DBRS Assigns Provisional Ratings to FREMF 2018-K82 Mortgage Trust, Series 2018-K82

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Multifamily Mortgage Pass-Through Certificates, Series 2018-K82 to be issued by FREMF 2018-K82 Mortgage Trust:

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

All trends are Stable.

The collateral consists of 62 fixed-rate loans secured by 62 commercial properties. All the loans within the transaction are structured with ten-year loan terms with the exception of Vistara at San Tan Village, which is structured as an 11-year loan term. The transaction is 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 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, two loans, representing 4.3% 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 52 loans, representing 97.9% of the pool, having refinance DSCRs below 1.00x, and 41 loans, representing 89.5% of the pool, with refinance DSCRs below 0.90x.

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 0.01% as of June 2018. This compares favorably with the delinquency rate for commercial mortgage-backed securities (CMBS) multifamily loans of approximately 3.52% over the same period. As of August 31, 2018, Freddie Mac has securitized 13,856 loans totaling approximately $265.4 billion in guaranteed issuance balance. 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 benefit from experienced and financially strong borrowers compared with typical CMBS multifamily loans. Many of the borrowers are repeat clients of Freddie Mac. Underlying collateral analysis is prudent, as evidenced by an average DBRS NCF variance of -5.9% on the sampled loans. In general, revenue has been set to levels similar to the recent trailing 12 months amount and lower than a recent annualized rent roll. The pool benefits from a low concentration of properties located in tertiary markets, with only 3 loans, totaling 1.4% of the transaction balance, located in such markets. Fifty-four loans, representing 98.6% of the pool, are located in suburban markets and none of the collateral properties in this transaction are located in urban or rural markets.

The transaction has a high concentration of loans suffering from elevated refinance risk. Fifty-two loans, representing 97.9% of the pool, have DBRS Refi DSCRs less than 1.00x. Forty-one of these loans, representing 89.5% of the pool, have DBRS Refi DSCRs less than 0.90x. The DBRS Refi DSCRs for these loans are based on a weighted-average (WA) stressed refinance constant of 9.3%, which implies an interest rate of 8.6%, amortizing on a 30-year schedule. This represents a significant stress of 4.2% over the WA contractual interest rate of the loans in the pool. Fifteen loans, representing 26% of the pool, including four of the top fourteen loans in the pool, are structured with full-term interest-only (IO) payments. An additional 44 loans, comprising 72.4% of the pool, have remaining partial IO periods ranging from 24 to 84 months. The DBRS Term DSCR is calculated by utilizing the amortizing debt service obligation, and the DBRS Refi DSCR is calculated considering the balloon balance and lack of amortization when determining refinance risk. DBRS determines probability of default (POD) based on the lower of term or refinance DSCR so loans that lack amortization are treated more punitively. The pool is concentrated by property type, as multifamily properties represent 100.0% of the collateral. Six loans (8.4% of the pool) are secured by non-traditional property types (i.e., manufactured housing communities, student housing, cooperatives, age-restricted housing and assisted living). 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 30 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.

The DBRS sample included 30 of the 62 loans in the pool. Site inspections were performed on 30 of the 62 properties in the portfolio (70.1% 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 70.1% of the pool. A cash flow review and a cash flow stability and structural review were completed on 30 of the 62 loans, representing 70.1 % of the pool, by loan balance. The DBRS sample had an average NCF variance of -5.9% and ranged from -1.4% (Vistara at San Tan Village) to +12.6% (Vista at Grand Crossing).

The Class X1, XAM, X2-A and X2-B balances are notional.

Classes X1, XAM, X2-A and X2-B are IO certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation 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.

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

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 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.