DBRS Upgrades One Class of FREMF 2010-K8 Mortgage Trust

DBRS Inc. (DBRS) has today upgraded the rating on Multifamily Mortgage Pass-Through Certificates Series 2010- K8, Class B issued by FREMF 2010-K8 Mortgage Trust, Series 2010-K8 (the Trust) to AA (low) (sf) from A (high) (sf). DBRS has also confirmed the rating on Class X-2 at AAA (sf).

All trends are Stable. DBRS does not rate the first loss bond, Class C. Classes A-1, A-2 and X-1 were finalized as of, and only as of, the date of issuance and are not subject to monitoring, upgrades or downgrades or any further assessment by DBRS.

The rating upgrade reflects the continued strong performance of the transaction since issuance. The collateral currently consists of 70 fixed-rate loans secured by 70 multifamily properties. As of the July 2016 remittance report, there has been collateral reduction of approximately 9.49% since issuance as a result of scheduled amortization and the prepayment of two loans. According to YE2015 reporting, the pool had a weighted-average (WA) debt service coverage ratio (DSCR) of 1.74 times (x) and a WA debt yield of 12.9%. The transaction also benefits from defeasance collateral as 14 loans, representing 14.5% of the current pool balance, are fully defeased.

The top 15 loans, which total 54.1% of the current pool balance have overall strong credit metrics with a WA DSCR of 1.76x, a debt yield of 13.0% and an average occupancy rate of 96.9%, according to YE2015 reporting (excluding the defeased loan, Prospectus ID#15, the Overlook). Overall, the WA net cash flow (NCF) growth for the top 15 loans is 7.2% higher than YE2014 NCF reporting and 42.8% higher than the DBRS underwritten figures.

There are nine loans on the servicer’s watchlist, representing 5.8% of the current pool balance, with no delinquent or specially serviced loans. Two of the watchlisted loans are being monitored for expired insurance policies while two more loans are being monitored because of damages caused by casualty events. Five of the loans on the servicer’s watchlist are being monitored for a low DSCR with a WA DSCR for the nine watchlisted loans of approximately 1.17x at YE2015. Three of the watchlisted loans are cross collateralized and cross defaulted: Village Park at Rockborough (Rockborough; Prospectus ID#18, 0.79% of the current pool), Village Park at Cedarbrooke (Cedarbrooke; Prospectus ID#19, 0.50% of the current pool) and Village Park at Kingsborough (Kinsborough; Prospectus ID#20, 0.37% of the current pool). The loans are highlighted below.

The loans in the Village Park portfolio are secured by three individual properties located in three separate submarkets of Wichita, Kansas. All three loans are on the watchlist because of declining DSCR trends with YE2015 coverages of 1.01x, 1.03x and 0.90x, respectively. The portfolio has historically struggled with declining rental and occupancy rates since 2014 as a result of property condition issues, rental concessions and non-paying or late-paying tenants. These issues were largely a product of the previous ownership’s mismanagement of the properties.

All three properties were sold and the loans were assumed in September 2014. The new ownership instituted is Eucalyptus Property Management (Eucalyptus), which began repairs and renovations shortly after closing, contributing to some occupancy fluctuations as work was completed. Through Q1 2016, approximately $730,000 was spent across all three properties to bring down units back online and to fix deferred maintenance items such as foundation and wood-rot repairs, asphalt resealing, exterior and interior painting as well as upgrades to leasing centers and clubhouses. According to the servicer, repairs are expected to continue through YE2016. Eucalyptus has also eliminated concessions, instituted strict tenant-qualification standards and enforced collections as outlined in the terms of the respective leases. As of March 2016, Rockborough, Cedarbrooke and Kingsborough were reporting occupancy rates of 88.3%, 87.7% and 77.5%, respectively. Occupancy rates and rental rates are also trending upward as the Q1 2016 DSCRs increased at Rockborough and Cedarbrooke to 1.10x and 1.23x, respectively. The Q1 2016 DSCR at Kingsborough declined to 0.69x; however, the average rental rate had increased by $60.00 per unit to $488.00 per unit. As future repairs and maintenance projects are completed, DBRS expects that occupancy rates and rental rates will continue to stabilize and that portfolio performance will improve further.

At issuance, DBRS shadow-rated Prospectus ID#40, Rocky Creek Apartments, as investment grade. With this review, DBRS has confirmed that credit metrics of the loan are consistent with investment-grade loan characteristics.

For the purposes of this review, DBRS reviewed the performance metrics for the entire pool, focusing on the largest 15 loans, the shadow-rated loan and the loans on the servicer’s watchlist which, together, comprise approximately 60.8% of the current pool balance.

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

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.

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

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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