures. Based on the 2015 cash flows (both annualized partial-year cash flows and YE2015 cash flows) for the Top 15 loans, the WA amortizing DSCR was 1.57x, representative of a WA net cash flow (NCF) growth over the respective DBRS UW figures of approximately 10.7%. All 105 loans currently remain in the pool with an aggregate balance of $1.24 billion, representing collateral reduction of approximately 1.3% since issuance as a result of scheduled loan amortization. The transaction benefits from a high concentration of loans secured by properties within urban and suburban markets, representing 39.6% and 44.4% of the pool, respectively. The pool is diverse based on loan size as the largest 15 loans only account for 42.2% of the current pool balance.

There are three loans in the top 15, representing 12.2% of the current pool, exhibiting NCF declines compared with the DBRS UW figures (based on the most recent NCF figure reported for each respective property by the servicer), with declines ranging from 0.7% to 8.4%. These three loans include Villages at Preserve Crossing (Prospectus ID#1, 6.1% of the pool), Hampton Point (Prospectus ID#4, 3.8% of the pool) and Winridge Apartments and Townhomes (Prospectus ID#9, 2.1% of the pool). According to the most recent financials received (either Q3 2015 or YE2015), these loans had a WA DSCR and WA Debt Yield of 1.18x and 7.3%, respectively, compared with the DBRS UW figures of 1.23x and 7.6%, respectively. DBRS has highlighted the Villages at Preserve Crossing loan below as it has recently experienced a decline in performance.

The Village at Preserve Crossing loan is secured by a 780-unit apartment complex located in Gahanna, Ohio, situated approximately 13.0 miles northeast of the Columbus CBD. The property was constructed in four phases between 2005 and 2013, and comprises a mix of townhomes and garden-style units with 178 one-bedroom units and 602 two-bedroom units. According to YE2015 financials, the loan had a DSCR of 1.15x, a decline in comparison with the DBRS UW figure of 1.25x. The decrease in performance was a result of (1) a decline in effective gross income (EGI) of 5.4% (caused by a decrease in rental revenue) and (2) an increase in operating expenses, which have risen by approximately 5.0% since issuance, primarily because of increases to repairs and maintenance (42.2%) and utilities (24.9%) expenses. According to the October 2015 rent roll, the property was 89.0% occupied with an average rental rate of $1,116 per unit compared with 92.3% occupied with an average rental rate of $1,082 per unit at issuance. As of YE2015, REIS reported that properties built between 2000 and 2009 in the Whitehall/Gahanna submarket reported an average rental rate of $1,052 per unit with a vacancy rate of 11.7% while one- and two-bedroom units achieved rental rates of $852 and $1,016 per unit, respectively. Although the property’s performance has marginally decreased since issuance, the subject has been able to achieve higher rental rates than competitive properties within its submarket, given the quality of its amenity package. Common-area amenities include two outdoor swimming pools, two sand-volleyball courts, a fitness center with classes regularly offered and a bar/restaurant operated by the sponsor. DBRS has modelled this loan based on the subject’s current financial performance.

As of the March 2016 remittance, there are no loans in special servicing and three loans on the servicer’s watchlist, representing 1.8% of the pool. According to 2015 reporting (both annualized partial-year 2015 and YE2015), these loans had a WA DSCR of 1.20x compared with the DBRS UW figure of 1.24x, reflective of a 2.4% WA NCF decline since issuance. The Woodbriar Apartments loan (Prospectus ID#31, 1.0% of the pool) was flagged as a result of deferred maintenance while the Washington Heights Apartments loan (Prospectus ID#48, 0.7% of the pool) was flagged because of an increase in expenses; however, these are expected to be non-reoccurring. The third loan, Timber Hollow Apartments loan (Prospectus ID#103, 0.2% of the pool), is highlighted below.

The Timber Hollow Apartments loan is secured by a 140-unit garden-style apartment complex, originally constructed in 1967 and located in Greensboro, North Carolina. The loan was added to the servicer’s watchlist in October 2015 because of a low Q3 2015 DSCR of 0.51x compared with the DBRS UW figure of 1.30x. The decrease in performance is reflective of a NCF decline of 61.1% compared with the DBRS UW figure and is a result of a decline in occupancy, which has caused the EGI to fall 32.5% since issuance. According to the November 2015 rent roll, the property was 60.0% occupied, down from 82.1% as of December 2014 and 90.0% as of December 2013. Historically, from 2010 to 2013, the subject maintained a physical occupancy above 93.0%; however, the borrower has reported that a number of unexpected events have recently occurred, depressing occupancy and rental rates. Firstly, as of November 2014, eight units sustained fire damage. According to the servicer, insurance proceeds are expected to cover all damages and business interruptions, and renovations are expected to be completed by the end of Q2 2016. To date, approximately $390,650 of insurance proceeds have been released to the borrower. Secondly, as of June 2015, the borrower hired a new property manager, who has implemented an aggressive marketing campaign focused on reducing tenant rollover and operating expenses. The property manager has also installed stricter leasing criteria, including criminal screening on all new tenants, as the borrower had to evict a number of tenants under past management. Lastly, as of October 2015, mold was found in 13 units, which needed remediation. To date, the borrower has completed renovation on ten of the 13 units. The borrower has also indicated that 14 additional units are currently under renovation. As of November 2015, the property was achieving an average rental rate of $519 per unit, down from $783 per unit as of December 2013. According to REIS, as of YE2015, properties built before 1970 in the Northeast Greensboro submarket reported an average rental rate of $606 per unit and a vacancy rate of 3.0%. The borrower has indicated that it does not currently have any perspective tenants for the units under repair, but it is focusing on an aggressive marketing campaign designed to increase traffic and leases to the other unoccupied units, including a preferred employer program to capture better -ualified residents. DBRS has modelled this loan with an elevated probability of default to capture the subject’s current financial performance.

At issuance, DBRS shadow-rated the Knickerbocker Plaza loan (Prospectus ID#2, 4.7% of the current pool balance) as investment grade. DBRS has today confirmed that the performance of this loan remains consistent with investment-grade loan characteristics.

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 (March 2016) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.

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