DBRS Confirms Ratings of Impact Funding Affordable Multifamily Housing Mortgage Loan Trust 2014-1

DBRS Limited (DBRS) confirmed the ratings of the following classes of Affordable Multifamily Mortgage Loan Pass-Through Certificates, Series 2014-1 (the Certificates) issued by Impact Funding Affordable Multifamily Housing Mortgage Loan Trust 2014-1 (the Trust):

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-FX1 at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (sf)
-- Class X-B at B (high) (sf)
-- Class X-FX2 at B (high) (sf)
-- Class F at B (sf)

All trends are Stable.

Classes A-1, A-2, A-3, X-A and X-FX1 represent the Certificates that were purchased and guaranteed by Freddie Mac and deposited into the SPC Trust to back the offered SPCs. Classes B, C, D, E, F, X-B and X-FX2 represent the non-guaranteed offered certificates.

The rating confirmations reflect the overall stable performance of the transaction, which closed in November 2014 with 124 fixed-rate loans secured by 118 multifamily properties. As of the October 2017 remittance report, there has been a collateral reduction of 4.0% since issuance, with all original loans remaining in the pool. The collateral properties are Low Income Housing Tax Credit (LIHTC) developments with generally low leverage metrics as reflected in the weighted-average (WA) current debt yield and loan-to-value of 15.5% and 41.1%, respectively. Based on the YE2016 reporting, the WA debt-service coverage ratio (DSCR) for the pool was 1.81 times (x), up from the WA DBRS Term DSCR figure of 1.41x at issuance and the Issuer’s figure of 1.50x. The top 15 loans, which represent 30.9% of the current pool, reported a WA YE2016 DSCR of 1.53x and a healthy WA net cash flow growth of 23.1% over the DBRS issuance figures.

There are 13 loans (11 properties) on the servicer’s watchlist, representing 6.3% of the transaction balance. All of these loans are being monitored for cash flow declines since issuance, with coverage ratios ranging between 0.04x and 1.06x for the Q2 2017 reporting period. Some of the collateral properties on the watchlist have shown occupancy declines since issuance while others have shown stable revenues with sharp increases in operating expenses. Although these cash flow declines present additional risk for the respective loans within the transaction, there are mitigants in the value of the tax credits sold as part of the LIHTC program, which provide significant incentive for the tax credit investors to fund any cash flow shortfalls (as necessary) at the collateral properties to avoid a credit recapture in the event the borrower defaults on the loan. The two largest loans on the watchlist are detailed below.

The Brookland ArtSpace Lofts loan (Prospectus ID #29, 1.1% of the pool) is secured by a 41-unit loft-style apartment property in Washington, D.C, which is approximately four miles northeast of the White House. The property was constructed in 2011 and caters to low income artists and performers. The loan is currently on the watchlist because of performance issues as occupancy rates at the property have remained below issuance levels for the past few years, with levels hovering around 85%. The servicer reports that the cash flow decline for Q1 2017 is a combination of vacancy losses, concessions and unit turnover of 22%. Occupancy recently rebounded to issuance levels at 95.1%, with an average rental rate of $1,053 per unit, according to the April 2017 rent roll. According to the borrower, occupancy is up because of staff additions and an increase in advertising and marketing spending. The servicer’s June 2017 site inspection cited a further improvement in occupancy to 97.4% and found the property in good condition overall, with no deferred maintenance items observed. According to REIS, the subject’s Brookland submarket is reporting an average rental rate of $1,315 per unit and a vacancy of 5.5%, with properties of similar vintage reporting an average rental rate of $2,393 per unit and a vacancy rate of 9.0%, as of September 2017. As cash flows have been sustained at significantly lower levels since issuance, with a Q1 2017 DSCR of 0.69x compared with the DBRS Term DSCR of 1.27x, DBRS analyzed this loan with a stressed scenario. However, given the recent stabilization of occupancy levels at the property, DBRS expects cash flows to continue to improve through the remainder of 2017.

The Noland Green Apartments loan (Prospectus ID #47, 0.9% of the pool) is secured by a 60-unit low-rise apartment complex located in Newport News, Virginia. The property was constructed in 1929 and reported historically stable occupancy rates that hovered around 98.0% since issuance. However, the loan was added to the watchlist as the Q2 2017 DSCR declined to 0.79x, compared with the YE2016 DSCR of 1.28x as a result of the occupancy dipping to 83.0%. The servicer noted that the decline was primarily due to high vacancy losses and increased unit turnover costs through 2017. In addition, the servicer noted that a new management team is in place to pursue qualifying tenants through their newly launched website. According to REIS, the subject’s Newport News submarket is reporting an average rental rate of $904 per unit and a vacancy of 5.5%, with properties of similar vintage reporting an average rental rate of $773 per unit and a vacancy rate of 7.8%, as of September 2017. In addition, REIS reports that the Newport News submarket is heavily weighted on older multifamily stock as 81.0% of the existing inventory was built prior to 1990, with inventory growth rates within the next five years forecasted at 0.3% for the Newport News submarket. Given the decline in cash flow compared with the DBRS Term DSCR of 1.16x, DBRS applied a stressed cash flow in its analysis to capture the risk associated with the increased vacancy at the subject.

Classes X-A, X-FX1, X-B and X-FX2 are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated reference tranche adjusted upward by one notch if senior in the waterfall.

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

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 principal methodology is CMBS North American Surveillance, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. Please note that not every related methodology listed under a principal Structured Finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

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

The rated entity or its related entities did participate initially, 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.