DBRS Confirms Ratings of FREMF 2013-K29 Mortgage Trust, Series 2013-K29, Stable Trends

DBRS Limited (DBRS) has today confirmed ratings on the following classes of Multifamily Mortgage Pass-Through Certificates, Series 2013-K29 (the Certificates) issued by FREMF 2013-K29 Mortgage Trust, Series 2013-K29 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 (high) (sf)
-- Class C at BBB (high) (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 87 fixed-rate loans secured by 87 multifamily properties. At issuance, the transaction had a DBRS weighted-average (WA) debt service coverage ratio (DSCR) and a DBRS WA debt yield of 1.50 times (x) and 8.1%, respectively. As of the April 2016 remittance, 28 loans (27.0% of the pool) reported partial-year 2015 cash flows (most being Q3 2015), while 55 loans (70.0% of the pool) reported year-end 2015 cash flows. The remainder of the loans (3.0% of the pool) reported year-end 2014 cash flows. Based on the 2015 cash flows (both annualized and year-end 2015 cash flows) for the Top 15 loans, the WA amortizing DSCR was 1.56x, with WA net cash flow (NCF) growth over the respective DBRS UW figures of approximately 12.2%.

As of the April 2016 remittance reports, all 87 loans remain in the pool, with an aggregate balance of $1.6 billion, representing collateral reduction of approximately 2.1% since issuance as a result of scheduled loan amortization. Three loans, representing 2.4% of the pool, are secured by defeased collateral.

There are three loans in the Top 15, representing 18.8% of the pool, exhibiting NCF declines compared with the DBRS UW figures (based on annualized and year-end 2015 cash flows), with declines ranging from -1.9% to -9.5%. These three loans include Crystal Towers (Prospectus ID#1, 15.0% of the pool), University House at The Retreat (Prospectus ID#8, 2.0% of the pool) and Grand Oaks at Ogeechee River (Prospectus ID#12, 1.8% of the pool). Based on the 2015 cash flows for these loans, the WA amortizing DSCR was 1.21x, compared to the DBRS UW figure of 1.33x, reflective of a WA NCF decline of -5.7% compared to DBRS UW figures. DBRS has highlighted the both the Crystal Towers and the University House at The Retreat loans below.

The largest loan in the pool, Crystal Towers, is secured by a 912-unit, high-rise apartment complex located outside of Arlington, Virginia, within three miles of the Washington, D.C., central business district. The two 12-story buildings were originally constructed in 1967, and consist of a diverse unit mix, featuring 122 studious units, 412 one-bedroom units, 305 two-bedroom units and 73 three-bedroom units. Between 2008 and 2012, the previous owner funded a $9.8 million ($10,697 per unit) renovation, which included the refurbishments/replacement of all windows, siding, balconies and exteriors, as well as an overhaul of the rooftop fitness center. The subject loan financed the sponsor’s acquisition of the collateral for $325 million, with approximately $84.5 million in equity contributed to close.

According to YE2015 financials, the loan had a DSCR of 1.17x, a decline in comparison with the DBRS UW figure of 1.24x, reflecting a negative NCF growth over the DBRS UW figure of -5.7%. The decrease in performance was a result of both a decline in effective gross income (EGI) by 0.5% (caused by a decrease in rental revenue) and an increase in operating expenses, which have risen by approximately 12.5% since issuance, primarily because of increases in utilities (17.3%), real estate taxes (15.8%) and payroll (11.1%) expenses. Although performance has declined since issuance, the NCF displayed a 4.9% growth from YE2014 to YE2015 as the result of a rebound in the occupancy rate. According to the December 2015 rent roll, the property was 96.3% occupied with an average rental rate of $2,135 per unit, compared to 92.8% occupied with an average rental rate of $2,132 per unit as of December 2014. As of YE2015, REIS reported that properties built prior to 1970 in the Pentagon City submarket reported an average rental rate of $2,111 per unit with a vacancy rate of 2.5%. Although the property’s cash flows have declined marginally since issuance, the subject has been able to achieve rental rate growth and higher rental rates than competitive properties within its submarket, given that the unit layouts are extremely large. DBRS expects the property’s cash flows will return to underwritten levels in the near term as occupancy gains and rental rate growth achieved in the past year are sustained in 2016.

The University House at The Retreat is secured by a recently developed student-housing complex located in Tallahassee, Florida, approximately three miles northwest of the Florida State University (FSU). The properties development was completed prior to the fall 2012 school year, and features 710 beds throughout the 178 units. The units are arranged in a cottage-style layout, with a unit mix consisting of eight two-bedroom units, 28 three-bedroom units, 100 four-bedroom and 42 five bedroom-units, with an average bedroom size of 479 sf. Leases are strictly written to 12-month terms and all require parental guarantees. Amenities at the subject include a business center, a virtual driving range, a resort-style swimming pool, volleyball courts and basketball courts. Additionally, all bedrooms feature private bathrooms and walk-in closets. The subject loan financed the sponsor’s acquisition of the asset for $54.0 million, with approximately $21.8 million of equity contributed to close the loan.

As of Q3 2015, the loan had an annualized DSCR of 1.89x, up from the YE2014 figure of 1.88x, but down from the DBRS UW figure of 2.07x, reflecting a negative NCF growth over the DBRS UW figure of -5.7%. The decrease in performance since issuance was primarily a result of an 8.4% decline in the EGI (caused by a decrease in rental revenue); however, the EGI has grown by 8.9% from YE2014 to YE2015, due to an increase in occupancy; total operating expenses remain below DBRS UW projections. According to the January 2016 rent roll, the property was 97.7% occupied with an average rental rate of $627 per bed, compared to 81.0% occupied with an average rental rate of $600 per bed as of September 2014, and 98.2% occupied with an average rental rate of $627 per bed as of March 2013, respectively. According to the servicer, the borrower attributes the decrease in both rental rates and occupancy during the 2014–2015 academic year to inventory growth within the market. The Tallahassee market has seen approximately 7,000 beds delivered since 2012, including GrandMarc at Tallahassee (400 beds) and Onyx Apartments, which have recently entered the market. As of the 2015–2016 academic year, FSU reported a total student body of 41,473, down 0.7% from the 2014–2015 school year, and 0.6% from the 2011–2012 school year. Although enrollment rates have declined in recent years, the borrower has confirmed that pre-leasing is underway and to date, the complex was 93.0% pre-leased for the upcoming 2015–2016 school year.

As of the April 2016 remittance report, there are no loans in special servicing and three loans on the servicer’s watchlist, representing 1.4% of the pool. According to the most recent financial reporting available for each respective loan, including the Kenilworth loan (Prospectus ID#72, 0.4% of the pool), which has been placed on the servicer’s watchlist for the lack of updated financials, these three loans had a WA DSCR of 1.03x, compared to the DBRS UW figure of 3.02x, reflective of a WA NCF decline of -20.6% compared to DBRS UW figures.

The 1111 on High loan (Prospectus ID#66, 0.5% of the pool) is the second-largest loan on the watchlist and is secured by a 344-bed student housing property located in Tallahassee, Florida. The subject was constructed in 1989 and is located within three miles of the University House at The Retreat, dealing with the previously discussed issues of a saturated Tallahassee student housing market; however, the property is of an older vintage and offers a less-attractive amenity package. As of YE2015, the property was 80.0% occupied with an average rental rate of $450 per bed, operating at a DSCR of 1.01x. According to the servicer, the borrower has indicated that expenses have increased due to efforts to improve occupancy for the upcoming 2016–2017 school season. To date, no information has been received with regard to pre-leasing statistics for the upcoming school year. 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 (March 2016) and CMBS North American Surveillance Methodology (December 2015), which can be found on our website under Methodologies.

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