DBRS Morningstar Finalizes Provisional Ratings on FREMF 2020-K112 Mortgage Trust, Series 2020-K112

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Multifamily Mortgage Pass-Through Certificates, Series 2020-K112 issued by FREMF 2020-K112 Mortgage Trust, Series 2020-K112 (FREMF 2020-K112):

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class X1 at AAA (sf)
-- Class X2-A at AAA (sf)

All trends are Stable.

With regard to the Coronavirus Disease (COVID-19) pandemic, the magnitude and extent of performance stress posed to global structured finance transactions remain highly uncertain. This considers the fiscal and monetary policy measures and statutory law changes that have already been implemented or will be implemented to soften the impact of the crisis on global economies. Some regions, jurisdictions, and asset classes are, however, feeling more immediate effects. DBRS Morningstar continues to monitor the ongoing coronavirus pandemic and its impact on both the commercial real estate sector and the global fixed-income markets. Accordingly, DBRS Morningstar may apply additional short-term stresses to its rating analysis, for example by front-loading default expectations and/or assessing the liquidity position of a structured finance transaction with more stressful operational risk and/or cash flow timing considerations.

The collateral consists of 61 fixed-rate loans secured by 52 garden or mid-rise properties, seven manufactured housing community (MHC) properties, and two age-restricted properties. All loans within the transaction are structured with 10-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 Net Cash Flow and their respective actual constants, 17 loans, representing 36.9% of the pool, 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 term default.

Classes A-1, A-2, A-M, X1, XAM and X3 of the FREMF 2020 K-112 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 Morningstar-rated classes will be subject to ongoing surveillance, confirmations, upgrades, or downgrades by DBRS Morningstar after the date of issuance. The initial ratings of the FREMF 2020-K112 Certificates and the Freddie Mac Structured Pass-Through Certificates, Series K-112 (Freddie Mac SPCs K-112) are assigned without giving effect to the Freddie Mac guarantee. Please see the FREMF 2020 K-112 Structural and Collateral Term Sheet for more information about the structure of the Freddie Mac SPCs K-112.

The deal has favorable overall credit metrics as evidenced by the issuance weighted-average (WA) loan-to-value (LTV) ratio and balloon WA LTV of 69.7% and 64.6%, respectively. Only nine loans, comprising approximately 18.2% of the trust balance, have issuance LTVs of higher than 75.0% , which is a similar proportion to other recently analyzed Freddie Mac transactions. In addition, the WA DBRS Morningstar Term DSCR is reasonable at 1.58x.

The pool is generally well-diversified from both a loan balance and geographical perspective. The portfolio’s loan Herfindahl score of 40.1 is higher than other recently analyzed transactions, and the state Herfindahl score of 14.2 represents geographic granularity. Furthermore, the pool contains two cross-collateralized portfolios each with five loans (collectively 10.9% of the pool). DBRS Morningstar modeled each of these portfolios as a single loan. Portfolios of cross-collateralized loans generally benefit from greater diversification of cash flow and may exhibit more favorable default and loss severity characteristics.

The pool has generally strong occupancy metrics, with a WA occupancy rate of 94.5%, based on the most recent rent rolls provided to DBRS Morningstar. Furthermore, only five loans have occupancy rates below 90% (four of which are MHC properties).

Forty loans, representing 59.0% of the pool by balance, are structured with an upfront debt service reserve designed to mitigate any potential impact of the ongoing coronavirus pandemic. Coronavirus-related reserves are generally being required by Freddie Mac, based on the property subtype and loan metrics at origination, and can be released back to the borrower if certain conditions are met.

Loans on Freddie Mac's balance sheet, which it originates according to the same policies as those for securitization, have an extremely low delinquency rate of 0.05% as of January 1, 2020. This compares favorably with the delinquency rate of approximately 0.35% for commercial mortgage-backed security (CMBS) multifamily loans as of January 2020.

As of February 29, 2020, Freddie Mac has securitized 17,849 loans, totaling approximately $357.45 billion in guaranteed issuance balance. To date, Freddie Mac has not realized any credit losses on its guaranteed issuances, although B-piece investors have realized a combined $18.8 million in total losses, representing less than 1.0 basis point 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.

Classes X1 and X2-A are interest-only (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.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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.

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

-- 01 – Kallisto at Bear Creek (7.4% of the pool)
-- 02 – Cross Collateralized Multifamily Portfolio (6.1% of the pool)
-- 03 – Cross Collateralized Manufactured Housing Portfolio (4.8% of the pool)
-- 04 – Millington at Merrill Creek (4.5% of the pool)
-- 05 – Crest Centreport (3.7% of the pool)
-- 06 – West Grove On the Lake (3.1% of the pool)
-- 07 – Orion Prosper Lakes (3.0% of the pool)
-- 08 – 208 North 10th Street (2.7% of the pool)
-- 09 – WildOak Apartment Homes (2.7% of the pool)
-- 10 – Alder Park (2.6% of the pool)
-- 11 – La Ventana (2.6% of the pool)
-- 12 – The Trellises (2.5% of the pool)
-- 13 – Orion Prosper (2.5% of the pool)
-- 14 – Lakeside (2.4% of the pool)
-- 15 – Ivy Lane (2.3% 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 North American CMBS Multi-Borrower Rating Methodology (March 9, 2020), which can be found on dbrsmorningstar.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 dbrsmorningstar.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.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905

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.

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.dbrsmorningstar.com or contact us at [email protected].

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