DBRS Morningstar Finalizes Provisional Ratings on FREMF 2020-K105 Mortgage Trust, Series 2020-K105

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Multifamily Mortgage Pass-Through Certificates, Series 2020-K105 issued by FREMF 2020-K105 Mortgage Trust, Series 2020-K105 (FREMF 2020-K105):

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

All trends are Stable.

The collateral consists of 71 fixed-rate loans secured by 48 garden-style properties, 10 midrise properties, five manufactured housing communities, three student-housing complexes, two townhome communities, and one each classified as high rise, independent living, and other. The property classified as other is a 20-unit garden-style development in Las Vegas that provides housing to formerly homeless U.S. military veterans. One group of loans, the Landmark Student Housing Portfolio (comprising Nine at Tallahassee, The Nine at Rio, and Nine at West Campus), are cross-collateralized, and the DBRS Morningstar analysis of this transaction incorporates this group of loans as a single loan, resulting in a modified loan count of 69, and the loan number referenced within this report reflects this total. Of the 69 loans, 64 loans have 10-year loan terms, four loans have 11-year loan terms, and one loan has a 10.5-year loan term. Loans with more than a 10-year term are typically part of Freddie Mac’s prestabilization lending program.

The transaction employs 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 cutoff loan balances were measured against the DBRS Morningstar Stabilized Net Cash Flow (NCF) and their respective actual constants, six loans, representing 18.6% of the trust balance, had a DBRS Morningstar Term Debt Service Coverage Ratio (DSCR) at or above 1.80 times (x), a threshold indicative of a lower likelihood of midterm default.

Classes A-1, A-2, A-M, X-1, XAM, and X3 of the FREMF 2020-K105 transaction have been conveyed into a trust by Freddie Mac to issue corresponding classes of Structured Pass-Through Certificates (SPCs). These Freddie Mac SPCs, Series K-105 are guaranteed by Freddie Mac (see the Transaction Structural Features section of the related report for more information). All DBRS Morningstar-rated classes will be subject to ongoing surveillance, confirmations, upgrades, or downgrades by DBRS Morningstar after the date of issuance. The ratings assigned by DBRS Morningstar at issuance are based exclusively on the credit provided by the transaction structure and underlying assets of FREMF 2020-K105 without regard to the Freddie Mac Guarantee. DBRS Morningstar may take the Freddie Mac Guarantee into consideration for future rating actions.

The deal has favorable credit metrics, as evidenced by an issuance weighted-average (WA) loan-to-value (LTV) and balloon WA LTV of 68.2% and 62.6%, respectively. Nine loans, comprising 14.4% of the trust balance, have issuance LTVs of greater than 75.0%, 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 WA occupancy rate of 94.4% based on the most recent rent rolls provided to DBRS Morningstar. Furthermore, only four loans have an occupancy rate below 90.0%. Thirty-four loans, representing 58.2% 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. 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 0.04% as of September 30, 2019. This compares favorably with the delinquency rate for commercial mortgage-backed security (CMBS) multifamily loans of approximately 0.44% as of September 2019. As of September 30, 2019, Freddie Mac had securitized 16,808 loans, totaling approximately $291.03 billion in guaranteed issuance balance. To date, Freddie Mac has not realized any credit losses on its guaranteed issuances, although a combined $18.8 million in total losses has been realized by B-piece investors, representing fewer than 1.0 basis points of total issuance. The loans in the transaction benefit from experienced and financially strong borrowers compared with typical CMBS multifamily loans. In addition, many of the borrowers are repeat clients of Freddie Mac that have performed as agreed.

Nineteen loans, representing 12.0% of the pool, are secured by properties located in DBRS Morningstar Market Ranks 1 and 2, which are considered more rural or tertiary in nature, including one top 15 loan (Country Club West Apartments). Furthermore, only seven loans, representing 5.4% of the pool, are secured by properties located in Market Rank 6 or higher, which are typically more urban in nature. Properties located in tertiary and rural markets were analyzed with higher loss severities than those located in urban markets.

Ten loans, representing 26.8% of the pool, including four of the top 15 loans in the pool, are structured with full-term interest-only (IO) payments. An additional 56 loans, comprising 70.5% of the pool, have remaining partial-IO periods ranging from 12 months to 60 months. Only three loans, representing 2.8% of the pool, are amortizing over the full loan term.

Classes X-1, X-2, XAM, X3, 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.dbrsmorningstar.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:
-- Prospectus ID#1–Landmark Student Housing Portfolio (7.2% of the pool)
-- Prospectus ID#2–NV at Harbor Point (7.2% of the pool)
-- Prospectus ID#3–Tivalli (5.0% of the pool)
-- Prospectus ID#4–Elysian at Flamingo (3.8% of the pool)
-- Prospectus ID#5–Arches at Hidden Creek (3.8% of the pool)
-- Prospectus ID#6–Prominence Apartments Phase I (3.7% of the pool)
-- Prospectus ID#7–Avalon Shelton (3.6% of the pool)
-- Prospectus ID#8–Rancho Hillside (3.5% of the pool)
-- Prospectus ID#9–Aurora at Summerfield (3.5% of the pool)
-- Prospectus ID#10–Sandpiper Apartments (3.4% of the pool)
-- Prospectus ID#11–Country Club West Apartments (2.9% of the pool)
-- Prospectus ID#12–Sterling Village (2.9% of the pool)
-- Prospectus ID#13–Registry at Windsor Parke (2.4% of the pool)
-- Prospectus ID#14–Beckett Farms (2.2% of the pool)
-- Prospectus ID#15–Trailside at Reedy Point (2.2% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.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 the North American CMBS Multi-borrower 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 Morningstar 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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883/dbrs-morningstar-provides-update-on-rating-methodologies-in-light-of-measures-to-contain-coronavirus-disease-covid-19.

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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar 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 [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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