DBRS Morningstar Finalizes Provisional Ratings on Freddie Mac Structured Pass-Through Certificates, Series K-746

DBRS, Inc. (DBRS Morningstar) finalized provisional ratings on the following classes of Structured Pass-Through Certificates (SPCs), Series K-746 to be issued by Freddie Mac Structured Pass-Through Certificates, Series K746 (Freddie Mac SPCs K-746):

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

All trends are Stable.

The collateral consists of 36 fixed-rate loans secured by 36 commercial properties, including 21 garden-style multifamily properties, eight MHCs, four mid-rise properties, and three townhome properties. 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-K746 Mortgage Trust, Series 2021-K746 (FREMF 2021-K746) transaction have been conveyed into a trust by Freddie Mac to issue corresponding classes of Structured Pass-Through Certificates (SPCs) guaranteed by Freddie Mac. 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 provisional ratings to the FREMF 2021-K746 Certificates and the Freddie Mac Structured Pass-Through Certificates, Series K-746 (Freddie Mac SPCs K-746) without giving effect to the Freddie Mac guarantee.

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. DBRS Morningstar does not rate the new certificates, 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 0.06% as of August 2021. This compares favorably with the delinquency rate of approximately 3.89% for CMBS multifamily loans. From the inception of the K-Series program through August 2021, Freddie Mac securitized 22,144 loans, totaling approximately $456.4 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 less than 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 2.49%, which is in line with recent Freddie Mac transactions rated by DBRS Morningstar. Twenty-four loans, representing 49.8% of the total balance, have a DBRS Morningstar Issuance LTV of 67.1% or lower, resulting in a decreased probability of default (POD). The overall pool has a WA DBRS Morningstar Issuance LTV of 68.7% and a WA DBRS Morningstar Balloon LTV of 65.5%. These credit metrics compare favorably with recent FREMF transactions rated by DBRS Morningstar and indicate lower leverage. The net cash flow (NCF) variance between FREMF and DBRS Morningstar NCFs was low, with an average sampled haircut of 7.5% across 18 loans, representing 74.7% of the total pool balance. Across the pool, 14 of the 18 sampled loans received a DBRS Morningstar haircut of less than 10.0%.

The loans in the transaction benefit from experienced and financially strong borrowers compared with typical CMBS multifamily loans, with 29 of the 36 loans (68% 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. While DBRS Morningstar views the inclusion of coronavirus-related upfront debt service reserves (DSRs) for 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.

The pool has significant concentration to two different sponsor groups totaling 29.4% of the pool balance. The two largest loans in the pool (Park Pointe and Rosina Vista), comprising 15.8% of the pool balance, share the same sponsor. Also, four loans in the top 15 (Foundations at Edgewater, Foundations at River Crest, Foundations at Lions Head, and Foundations at Austin Colony), comprising 13.6% of the pool balance, have the same sponsor and are all in Sugar Land, Texas. All loans in Sugar Land were analyzed as a crossed portfolio resulting in a lower Herfindahl score.

Nineteen loans, representing 65.3% 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 given default rates.

The pool is split between multifamily properties, which encompass 92.4% of the pool, and MHC properties, representing 7.6% of the pool (one of which is age restricted). Ten properties in the pool, representing 38.9% of the total pool balance, have disclosed a military or student tenant concentration ranging from 1.0% to 22.0%. 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-two loans, representing 94.3% of the pool, exhibited a recent occupancy rate above 95.0%, while two loans, representing 3.4% of the pool, exhibited an occupancy rate between 90.0% and 94.9%. Two loans, comprising 2.3% of the pool balance, exhibited an occupancy rate under 90.0%.

Fourteen loans, representing 48.1% of the total pool balance, are full-term interest-only (IO) loans, including seven in the top 15. An additional 22 loans, representing 51.9% of the pool, are partial IO loans, ranging between 12 and 84 months of IO. No loans in 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 to 84 months of IO. Fully amortizing and full-term IO loans receive a decreased POD adjustment.

Four loans (Rosina Vista, Stone Arch Apartments, Silver Eagle MHP, and Roaring Fork MHC), representing 12.4% of the pool, did not have customary due diligence performed by the mortgage loan seller. This includes an in-person site
inspection or the completion of a property condition report. However, the loans have a WA DBRS Morningstar LTV of 63.7%. Additionally, the properties are all at or close to 100% occupancy.

Class X1 and X2-A are 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

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.

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 – Park Pointe (8.4% of the pool)
-- Prospectus ID#02 – Rosina Vista (7.4% of the pool)
-- Prospectus ID#03 – Sendero Townhomes (7.3% of the pool)
-- Prospectus ID#04 – The Abbey at Sonterra Apartments (5.8% of the pool)
-- Prospectus ID#05 – The Retreat at Lakeland Apartments (5.0% of the pool)
-- Prospectus ID#06 – Ironwood at the Ranch (4.6% of the pool)
-- Prospectus ID#07 – Luma Headwaters (4.2% of the pool)
-- Prospectus ID#08 – The Atlantic BridgeMill (3.9% of the pool)
-- Prospectus ID#09 – Village Walk (3.8% of the pool)
-- Prospectus ID#10 – Foundations at Edgewater (3.6% of the pool)

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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