DBRS Morningstar Finalizes Provisional Ratings to Freddie Mac Structured Pass-Through Certificates, Series K-129

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Structured Pass-Through Certificates (SPCs), Series K-129 issued by Freddie Mac Structured Pass-Through Certificates, Series K-129 (Freddie Mac SPCs K-129):

-- 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 remains 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 59 fixed-rate loans secured by 59 commercial properties, including 42 garden-style multifamily properties; eight manufactured housing communities (MHCs); five high-rise, mid-rise, or townhome properties; and four nontraditional multifamily properties that are independent living or age restricted. Additionally, the pool contains two groups of cross-collateralized loans. One group has four crossed loans and the other has two crossed loans. As a result, DBRS Morningstar rolled up crossed loans and analyzed the transaction assuming 55 loans. The transaction is a sequential-pay pass-through structure. DBRS Morningstar analyzed the conduit pool to determine the provisional ratings, reflecting the long-term probability of loan default within the term and its liquidity at maturity.

Classes A-1, A-2, A-M, X1, XAM, and X3 of the FREMF 2021-K129 Mortgage Trust, Series 2021-K129 (FREMF 2021-K129) transaction have been conveyed into a trust by Freddie Mac to issue corresponding classes of SPCs guaranteed by Freddie Mac (see the Transaction Structural Features section of the rating 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. DBRS Morningstar assigned the initial ratings to the FREMF 2021-K129 Certificates and the Freddie Mac SPCs K-129 without giving effect to the Freddie Mac guarantee. Please see the FREMF 2021-K129 Structural and Collateral Term Sheet for more information about the structure of the Freddie Mac SPCs K-129.

Freddie Mac has strong origination practices, and the K-Program exhibits strong historical loan performance. 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 0.16% as of April 2021. This compares favorably with the delinquency rate for commercial mortgage-backed security (CMBS) multifamily loans of approximately 3.89%. Since the inception of the K-Program through April 2021, Freddie Mac has securitized 21,360 loans, totaling approximately $439.8 billion in issuance balance. To date, Freddie Mac has not realized any credit losses on its guaranteed issuances, although B-piece investors have realized a combined $30.0 million in total losses, representing fewer than 1.0 basis points of total issuance.

Given the pool’s overall credit metrics, property quality, and sponsor strength, the deal has a weighted-average (WA) expected loss of 2.0%, which is considerably lower than recent Freddie Mac transactions rated by DBRS Morningstar. The main drivers for the lower expected loss are in part due to the overall pool’s lower leverage, strong DBRS Morningstar debt service coverage ratio (DSCR), low proportion of loans in the punitive DBRS Morningstar metropolitan statistical area (MSA) Group 1, low DBRS Morningstar net cash flow (NCF) variance, and strong sponsorship strength.

There are 23 loans, representing 37.6% of the total balance, with a DBRS Morningstar Issuance loan-to-value (LTV) ratio of 67.1% or less, resulting in a decreased probability of default (POD). The overall pool has a WA DBRS Morningstar Issuance LTV of 70.0% and a WA DBRS Morningstar Balloon LTV of 65.3%. These credit metrics compare favorably with recent FREMF transactions rated by DBRS Morningstar and are indicative of lower leverage. Please see the Comparable Transactions table in the rating report for additional details.

The pool exhibits a relatively strong WA DBRS Morningstar Term DSCR of 1.65 times (x), with the largest, second-largest, and fourth-largest loans in the pool having a DBRS Morningstar Term DSCR in excess of 2.25x. The high DSCR is credit positive in the DBRS Morningstar model; however, DBRS Morningstar notes that the high DSCR is in part due to many of the loans being interest only (IO) throughout the loan term. Please see the Comparable Transactions table in the rating report for more information on how the credit characteristics of this transaction compare with recent Freddie Mac deals.

The NCF variance between FREMF and DBRS Morningstar NCFs was low, with an average sampled haircut of 6.2% across 26 loans, representing 81.8% of the total balance. Across the pool, 70.8% of loans received a DBRS Morningstar haircut of less than 10.0%. The average sampled NCF variance of the subject transaction is fairly comparable with recent Freddie Mac transactions rated by DBRS Morningstar.

The loans in the transaction benefit from experienced and financially strong borrowers compared with typical CMBS multifamily loans, with 53 of the 55 loans having Strong DBRS Morningstar sponsor strength scores. Additionally, many of the borrowers are repeat clients of Freddie Mac that have performed as agreed on prior loans.

Forty-two loans, representing 56.6% of the pool, have coronavirus debt service reserves (DSRs) that are generally sized from six to nine months. Borrowers may request disbursement from the reserve in the amount of a shortfall upon submission of rental collection, current rent schedule, and a current trailing 12 months operating statement. The reserves will be released at least 90 days following the lifting of all governmental actions related to the coronavirus affecting the property.

In response to the ongoing coronavirus 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 DSRs for a majority 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. DBRS Morningstar generally expects multifamily properties to fare better than hospitality and retail properties; however, 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, government programs, such as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), provided, among other things, supplemental unemployment benefits to displaced employees. An additional coronavirus relief bill was signed in March 2021 that extended supplemental unemployment benefits to displaced employees until September 2021. 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: March 2021 Update” and is projecting generalized commercial real estate asset value declines for the U.S. of approximately 15% under its moderate scenario and 30% under its adverse scenario.

Thirteen loans, representing 43.4% of the pool, do not have a coronavirus DSR. Three of these loans were originated before March 2020, and 10 were originated after the outbreak of the coronavirus pandemic in the U.S. These properties have a WA occupancy of 95.8% as of the latest occupancy dates between January 2021 and April 2021. These high occupancy rates indicate strong performance and a lower likelihood of a debt service shortfall. Additionally, these loans exhibit WA DBRS Morningstar Issuance and Balloon LTVs of 69.7% and 67.5%, respectively.

Thirty-three loans, representing 73.6% of the total pool balance, are in suburban markets (defined as DBRS Morningstar Market Ranks of 3 or 4). Properties in these markets historically exhibit higher PODs and higher loss severity given defaults (LGDs). Accordingly, the loans in a DBRS Morningstar Market Rank of 3 or 4 had higher PODs and higher LGDs. Four loans, representing 7.3% of the total balance, are in urban markets (defined as DBRS Morningstar Market Ranks of 5 or greater). These markets historically indicate a lower POD and a smaller LGD. Additionally, 15 loans, representing 53.5% of the total balance, fall into DBRS Morningstar MSA Groups 2 and 3, which also result in a lower POD and smaller LGD.

The pool is split between multifamily properties, which encompass 95.9% of the pool, and MHCs, encompassing 4.1% of the pool. Seven properties in the pool, representing 7.3% of the total pool balance, have disclosed a military or student tenant concentration ranging from 1.0% to 26.0%. Compared with other property types, multifamily assets generally benefit from staggered lease rollover and lower 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. Thirty-nine loans, representing 75.8% of the pool, exhibited a recent occupancy rate above 95.0%, and another 10 loans, representing 13.5% of the pool, exhibited an occupancy rate between 90.0% and 94.9%. Only six loans, representing approximately 10.7% of the pool, exhibited an occupancy less than 90.0%.

Fourteen loans, representing 41.8% of the total balance, are full-term IO loans, including seven in the top 15. An additional 39 loans, representing 55.8% of the pool, are partial-IO loans, ranging between two and seven years of IO. The remaining seven loans, representing 2.4% of the pool, are fully amortizing. Based on observed historical performance, partial-IO loans receive an increased POD adjustment in the model, with the most severe adjustment applied to loans with 12 months to 84 months of IO. Fully amortizing and full-term IO loans receive a decreased POD adjustment.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Class X1 is an IO certificate 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 #01 – CalSTRS Portfolio I (11.9% of the pool)
-- Prospectus ID #02 – CalSTRS Portfolio II (7.5% of the pool)
-- Prospectus ID #03 – Barclay Chase At Marlton (6.0% of the pool)
-- Prospectus ID #04 – La Terraza Apartments (5.7% of the pool)
-- Prospectus ID #05 – Gradient Arbor Hill (5.6% of the pool)
-- Prospectus ID #06 – Residences At Great Pond (4.4% of the pool)
-- Prospectus ID #07 – Ten Trumbull (4.1% of the pool)
-- Prospectus ID #08 – Cahaba Ridge Retirement Community (3.5% of the pool)
-- Prospectus ID #09 – Umbrella Building (3.0% of the pool)
-- Prospectus ID #10 – Fountaine Bleau West Apartments (2.6% of the pool)
-- Prospectus ID #11 – Echo Ridge At North Hills (2.3% of the pool)
-- Prospectus ID #12 – Alder Pointe (2.3% of the pool)
-- Prospectus ID #13 – Bungalows On Jomax (2.2% of the pool)
-- Prospectus ID #14 – Spring Creek Apartments Phase I (2.2% of the pool)
-- Prospectus ID #15 – Maple Springs (2.1% of the pool)
-- Prospectus ID #16 – Gramercy Parc (2.1% of the pool)
-- Prospectus ID #17 – Graham Park At The Highlands (2.0% of the pool)
-- Prospectus ID #18 – Brier Creek Apartments (2.0% of the pool)
-- Prospectus ID #19 – Country Glenn Apartments (1.9% of the pool)
-- Prospectus ID #20 – Courtyard At Cedar Hills (1.8% of the pool)
-- Prospectus ID #21 – The Residences At Breckenridge (1.5% of the pool)
-- Prospectus ID #24 – Mystic Point (1.2% of the pool)
-- Prospectus ID #25 – Brookview Noble Park (1.2% of the pool)
-- Prospectus ID #26 – Gia At Spring Branch (1.1% of the pool)
-- Prospectus ID #29 – South Village (1.0% of the pool)
-- Prospectus ID #39 – Allendale Village (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 the North American CMBS Multi-Borrower Rating Methodology (March 26, 2021), 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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