DBRS Confirms Ratings of FREMF 2012-K22 Mortgage Trust, Series 2012-K22

DBRS Limited (DBRS) has today confirmed the Multifamily Mortgage Pass-Through Certificates Series 2012-K22 issued by FREMF 2012-K22 Mortgage Trust, Series 2012-K22 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 AA (low) (sf)
-- Class C at A (sf)

All trends are Stable.

The rating confirmations reflect the strong overall performance of the transaction since issuance in December 2012. As of the August 2016 remittance, the pool has experienced a collateral reduction of 4.6%. Of the original 81 loans secured by 81 multifamily properties, 80 loans remain in the pool and report a weighted average (WA) debt service coverage ratio (DSCR) and debt yield of 1.70 times (x) and 10.3%, compared to DBRS underwritten (UW) WA DSCR and debt yield of 1.60x and 9.1%, respectively. Seven loans representing 3.45% of the pool have fully defeased. The top 15 loans represent 45.75% of the pool and have experienced a WA Net Cash Flow growth of +28.78% since DBRS UW and reported a WA DSCR of 1.78x at YE2015 compared to 1.70x at YE2014.

The pool benefits from properties located in urban and suburban markets representing 85.8% of the current pool balance, including 13 out of the top 15 loans. Two loans in the top 15 (Prospectus ID# 10 and #12), representing 3.9% of the pool, are secured by student housing properties located in rural and tertiary markets. However, both properties service large university campuses and report strong YE2015 DSCRs above 1.70x. As of the August 2016 remittance, there were four loans on the servicer’s watchlist, representing 3.7% of the pool balance. Two of these loans are monitored for non-performance related issues, while the remaining two loans are monitored for depressed DSCRs. One of the watchlisted loans are discussed in detail below.

The Grove at Columbia (Prospectus ID #15, 1.64% of the current pool balance) is secured by a student housing complex constructed in 2011 in Columbia, Missouri, primarily serving students of the University of Missouri (the University). The property is situated approximately 1.5 miles south of the campus, off of Nifong Boulevard, a primary artery servicing residential neighbourhoods and commercial developments alike. A shuttle service is provided for students to and from campus at the subject property. All leases are signed by the bed for a full 12-month term and applicants that do not meet the credit requirements must provide parental guarantees. This loan has been on the servicer’s watchlist for a low DSCR for several years, with the most recent year-end reporting showing a YE2015 DSCR of 0.97x because of low occupancy. In 2013, the property was cited for violating the University’s rules for off-campus housing (details of the violation have not been publicly disclosed) and an advertising ban was imposed through the spring 2014 leasing window. In addition, Columbia has seen significant on-campus and off-campus housing development in recent years, saturating the market with new supply. At issuance, the property was owned by Campus Crest Communities, Inc.; that company was acquired in March 2016 by Harrison Street Real Estate Capital, a real estate private equity firm based in Chicago, Illinois. An assumption of the subject loan was approved by the servicer and new management has been installed at the property in conjunction with the sale. The property is now known as The Arch Columbia.

Enrollment at the University had been negatively impacted by state budget cuts and recent well publicized controversies on campus, resulting in a 25.0% freshmen enrollment decline (7.0% overall) for fall 2016, when compared to last year. Incoming freshmen are required to live on campus and the enrollment drop resulted in the closure of four dormitories because of the lack of demand. Enrollment at the University had been trending up for several years, prompting the previously mentioned housing development boom in the community and on campus.

Despite the dampened enrollment and budget outlook for the University, occupancy levels at the subject property have improved, reaching 85.6% as of the August 2016 rent roll, from 82.6% in March 2016 and 70.3% at YE2014. However, that rent roll shows an average rental rate of $453.00 per bed, down from the YE2015 average of approximately $546.00 per bed caused by an increase in concessions and lower market rents at the property. As such, the cash flow improvements that led to an improvement in the DSCR to 1.10x for the Q1 2016 reporting period may not be sustained through the end of the year. DBRS has modeled this loan with an increased probability of default to capture the increased credit risk and will continue to monitor closely for developments.

The ratings assigned to Class B and Class C materially deviate from the higher ratings implied by the quantitative model. DBRS considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by the quantitative model that is a substantial component of a rating methodology; in this case, the assigned rating reflects the sustainability of loan performance trends not demonstrated.

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.

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.