DBRS Morningstar Finalizes Provisional Ratings on Freddie Mac Structured Pass-Through Certificates, Series K-114

DBRS, Inc. (DBRS Morningstar) finalized provisional ratings on the following classes of Multifamily Mortgage Pass-Through Certificates, Series K-114 issued by Freddie Mac Structured Pass-Through Certificates, Series K-114:

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

All trends are Stable.

The Class X1 balance is notional.

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 (CRE) 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 59 fixed-rate loans secured by 55 garden-style or mid-rise multifamily properties, three manufactured housing community properties, and one assisted living facility. 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 final 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’s net cash flow (NCF) and their respective actual constants, 17 loans, representing 28.9% 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.

The deal has favorable overall credit metrics as evidenced by a weighted-average (WA) Issuance and Balloon loan-to-value (LTV) ratios of 68.7% and 63.3%, respectively. Thirteen loans, representing 20.1% of the pool, have an Issuance LTV of 75.0% or higher; however, this includes only two loans in the top 15. Additionally, the DBRS Morningstar Term DSCR of 1.52x is reasonable and comparable to FREMF 2020-K113 and FREMF 2020-K112 at 1.64x and 1.58x, respectively. The pool is generally well diversified from a loan balance perspective with the portfolio’s loan Herfindahl index score of 38.0, which is in line with FREMF 2020-K112 at 40.1 and higher than FREMF 2020-K113 at 30.4. The pool also demonstrates strong occupancy metrics, with a WA occupancy rate of 94.5% based on the most recent rent rolls provided to DBRS Morningstar. Furthermore, only three loans, representing 4.0% of the pool, have occupancy rates below 90%.

In response to the ongoing pandemic, Freddie Mac made changes to its standard servicing practices to permit a temporary deferral of loan payments and forbearance of various remedies that could, among other things, adversely affect cash flow. While DBRS Morningstar views the inclusion of coronavirus-related upfront debt service reserves for a portion of the loans as a positive mitigant of some of the potential coronavirus-related disruptions, the continued economic fallout from the ongoing pandemic continues to evolve. While DBRS Morningstar generally expects multifamily properties to fare better than hospitality and retail, short- and medium-term challenges still exist in this sector. In addition to imposing various containment-related restrictions, certain jurisdictions have also placed temporary moratoriums on the eviction of tenants that may be continued, extended, or expanded. Furthermore, the government program the Coronavirus Aid, Relief, and Economic Security Act, which provided, among other things, supplemental unemployment benefits to displaced employees, expired on July 25, 2020. This could result in additional stress on properties whose residents have been disproportionately affected by furloughs and layoffs. In addition, the resurgence of coronavirus cases has created additional uncertainty and increased stress on the planned reopening of businesses. DBRS Morningstar also published its “Global Macroeconomic Scenarios: July Update” and is projecting generalized CRE asset value declines of approximately 15% under our moderate scenario and 30% under our adverse scenario in the U.S.

Individual loan information provided generally included monthly collection reports through March 30, 2020, which may not fully reflect any reductions to income as a result of coronavirus-related economic conditions. The DBRS Morningstar NCF analysis generally applied a vacancy loss that reflected projected submarket vacancy rates through 2024. These rates were either in line with or 100 basis points (bps) to 200 bps higher than current submarket vacancy rates, adding a marginal amount of conservatism to the NCFs. Additionally, for loans that DBRS Morningstar did not sample, DBRS Morningstar conservatively applied a 10.0% reduction to the issuer’s cash flow as applied. This reduction was greater than the sample average NCF variance of -6.7%. Fifty-three loans, representing 95.8% of the pool by balance, have an upfront debt service reserve designed to mitigate any potential impact of the ongoing coronavirus pandemic.

According to the Exceptions to the Representation and Warranties - #6 (Condition of Mortgage Property), the Mortgage Loan Seller did not perform, or cause to perform, certain customary due diligence for 32 loans with respect to the condition of the Mortgaged Property in connection with the origination of the loans. DBRS Morningstar did not obtain a complete property condition report or Physical Risk Report, as applicable, and/or an in-person inspection of the Mortgaged Property was not conducted at origination of the Loan. Of these 32 loans, 11 loans were not included in the DBRS Morningstar sample. To mitigate against any issues because of the absence of the customary due diligence, DBRS Morningstar applied a probability of default penalty to these 11 loans: Summit Pointe; Glen Mar Apartments; Lincoln Park; Country Village; Creekside Apartment Homes; Washington Place; Appleby Apartments; Solana Apartments; Aspen Meadows; Madonna Home; and 400 Maple Street.

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.

Class X1 is comprised of 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.

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 - Aspire Apartments (6.6% of the pool)
-- Prospectus ID #2 - Autumn Chase Apartments (4.5% of the pool)
-- Prospectus ID #3 - Eagle Rock At Mineola (4.4% of the pool)
-- Prospectus ID #4 - Inwood Station (4.4% of the pool)
-- Prospectus ID #5 - Sherwood Crossing (4.0% of the pool)
-- Prospectus ID #6 - Woodview At Legacy Farms (3.6% of the pool)
-- Prospectus ID #7 - Sky Vista Commons North (3.2% of the pool)
-- Prospectus ID #8 - The 5800 Apartment Homes (2.7% of the pool)
-- Prospectus ID #9 - Belvedere At Springwoods Village (2.7% of the pool)
-- Prospectus ID #10 - Hawthorne At Lake Norman (2.7% of the pool)
-- Prospectus ID #11 - The Casitas (2.5% of the pool)
-- Prospectus ID #12 - Sync At Spring Cypress (2.5% of the pool)
-- Prospectus ID #13 - Horizons At Franklin Lakes Apartment Homes (2.4% of the pool)
-- Prospectus ID #14 - Ansley Commons (2.4% of the pool)
-- Prospectus ID #15 - Cranbury Crossing (2.3% of the pool)
-- Prospectus ID #16 - Villas At Spring Trails (2.2% of the pool)
-- Prospectus ID #17 - Carlton Senior Living Davis (2.1% of the pool)
-- Prospectus ID #18 - The Tradition Apartments And West Pacific Crossing Retail Center (2.1% of the pool)
-- Prospectus ID #19 - Regency Park (2.0% of the pool)
-- Prospectus ID #30 - Cranford Crossing Apartments (1.5% of the pool)
-- Prospectus ID #32 - Avignon Apartment Homes (1.5% of the pool)
-- Prospectus ID #33 - Longspur Crossing (1.2% of the pool)
-- Prospectus ID #35 - Summit East And Summit West Apartments (1.1% of the pool)
-- Prospectus ID #38 - Marquis At Turtle Creek Apartments (1.0% of the pool)
-- Prospectus ID #44 - Futura/3200 Main Lofts (0.9% of the pool)
-- Prospectus ID #47 - Kilsyth Manor (0.7% of the pool)
-- Prospectus ID #57 - Cloverdale (0.2% 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 North American CMBS Multi-Borrower Rating Methodology (August 7, 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.

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

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