DBRS Finalizes Provisional Ratings on FREMF 2017-K61 Mortgage Trust

DBRS, Inc. (DBRS) has today finalized its provisional ratings on the following classes of Multifamily Mortgage Pass-Through Certificates, Series 2017-K61 (the Certificates), issued by FREMF 2017-K61 Mortgage Trust, Series 2017-K61. The trends are Stable.

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-M at A (high) (sf)
-- Class X1 at AAA (sf)
-- Class XAM at AAA (sf)
-- Class X2-A at AAA (sf)
-- Class X2-B at AAA (sf)
-- Class B at BBB (high) (sf)
-- Class C at BBB (low) (sf)

All trends are stable.

Classes X2-A, X2-B, B and C have been privately placed.

Classes A-1, A-2, A-M, X1 and XAM are being conveyed by Freddie Mac into the Freddie Mac Structured Pass-Through Certificates, Series K-061.

The X-1, X-AM, X2-A and X2-B balances are notional. DBRS ratings on IO certificates address the likelihood of receiving interest based on the notional amount outstanding. DBRS considers the IO certificate’s position within the transaction payment waterfall when determining the appropriate rating.

On January 17, 2017, DBRS released a Request for Comment on its proposed methodology “Rating North American CMBS Interest-Only Certificates.” If this methodology is adopted without changes, DBRS indicates that potential rating actions could be either downgrades or confirmations to IO certificates. Please refer to the January 17, 2017, <a href="http://dbrs.com/research/304672/dbrs-requests-comment-on-proposed-rating-north-american-cmbs-interest-only-certificates-methodology.html" target="_blank">DBRS press release</a> for further details on the proposed methodology.

The collateral consists of 69 fixed-rate loans secured by 69 multifamily properties, comprising a total transaction balance of $1,261,089,402. The transaction has a sequential-pay pass-through structure. The conduit pool was analyzed to determine the provisional ratings, reflecting the long-term probability of loan default within the term, as well as liquidity at maturity. When the cut-off loan balances were measured against the DBRS Stabilized NCF and their respective actual constants, six loans, representing 10.9% of the total pool, had a DBRS Term DSCR at or below 1.15x, a threshold indicative of a higher likelihood of term default. Additionally, to assess refinance risk given the current low interest rate environment, DBRS applied its refinance constants to the balloon amounts. This resulted in 57 loans, representing 93.5% of the pool, having refinance DSCRs below 1.00x, based on the whole loan.

The 69 loans benefit from strong origination practices. Loans on Freddie Mac’s balance sheet, which are originated according to the same policies as those for securitization, have an extremely low delinquency rate of 0.01%, as of September 30, 2016. This compares favorably with the delinquency rate for CMBS multifamily loans of approximately 0.58% at that same time. As of September 30, 2016, Freddie Mac has securitized 8,853 loans, with an approximate guaranteed issuance balance of $140.5 billion and an approximate underlying certificate balance of $163.3 billion. To date, Freddie Mac has not realized any credit losses on their guaranteed issuances, with a combined $12.4 million in total losses realized by B-Piece Investors. Additionally, cash flow underwriting is prudent, as evidenced by an average DBRS net cash flow (NCF) variance of -6.5% on the sampled loans. In general, revenue has been underwritten to levels similar to the recent trailing 12 months amount and lower than a recent annualized rent roll.

The pool is concentrated by property type, with multifamily properties representing 100.0% of the collateral; however, multifamily properties benefit from staggered lease rollover and generally low expense ratios compared with other property types. While revenue is quick to decline in a downturn because of the short-term nature of the leases, it is also quick to respond when the market improves. Analysis performed on the 33 sampled loans indicates that most markets are displaying strong vacancy and rent growth figures, with positive year-over-year trends being established. Excluding cooperatives, many of the non-traditional multifamily uses have been modeled with an increase to the loan’s POD, as have loans with significant concentrations of non-traditional residents. Furthermore, refinance risk is elevated due to forty-seven loans, representing 74.5% of the pool, having an IO period between one and six years before amortization commences. Additionally, seven loans, two of which are in the top ten, representing 12.1% of the pool, are IO for the entire ten-year loan term.

The DBRS sample included 33 of the 69 loans in the pool. Site inspections were performed on 28 of the 69 properties in the portfolio (69.9% of the pool by allocated loan balance). DBRS conducted meetings with on-site property manager, leasing agent or a representative of the borrowing entity for 57.7% of the pool. The DBRS sample had an average NCF variance of -6.5%, ranging from -18.2% to 4.3%.

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 methodology is North American CMBS Rating Methodology, which can be found on our website under Methodologies.

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form 15-E) which contains the description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not rely on the due diligence services outlined in Form 15-E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.