DBRS Finalizes Provisional Ratings of FREMF 2019-K88 Mortgage Trust, Series 2019-K88

DBRS, Inc. (DBRS) finalized its provisional ratings on the following classes of Multifamily Mortgage Pass-Through Certificates, Series 2019-K88 issued by FREMF 2019-K88 Mortgage Trust, Series 2019-K88:

-- 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 (sf)
-- Class A-M at AA (low) (sf)
-- Class B at A (low) (sf)
-- Class X2-B at BBB (high) (sf)
-- Class C at BBB (sf)

All trends are Stable.

The Class X1 and XAM balances are notional.

The collateral consists of 64 fixed-rate loans secured by 70 commercial and multifamily properties. Two loans are cross-collateralized and cross-defaulted into the Quail Park Portfolio loan, which represents 2.7% of the pool. The DBRS analysis of this transaction incorporates these loans as a single portfolio, resulting in a modified loan count of 63 and the loan number references within this report reflect this total. All the loans within the transaction are structured with ten-year loan terms, with the exception of Hawthorne at Crenshaw Apartments and Gemstone Apartments, both of which were structured with 11-year terms and have since seasoned 11 months and eight months, respectively. 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, seven loans, representing 17.0% 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 59 loans, representing 98.2% of the pool, having refinance DSCRs below 1.00x and 40 loans, representing 79.6% of the pool, with refinance DSCRs below 0.90x.

Ten loans, comprising 38.8% of the DBRS sample (28.7% 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. Three of these loans are within the top ten (Toscana at Crescent Village, Parkview Terrace and Uno Apartments). Properties of higher quality are more likely to retain existing residents and more easily attract new tenants, resulting in more stable performance. Underlying collateral analysis is prudent, as evidenced by an average DBRS NCF variance of -7.6% 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.

DBRS considered sponsorship to be weak for two loans: Uno Apartments and Sunrise Mobile Estates, representing 3.1%
of the pool, were modeled with Weak sponsorship as both respective sponsors were subject to ongoing lawsuits. DBRS increased probability of default (PD) significantly for loans with identified sponsorship concerns.

The pool is concentrated by property type, as multifamily properties represent 100.0% of the collateral. Three loans
(Calverton Meadows, High Rock Mobile Park and Sunrise Mobile Estates, representing 2.7% of the pool) are secured by
a non-traditional property type (i.e., manufactured housing community, 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 31 sampled loans indicates that most markets are displaying strong vacancy and rent growth figures, with positive year-over-year trends being established. Many of the non-traditional multifamily uses have been modeled with an increase to the loan’s PD.

A large percentage (98.2%) of the pool has a DBRS Refi DSCR below 1.00x and 93.5% of the pool has a DBRS Exit Debt Yield of less than 9.0%. These loans have elevated refinance risk and may be dependent upon cash flow growth in order to refinance in a higher interest rate environment. The weighted-average (WA) DBRS Refi DSCR is based on a WA refinance constant of 9.34%, which implies an interest rate of 8.63%, amortizing on a 30-year schedule. This represents a significant stress of 4.0% over the WA contractual interest rate of the loans in the pool. Loan-level PD is based on the lower of the DBRS Term DSCR and DBRS Refi DSCR and is calculated at each rating category.

Fifty-one loans, representing 75.5% of the pool, have an interest-only (IO) period between two and seven years before amortization commences. Furthermore, an additional nine loans, four of which are in the top 15, representing 22.2% of the pool, are IO for the entire ten-year loan term. The full-term IO loans have a WA DBRS Exit Debt Yield of 8.5%, which is slightly higher than the overall deal averages. Ten of the properties, representing 89.7% of the full-term IO concentration, are well located in established suburban locations with only one property located in a tertiary market. Furthermore, all of the full-term IO loans have appraised loan-to-value (LTV) ratios at or below 68.0%, compared with the deal WA LTV ratio of 67.1%. In aggregate, the pool is scheduled to realize 7.8% amortization by maturity.

Seventeen loans, representing 22.3% of the pool, are secured by properties located in tertiary markets, including three of
the top ten loans (Erie Portfolio, Hibiscus Springs and Quail Park Portfolio). Properties located in tertiary and rural markets were analyzed with significantly higher loss severities than those located in urban and suburban markets. Furthermore, the WA DBRS Exit Debt Yield of 8.4% for loans secured by properties located in rural and tertiary markets is above the WA DBRS Exit Debt Yield of 7.9% for loans secured by properties in suburban, urban and super-dense urban markets.

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

For supporting data and more information on this transaction, please log into www.viewpoint.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 a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS’s methodology, DBRS used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is North American CMBS Multi-borrower Rating Methodology, which can be found on dbrs.com under Methodologies & Criteria. 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, which can be found on www.dbrs.com in the Commentary tab under Regulatory Affairs. 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 entitiesdid 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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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

DBRS, Inc.
333 West Wacker Drive, Suite 1800
Chicago, IL 60606 USA