DBRS Morningstar Finalizes Provisional Ratings on FREMF 2019-K100 Mortgage Trust, Series 2019-K100

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of the Multifamily Mortgage Pass-Through Certificates, Series 2019-K100 (the Certificates) issued by FREMF 2019-K100 Mortgage Trust, Series 2019-K100 (FREMF 2019-K100 or the Issuer):

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

All trends are Stable.

The collateral consists of 70 fixed-rate loans secured by 64 multifamily properties, two age-restricted properties, one independent/assisted-living property, one age-restricted manufactured housing community (MHC) property, one MHC property and one student-housing property. All 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 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 Morningstar Stabilized NCF and their respective actual constants, 14 loans, representing 17.4% of the trust balance, had a DBRS Morningstar Term DSCR at or above 1.80 times (x), a threshold indicative of a lower likelihood of mid-term default.

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 0.03% as of June 2019. This compares favorably with the delinquency rate for commercial mortgage-backed securities (CMBS) multifamily loans of approximately 2.47% as of August 2019. As of June 30, 2019, Freddie Mac has securitized 16,188 loans totaling approximately $317.4 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 68.5% and 62.9%, respectively. Only ten loans, comprising 11.9% of the trust balance, have Issuance LTVs of 75.0% or higher, which is a lower proportion than other recently-analyzed Freddie Mac transactions. In addition, the WA DBRS Morningstar Term DSCR is reasonable at 1.49x.

The pool has strong occupancy metrics, with a weighted-average occupancy rate of 95.1% based on the most recent rent rolls provided to DBRS Morningstar. Furthermore, only two loans have occupancy rates below 90%. Twenty-six loans, representing 38.7% of the pool by balance, were for the purpose of acquisition. Acquisition loans are favorable because the sponsor is usually required to contribute a significant amount of cash equity as a part of the transaction. Acquisition financing is also generally based on actual transaction values rather than an appraiser’s estimate of market value.

Fourteen loans, representing 12.7% of the pool, are secured by properties located in market rank two, which are considered more rural or tertiary in nature, including three of the top 15 loans (100 Inverness Apartment Homes, Treasure Cay Apartments and Kingston Crossing). Further, only two loans, representing 2.9% of the pool, are secured by properties located in markets ranked six, which are typically lighter urban in nature. Only one loan (Anew Terry Apartments), representing 1.4% of the pool, is secured by a property located in a market ranked seven and only one loan (315 East 70th Street), comprising 0.6% of the pool, is secured by a property in a market ranked eight. Markets ranked 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. Seventeen loans, representing 30.4% of the pool, including three of the top 15 loans in the pool, are structured with full-term interest-only (IO) payments. An additional 46 loans, comprising 64.0% of the pool, have remaining partial-IO periods ranging from 24 months to 84 months. Seven loans representing 5.6% of the pool are amortizing. 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. Six loans (5.8% of the pool) are secured by non-traditional property types (i.e., MHC, student housing, cooperatives, age-restricted housing and assisted living) including Peninsula Del Rey, the third-largest loan in the pool (3.2%), which is an assisted/independent living property. Traditional multifamily properties, which typically are less volatile than those mentioned above, represent the remaining 94.2% of the pool by balance. 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 31 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.

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

For supporting data and more information on this transaction, please log into www.viewpoint.dbrs.com.

DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Domain Apartments (12.0% of pool)
-- Royal Gardens (5.7% of pool)
-- Peninsula Del Rey (3.2% of pool)
-- Sutter Creek (3.2% of pool)
-- Carlton Arms Of South Lakeland (3.1% of pool)
-- Mueller Flats (3.1% of pool)
-- Discovery At Rowlett Creek (3.0% of pool)
-- Kingston Crossing (2.8% of pool)
-- Pima Canyon Luxury Apartments (2.5% of pool)
-- Level At 401 (2.3% of pool)
-- City Parc At Keller (2.3% of pool)
-- Treasure Cay Apartments (2.2% of pool)
-- One Webster (2.0% of pool)
-- 100 Inverness Apartment Homes (1.9% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrs.com. The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

With regard to due diligence services, DBRS Morningstar 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 Morningstar’s methodology, DBRS Morningstar 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 entities did participate in the rating process for this rating action. DBRS Morningstar 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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

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