DBRS Morningstar Finalizes Provisional Ratings on FREMF 2021-K133 Mortgage Trust, Series 2021-K133

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Multifamily Mortgage Pass-Through Certificates, Series 2021-K133 issued by FREMF 2021-K133 Mortgage Trust, Series 2021-K133 (FREMF 2021-K133):

-- 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.

The collateral consists of 44 fixed-rate loans secured by 44 commercial properties, including 34 garden-style multifamily properties; three manufactured housing communities (MHCs); four high-rise, mid-rise, or townhome properties; and three senior housing properties that are age restricted or offer assisted living services. None of the loans are crosscollateralized or crossdefaulted. 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-K133 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 corresponding presale 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-K133 Certificates and the Freddie Mac Structured Pass-Through Certificates, Series K-133 (Freddie Mac SPCs K-133) without giving effect to the Freddie Mac guarantee. Please see the FREMF 2021-K133 Structural and Collateral Term Sheet for more information about the structure of the Freddie Mac SPCs K-133.

This transaction represents a change from prior Freddie Mac issuance under its When Issued (WI) K-Series. The WI program introduces a class of WI Certificates that are initially backed by cash assets and exchanged for Class A-M certificates of the transaction once it is issued. The program is designed to transfer market risk from Freddie Mac to investors in the certificates while Freddie Mac aggregates and pools the mortgages for the transaction. The new certificates are not rated by DBRS Morningstar and the program represents no change to the credit metrics of the transaction. DBRS Morningstar did not apply any adjustments to account for this new program feature.

Freddie Mac has strong origination practices and the K-Series 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 0.04% as of September 2021. This compares favorably with the delinquency rate of approximately 3.89% for commercial mortgage-backed security (CMBS) multifamily loans. Since the inception of the K-Series program through September 2021, Freddie Mac has securitized 22,339 loans, totaling approximately $461.1 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 one basis point (0.01%) 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 2.8%, which is generally consistent with recent Freddie Mac transactions rated by DBRS Morningstar. However, compared with the general multiborrower CMBS universe, the deal’s expected loss is considered quite low.

Fourteen loans, representing 35.4% of the total balance, have 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 70.3% and a WA DBRS Morningstar Balloon LTV of 64.8%. 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 corresponding presale for additional details.

The pool exhibits a favorable WA DBRS Morningstar Term debt service coverage ratio (DSCR) of 1.51 times (x), with two loans, comprising 7.8% 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 because many of the loans are interest only (IO) throughout the loan term. Please see the Comparable Transactions table in the corresponding presale for more information on how the credit characteristics of this transaction compare with recent Freddie Mac deals.

The net cash flow (NCF) variance between the FREMF and DBRS Morningstar NCFs was low, with an average sampled haircut of -8.1% across 22 loans, representing 74.1% of the total pool balance. Across the pool, 76.6% 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 38 of the 44 loans (89.2% 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 Disease (COVID-19) 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. 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 “Baseline Macroeconomic Scenarios For Rated Sovereigns” 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.

Three loans 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 (PCR). These loans have an average vintage of 1978 with minimal capital expenditure in recent years. These properties represent only 3.8% of the total pool balance. Additionally, the three properties demonstrated strong occupancy levels with an average occupancy rate of 99.5% (ranging from 99.3% to 100.0%). 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-four loans, representing 66.2% 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 loss severity given default (LGDs). Five loans, representing 12.5% of the total pool 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.

The pool is split between multifamily properties, which encompass 96.2% of the pool; MHC properties, representing 2.1% of the pool; and senior housing properties, totaling 1.7% of the pool. Three properties in the pool, representing 8.0% of the total pool balance, have disclosed a military or student tenant concentration ranging from 34.0% to 40.0%. 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. Thirty-five loans, representing 77.0% of the pool, exhibited a recent occupancy rate above 95.0%, while nine loans, representing 23.0% of the pool, exhibited an occupancy rate between 90.0% and 94.9%. None of the loans exhibited an occupancy rate under 90.0%.

Thirteen loans, representing 37.3% of the total pool balance, are full-term IO loans, including six in the top 15. An additional 26 loans, representing 54.4% of the pool, are partial IO loans, ranging between three and seven years of IO. None of the loans 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 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 – Allure At Harbor Point (A-1) (7.8% of the pool)
-- Prospectus ID#02 – Uptown Fullerton (7.3% of the pool)
-- Prospectus ID#03 – Azure - Phase I (6.1% of the pool)
-- Prospectus ID#04 – The Alexander At South Virginia (4.7% of the pool)
-- Prospectus ID#05 – Promontory Apartments (4.5% of the pool)
-- Prospectus ID#06 – Playa Pacifica (4.5% of the pool)
-- Prospectus ID#07 – Wellington Apartment Homes (3.9% of the pool)
-- Prospectus ID#08 – The Tides Lakeside (3.5% of the pool)
-- Prospectus ID#09 – Opal At Barker Cypress (3.4% of the pool)
-- Prospectus ID#10 – 44 Washington (3.3% of the pool)
-- Prospectus ID#11 – Enchanted Springs (3.2% of the pool)
-- Prospectus ID#12 – The Emerson At Forney Marketplace (3.2% of the pool)
-- Prospectus ID#13 – Mosby Lakeside (3.1% of the pool)
-- Prospectus ID#14 – Solace Apartment Homes (3.0% of the pool)
-- Prospectus ID#15 – Viewcrest Village (2.8% of the pool)
-- Prospectus ID#16 – Broadmoor 63 (2.6% of the pool)
-- Prospectus ID#17 – Silverstream Apartments (2.5% of the pool)
-- Prospectus ID#20 – Legacy At Pecan Grove (1.8% of the pool)
-- Prospectus ID#30 – Sunshine Village MHC (1.2% of the pool)
-- Prospectus ID#32 – Summer Breeze Senior Living (1.0% of the pool)
-- Prospectus ID#41 – Desert Mobile Home Park (0.4% of the pool)
-- Prospectus ID#43 – Floral Gardens Senior Apartments (0.4% 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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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