DBRS Morningstar Finalized Provisional Ratings on Freddie Mac Structured Pass-Through Certificates, Series K-115

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Multifamily Mortgage Pass-Through Certificates, Series K-115 issued by Freddie Mac Structured Pass-Through Certificates, Series K-115:

-- 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 54 fixed-rate loans secured by 47 garden-style or mid-rise multifamily properties, six manufactured housing community properties, and one student-housing property. All but two of the loans within the transaction are structured with 10-year loan terms. These two loans, Corsa Tuscan Village North and The Cliftwood, are structured with 11-year loan terms. The transaction is a sequential-pay pass-through structure. The pool was analyzed to determine the DBRS Morningstar ratings, reflecting the long-term risk that the issuer will default and fail to satisfy its financial obligations in accordance with the terms of the transaction. When the cut-off loan balances were measured against the DBRS Morningstar’s net cash flow (NCF) and their respective actual constants, 18 loans, representing 38.3% 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 term default.

The deal has favorable overall credit metrics as evidenced by a weighted-average (WA) Issuance and Balloon loan-to-value (LTV) ratio of 66.9% and 62.0%, respectively. The adjusted WA DBRS Morningstar Issuance and Balloon LTV were 71.2% and 62.0%, respectively. These metrics are comparable with the FREMF 2020-K114 WA Issuance LTV of 68.7% and WA Balloon LTV of 63.3%, the FREMF 2020-K113 WA Issuance LTV of 69.7% and WA Balloon LTV of 64.3%, and the FREMF 2020-K112 WA Issuance LTV of 69.8% and WA Balloon LTV of 64.6%. Only eight loans, representing 11.9% of the pool, have an Issuance LTV of 75.0% or higher, including only one loan in the top 15. Additionally, the DBRS Morningstar DSCR of 1.62x is higher than the FREMF 2020-K114 DSCR of 1.52x, FREMF 2020-K113 of 1.64x, and FREMF 2020-K112 of 1.58x. The pool is generally well diversified from a loan balance perspective, with the portfolio’s loan Herfindahl index score at 32.3. This is comparable with the FREMF 2020-K114 transaction score at 38.0, FREMF 2020-K112 at 40.1, and FREMF 2020-K113 at 30.4.

Twelve loans, representing 35.2% of the pool, exhibit Average (+) or Above Average property quality, nine of which are in the top 15. This is greater than the FREMF 2020-K114 transaction, which had nine loans with Average (+) or Above Average quality, representing 25.8% of the pool. Furthermore, no loans in the pool exhibited Average (-) or Below Average property quality. The pool demonstrates strong occupancy metrics with a WA occupancy rate of 95.7%, based on the most recent rent rolls provided to DBRS Morningstar. Furthermore, only three loans, representing 3.9% 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 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 known as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) that provided, among other things, supplemental unemployment benefits to displaced employees, expired on July 25, 2020, which 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: September Update” and is projecting generalized CRE asset value declines of approximately 15% under the Moderate Scenario and 30% under the Adverse Scenario.

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 0.05% as of January 2020. This compares favorably with the delinquency rate for CMBS multifamily loans of approximately 0.35% 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 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.

Forty-seven loans, representing 90.2% of the pool by balance, are structured with an upfront debt service reserve (DSR) designed to mitigate any potential impact of the ongoing coronavirus pandemic on property and loan performance. Freddie Mac is generally requiring coronavirus-related reserves, based on the property subtype and loan metrics at origination, which can be released back to the borrower if certain conditions are met.

The individual loan information provided generally included monthly collection reports through June 30, 2020, which may not fully reflect any reductions to income as a result of coronavirus-related economic conditions. Additionally, for loans that DBRS Morningstar did not sample, DBRS Morningstar conservatively applied a 10.0% reduction to the issuer’s cash flow. This reduction was greater than the sample average NCF variance of -7.0%. Forty-seven loans, representing 90.2% of the pool by balance, have an upfront DSR designed to mitigate any potential impact of the ongoing coronavirus pandemic.

According 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 22 loans with respect to the condition of the mortgaged property in connection with the origination of the loans. 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 loans. Of these 22 loans, 13 loans were not included in the DBRS Morningstar sample. To mitigate against any issues resulting from the absence of the customary due diligence, DBRS Morningstar applied a probability of default penalty to these 13 loans: Mapleton Square, Arundel Apartments, Villa Espada, Highpoint Terrace, Greentree Village, Woodcrest Arms, Beacon Fairbanks Manor 2, The Colony At Chews Landing, The Ashton, Gates Of Oakwood, 164 S Harrison Street, Hampton Woods, and 57 Chestnut 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 an interest-only (IO) certificate that references 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 - Modena Apartments (8.6% of the pool)
-- Prospectus ID #2 - Vineyards At Paseo Del Sol (4.6% of the pool)
-- Prospectus ID #3 - Park Grove (4.1% of the pool)
-- Prospectus ID #4 - Fort Hill Apartments (4.4% of the pool)
-- Prospectus ID #5 - Parkvue At Livingston (3.8% of the pool)
-- Prospectus ID #6 - Corsa Tuscan Village North (3.8% of the pool)
-- Prospectus ID #7 - Woodview At Marlton (3.7% of the pool)
-- Prospectus ID #8 - Encore Evans Station (3.6% of the pool)
-- Prospectus ID #9 - Eagle Rock At Carle Place (3.5% of the pool)
-- Prospectus ID #10 - GreenVue (3.2% of the pool)
-- Prospectus ID #11 - The Cliftwood (3.2% of the pool)
-- Prospectus ID #12 - Emerald Hills Apartments (3.1% of the pool)
-- Prospectus ID #13 - Village Of Canterbury (2.6% of the pool)
-- Prospectus ID #14 - Baytree Apartments And Mifflin Run Apartments (2.6% of the pool)
-- Prospectus ID #15 - Levanto (2.4% of the pool)
-- Prospectus ID #16 - The Hammocks At Southern Hills (2.4% of the pool)
-- Prospectus ID #17 - The Residences At The Gramercy (2.4% of the pool)
-- Prospectus ID #19 - Holiday Village (2.2% of the pool)
-- Prospectus ID #31 - Village Square Apartments (1.1% of the pool)
-- Prospectus ID #40 - The Gaslamp (0.7% 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].

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 696-6293