DBRS Finalizes Provisional Ratings on FREMF 2017-K64 Mortgage Trust, Series 2017-K64

DBRS, Inc. (DBRS) has today finalized its ratings on the following classes of Multifamily Mortgage Pass-Through Certificates, Series 2017-K64 (the Certificates), issued by FREMF 2017-K64 Mortgage Trust, Series 2017-K64:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class X1 at AAA (sf)
-- Class X2-A at AAA (sf)
-- Class XAM at AA (high) (sf)
-- Class A-M at AA (sf)
-- Class B at A (low) (sf)
-- Class X2-B at BBB (high) (sf)
-- Class C at BBB (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-064 Trust.

The Class X2-A, X2-B, X-1 and X-AM balances are notional. DBRS ratings on interest-only (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.

The collateral consists of 71 fixed-rate loans secured by 71 multifamily properties, comprising a total transaction balance of $1,549,999,018. 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 default (POD) within the term as well as its liquidity at maturity. When the cut-off loan balances were measured against the DBRS Stabilized Net Cash Flow (NCF) and their respective actual constants, DBRS identified two loans, representing 3.0% of the total pool, with a term debt service coverage ratio (DSCR) at or below 1.15 times (x) based on the whole-loan amount, which is indicative of a higher likelihood of term default. In addition, given the current low interest rate environment, DBRS also applied its refinance constants to the balloon amounts, resulting in 91.2% of the pool having refinance DSCRs below 1.00x based on the whole loan.

The 71 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 0.03% as of December 31, 2016. This compares favorably with the delinquency rate for CMBS multifamily loans of approximately 0.61% as of the same time. As of December 31, 2016, Freddie Mac has securitized 9,643 loans totaling approximately $151.4 billion in guaranteed issuance balance with an approximate underlying certificate balance of $175.7 billion. To date, Freddie Mac has not realized any credit losses on its guaranteed issuances, though a combined $11.9 million in total losses has been realized by B-Piece Investors, representing less than one basis point of total issuance. The loans in the transaction generally benefit from experienced and financially strong borrowers compared with typical CMBS multifamily loans. Many of the borrowers are repeat clients of Freddie Mac. Additionally, cash flow analysis is prudent as evidenced by an average DBRS NCF variance of -4.4% on the sampled loans. In general, revenue has been set to levels similar to the recent trailing 12-month 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 29 sampled loans indicates that most markets are displaying strong vacancy and rent growth figures with positive year-over-year trends 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 as 44 loans, representing 71.8% of the pool, have an IO period between two years and seven years before amortization commences. An additional nine loans, two of which are in the top 15, representing 11.2% of the pool, are IO for the entire ten-year loan term.

The DBRS sample included 29 of the 71 loans in the pool. Site inspections were performed on 29 of the 71 properties in the pool (69.1% of the pool by allocated loan balance). DBRS conducted meetings with the on-site property manager, leasing agent or a representative of the borrowing entity for 55.6% of the pool. The DBRS sample had an average NCF variance of -4.4%, ranging from -10.4% to -0.7%.

For more information on this transaction and supporting data, please log into www.ireports.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS CMBS IReports platform.

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

The principal methodologies are North American CMBS Multi-borrower Rating Methodology, Rating North American CMBS Interest-Only Certificates and DBRS Commercial Real Estate Property Analysis Criteria, which can be found on dbrs.com under Methodologies.

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

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.

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