DBRS Finalizes Provisional Ratings of FREMF 2018-K79 Mortgage Trust, Series 2018-K79

DBRS, Inc. (DBRS) finalized its provisional ratings of the following classes of Multifamily Mortgage Pass-Through Certificates, Series 2018-K79 to be issued by FREMF 2018-K79 Mortgage Trust:

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

All trends are Stable.

The Class X1 and XAM balances are notional.

The collateral consists of 60 fixed-rate loans secured by 60 commercial and multifamily properties. All the loans within the transaction are structured with ten-year loan terms. The transaction is a sequential-pay pass-through structure. The conduit pool was analyzed to determine the ratings, reflecting the long-term probability of loan default within the term and 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, five loans, representing 8.8% of the aggregate pool balance, had a DBRS Term debt service coverage ratio (DSCR) below 1.15 times (x), a threshold indicative of a higher likelihood of mid-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 48 loans, representing 87.4% of the pool, having refinance DSCRs below 1.00x, and 30 loans, representing 61.3% of the pool, with refinance DSCRs below 0.90x.

The pool has 21 loans, representing 43.1% of the pool, that are acquisition financings. The acquisition financings within this securitization generally required the respective sponsor(s) to contribute material cash equity as a source of funding in conjunction with the mortgage loan, resulting in a higher sponsor cost basis in the underlying collateral. The acquisition financing concentration in this pool is well above the 23.0% and 24.1% in the FREMF 2018-K75 and FREMF 2018-K77 transactions, respectively, which were rated by DBRS.

There are 19 loans, representing 28.0% of the pool, that are secured by properties located in rural or tertiary markets, including two of the top ten loans (Bella Apartment Homes and La Vista Apartments). Properties located in tertiary and rural markets were analyzed with significantly higher loss severities than those located in urban and suburban markets. The two largest loans secured by properties in tertiary and rural markets are Bella Apartment Homes and La Vista Apartments. Both properties perform well compared with their respective appraiser competitive set in terms of in-place occupancy and rental rates and are well-located within their respective markets near major thoroughfares and local economic drivers. The weighted-average (WA) DBRS Exit Debt Yield (DY) of 8.7% for loans secured by properties located in rural and tertiary markets is higher than the WA DBRS Exit DY of 8.4% for loans secured by properties in suburban, urban and super dense urban markets.

Six loans, comprising 28.7% of the DBRS sample (20.6% of the pool), were considered to be of Above Average or Average (+) property quality based on physical attributes and/or a desirable location within their respective markets. Four of these loans are within the top ten (Stonegate Apartment Homes, Ascent Four Thirty, The Lexington Apartments and Brightview On New Canaan). Properties of higher quality are more likely to retain existing residents and more easily attract new tenants, resulting in more stable performance.

Twelve loans, representing 23.9% of the pool, including seven of the largest ten loans, are structured with full-term IO payments. An additional 40 loans, comprising 67.7% of the pool, have partial IO periods. The full-term IO loans have a WA DBRS Exit DY of 9.1%, which is higher than the overall deal average of 8.5%. Seven of the properties, representing 66.0% of the full-term IO concentration, are well-located in urban or established suburban locations. Furthermore, the full-term IO loans have a WA appraised loan-to-value (LTV) at maturity of 54.5%, compared with the deal WA appraised LTV at maturity ratio of 60.6%. DBRS expects amortization by maturity to be at 8.4%.

The transaction has a notable affiliated sponsorship concentration risk that, when combined, totals 18 loans and represents 33.3% of the pool. A loan group increases the aggregate risk of consolidation, since it involves the same sponsor. The largest concentration (Group 1) consists of six loans representing 16.6% of the pool. Freddie Mac generally requires non-consolidation opinions for loans with an original principal balance of $25.0 million or more. 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. Only one loan, representing 1.9% of the pool, was analyzed without strong sponsorship quality and is not one of the loans included in the affiliated sponsorship concentration.

The 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 0.02% as of March 2018. This compares favorably with the delinquency rate for CMBS multifamily loans of approximately 0.38% as of July 2018. Underwriting is prudent, as evidenced by an average DBRS NCF variance of -5.7% on the sampled loans. This variance is in line with the DBRS NCF variance of -5.8% for the FREMF 2018-K77 transaction, but below the -7.0% for the FREMF 2018-K75 transaction.

Classes X1 and XAM are 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.

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

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

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), 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 require due diligence services outlined in Form-15E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

The principal methodology is the North American CMBS Multi-borrower Rating Methodology, 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.

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

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

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