DBRS Assigns Provisional Ratings to FREMF 2019-K735 Mortgage Trust, Series 2019-K735

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Multifamily Mortgage Pass-Through Certificates, Series 2019-K735 to be issued by FREMF 2019-K735 Mortgage Trust, Series 2019-K735 (FREMF 2019-K735):

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

All trends are Stable.

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

The collateral consists of 49 fixed-rate loans secured by 48 multifamily properties and one manufactured housing community (MHC) property. All loans within the transaction are structured with seven-year loan terms with the exception of ten loans, which are structured with 83-, 84- or 90- to 96-month loan terms. 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, eight loans, representing 22.1% of the trust 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.

Classes A-1, A-2, A-M, X1 and XAM of the FREMF 2019-K735 transaction have been conveyed into a trust by Freddie Mac to issue corresponding classes of Structured Pass-Through Certificates (SPCs) guaranteed by Freddie Mac (see the Transaction Structural Features section for more information). All DBRS-rated classes will be subject to ongoing surveillance, confirmations, upgrades or downgrades by DBRS after the date of issuance. The initial ratings of the FREMF 2019-K735 Certificates and the Freddie Mac Structured Pass-Through Certificates, Series K-735 (Freddie Mac SPCs K-735) are assigned without giving effect to the Freddie Mac guarantee. Please see the FREMF 2019-K735 Structural and Collateral Term Sheet for more information about the structure of the Freddie Mac SPCs K-735.

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, had an extremely low delinquency rate of 0.03% as of March 2019. This compares favorably with the delinquency rate for CMBS multifamily loans of approximately 2.32% as of May 2019. As of March 31, 2019, Freddie Mac had securitized 15,608 loans totaling approximately $280.6 billion in guaranteed issuance balance. To date, Freddie Mac has not realized any credit losses on its guaranteed issuances, although a combined $15.33 million in total losses has been realized by B-piece investors, representing less than one basis point of total issuance.

The deal has favorable credit metrics as evidenced by an issuance weighted-average (WA) loan-to-value (LTV) and balloon WA LTV of 68.7% and 64.6%, respectively. Only ten loans, comprising 13.8% of the trust balance, have issuance LTVs of 75.0% or higher. In addition, the WA DBRS Term DSCR is reasonable at 1.35x. 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. Two loans, representing 7.0% of the pool, exhibit Above Average property quality, and eight loans, representing 25.7% of the pool, exhibit Average (+) property quality. Six of these loans are in the top 15. Underlying collateral analysis is prudent, as evidenced by an average DBRS NCF variance of -6.3% 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.

Twelve loans, representing 28.6% of the pool and including five of the top 15 loans in the pool, are structured with full-term interest-only (IO) payments. An additional 36 loans, comprising 70.8% of the pool, have remaining partial IO periods ranging from 24 months to 48 months. The probability of default (POD) is calculated using a DSCR that includes amortizing debt service. Balloon LTV is also incorporated into the POD. Furthermore, partial IO loans are penalized in the model.

The pool is concentrated by property type, as multifamily properties represent 96.1% of the collateral. Four loans (3.9% of the pool) are secured by non-traditional property types (i.e., MHC and student housing). Compared with other property types, multifamily properties benefit from staggered lease rollover and generally low expense ratios. 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. The analysis performed on the 38 sampled loans indicates that most markets are displaying strong occupancy and rent growth figures with positive year-over-year trends established. Student-housing properties are modeled with higher PODs than traditional multifamily properties, and MHCs have historically performed very well despite not being a core asset class. Furthermore, there is only one student-housing property, Green Leaf River Edge (2.1% of the trust balance), in the top 20.

Five loans, representing 4.9% of the pool, are secured by properties located in DBRS Market Rank one or two, which are considered more rural or tertiary in nature. Only three loans, representing 2.8% of the pool, are secured by properties located in DBRS Market Rank six, which are typically lighter urban in nature. Only one loan, representing 0.6% of the pool, is secured by a property located in a DBRS Market Rank seven. DBRS Market Rank seven and eight are generally denser urban in nature and benefit from greater liquidity, even during times of economic stress. Properties located in tertiary and rural markets were analyzed with higher loss severities than those located in urban markets.

Classes X1, X2-A, X2-B and XAM 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 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 www.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 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. 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.

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.

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

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