DBRS Morningstar Assigns Provisional Ratings to FREMF 2021-K131 Mortgage Trust, Series 2021-K131

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Multifamily Mortgage Pass-Through Certificates, Series 2021-K131 to be issued by FREMF 2021-K131 Mortgage Trust, Series 2021-K131 (FREMF 2021-K131):

-- 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.

The Class X1 and X2-A balances are 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 47 fixed-rate loans secured by 50 commercial properties, including 38 garden-style multifamily properties; two manufactured housing communities; six high-rise, mid-rise, or townhome properties; and one nontraditional multifamily property that is independent living or age restricted. Additionally, the pool contains two groups of cross-collateralized loans. Both groups have two crossed loans. As a result, DBRS Morningstar rolled up the crossed loans and analyzed the transaction assuming 45 loans, which reduces the pool’s overall diversity. The transaction has 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-K131 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 of the presale 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-K131 Certificates and the Freddie Mac Structured Pass-Through Certificates, Series K-131 (Freddie Mac SPCs K-131) without giving effect to the Freddie Mac guarantee. Please see the FREMF 2021-K131 Structural and Collateral Term Sheet for more information about the structure of the Freddie Mac SPCs K-131.

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 0.06% as of July 2021. This compares favorably with the delinquency rate for commercial mortgage-backed securities (CMBS) multifamily loans of approximately 3.89%. Since the inception of the K-Program through July 2021, Freddie Mac has securitized 21,968 loans, totaling approximately $452.6 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 $33.7 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 1.5%, 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 variance, and strong sponsorship strength.

There are 26 loans, representing 48.7% 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 66.5% and a WA DBRS Morningstar Balloon LTV of 63.4%. These credit metrics compare favorably with recent FREMF transactions rated by DBRS Morningstar and are indicative of lower leverage.

The pool exhibits a strong WA DBRS Morningstar Term DSCR of 1.80 times (x), with six loans, comprising 14.2% of 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 presale report for more information on how the credit characteristics of this transaction compare with recent Freddie Mac deals.

The loans in the transaction benefit from experienced and financially strong borrowers compared with typical CMBS multifamily loans, with 43 of the 45 loans (89.4% of pool balance) 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.

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 debt service reserves 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. DBRS Morningstar also published its “Global Macroeconomic Scenarios - June 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.

Six loans, representing 6.7% of the pool, did not have customary due diligence performed by the mortgage loan seller. This includes an in-person site inspection and the completion of a property condition report. These loans have a WA vintage of 1975 with three loans having recent renovations in 2019 and 2020. These properties have a low WA DBRS Morningstar Issuance and Balloon LTV of 64.3% and 59.3%, respectively. Additionally, the six properties demonstrated strong occupancy levels with a WA occupancy of 97.1% (ranging from 96.% to 98.9%). DBRS Morningstar also reviewed third-party reports, asset summary reports, and other online information to determine the appropriate property quality score for each remaining property.

Twenty-two loans, representing 45.4% of the total pool balance, are in suburban markets (defined as DBRS Morningstar Market Ranks of 3 or 4), which have experienced higher default rates historically. Accordingly, the loans in a DBRS Morningstar Market Rank of 3 or 4 have higher PODs and higher loss severity given defaults (LGDs). Eleven loans, representing 34.7% 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, 14 loans, representing 50.5% 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 95.0% of the pool; student housing, representing 3.4% of the pool; and manufactured housing properties, totaling 1.6% of the pool. Fourteen properties in the pool, representing 24.4% of the total pool balance, have disclosed a military or student tenant concentration ranging from 1.0% to 45.0%. 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 rebound when the market improves. Forty-two loans, representing 98.5% of the pool, exhibited a recent occupancy rate above 95.0%, while only three loans, representing 1.5% of the pool, exhibited an occupancy rate between 90.0% and 94.9%. No loans exhibited an occupancy less than 90.0%.

Fifteen loans, representing 62.0% of the total pool balance, are full-term IO loans, including eight in the top 15. An additional 23 loans, representing 34.0% of the pool, are partial-IO loans, ranging between two and seven years of IO. The remaining seven loans, representing 40% 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.

Classes X1 and X2-A 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#01 – CalSTRS Portfolio I (9.9% of the pool)
-- Prospectus ID#02 – Lake Carlton Arms (9.6% of the pool)
-- Prospectus ID#03 – CalSTRS Portfolio II (8.3% of the pool)
-- Prospectus ID#04 – Miami Plaza (7.9% of the pool)
-- Prospectus ID#05 – Palm Island Apartments (7.3% of the pool)
-- Prospectus ID#06 – Monarch Meadows Apartments (3.6% of the pool)
-- Prospectus ID#07 – City View (3.4% of the pool)
-- Prospectus ID#08 – Meridian At Harrison Pointe (3.4% of the pool)
-- Prospectus ID#09 – 500 Ocean (3.3% of the pool)
-- Prospectus ID#10 – Spark Black Bear (3.3% of the pool)
-- Prospectus ID#11 – The Locale (2.8% of the pool)
-- Prospectus ID#12 – Salish Flats (2.5% of the pool)
-- Prospectus ID#13 – Arista Apartment Homes (2.5% of the pool)
-- Prospectus ID#14 – Boulevard At Green (2.4% of the pool)
-- Prospectus ID#15 – Harbour Pointe (2.3% of the pool)
-- Prospectus ID#16 – Park And Kingston Apartments (2.2% of the pool)
-- Prospectus ID#18 – Village Of The Pines Apartments (1.9% of the pool)
-- Prospectus ID#19 – The Place At Savanna Springs (1.7% of the pool)
-- Prospectus ID#20 – Elan Meadowwoods At Alpine (1.7% of the pool)
-- Prospectus ID#21 – The Horizon At Fleetwood (1.5% of the pool)
-- Prospectus ID#24 – Seaview Apartments (1.2% of the pool)
-- Prospectus ID#28 – HACEP LIHTC Portfolio 3 (1.0% of the pool)
-- Prospectus ID#29 – Perkins Place (0.9% of the pool)
-- Prospectus ID#40 – Fox Run Apartments (0.5% 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 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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