DBRS Morningstar Finalizes Provisional Ratings on Freddie Mac Structured Pass-Through Certificates, Series K-134

DBRS, Inc. (DBRS Morningstar) finalized provisional ratings on the following classes of Structured Pass-Through Certificates (SPCs), Series K-134 issued by Freddie Mac Structured Pass-Through Certificates, Series K-134 (Freddie Mac SPCs K-134):

-- 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.

The collateral consists of 43 fixed-rate loans secured by 43 commercial properties, including 37 garden-style multifamily properties and six mid-rise or 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-K134 Mortgage Trust, Series 2021-K134 (FREMF 2021-K134) transaction have been conveyed into a trust by Freddie Mac to issue corresponding classes of Structured Pass-Through Certificates (SPCs) guaranteed by Freddie Mac. 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-K134 Certificates and the Freddie Mac SPCs K-134 without giving effect to the Freddie Mac guarantee. Please see the FREMF 2021-K134 Structural and Collateral Term Sheet for more information about the structure of the Freddie Mac SPCs K-134.

This transaction includes a recent change to the Freddie Mac capital structure, with the addition of 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 its issued. The program is designed to transfer market risk to investors in the certificates from Freddie Mac while it 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 0.04% as of September 2021. This compares favorably with the delinquency rate of approximately 3.89% for commercial mortgage-backed securities (CMBS) multifamily loans. Since the inception of the K-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 2.7%, which is generally higher than recent Freddie Mac transactions rated by DBRS Morningstar. However, compared with the general multiborrower CMBS universe, the deal’s expected loss is quite low.

Ten loans, representing 29.5% of the total pool balance, have a DBRS Morningstar Issuance Loan-to-Value Ratio (LTV) of 67.1% of less, resulting in a decreased probability of default (POD). The overall pool has a DBRS Morningstar WA Issuance LTV of 70.3% and a DBRS Morningstar WA Balloon LTV of 64.7%. These credit metrics compare similarly with recent FREMF transactions rated by DBRS Morningstar and are indicative of lower leverage.

The pool exhibits a favorable DBRS Morningstar WA Term Debt Service Coverage Ratio (DSCR) of 1.46 times (x). Furthermore, approximately 36.8% of the total pool balance exhibits a DBRS Morningstar DSCR above 1.25x, and approximately 19.6% of the total pool balance exhibits a DBRS Morningstar DSCR above 2.00x. 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.

The net cash flow (NCF) variance between FREMF and the DBRS Morningstar NCFs was low, with an average sampled haircut of 8.5% across 24 loans, representing 78.0% of the total pool balance. Across the pool, 35 loans, representing 70.2% of the total pool balance, 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 40 of the 43 loans (91.2% 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. 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.

Twenty-five loans, representing 54.2% of the total pool balance, are in suburban markets (defined as DBRS Morningstar Market Ranks of 3 or 4), which have experienced higher default and loss rates historically. Accordingly, the loans in a DBRS Morningstar Market Rank of 3 or 4 have higher PODs and loss severity given defaults (LGDs). Four loans, representing 8.7% 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 comprises entirely of multifamily properties, which presents property type concentration risk. 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’s also quick to rebound when the market improves. Forty loans, representing 94.6% of the pool balance, exhibited a recent occupancy rate of 95.0% or above, while the remaining three loans, representing 4.4% of the pool balance, exhibited an occupancy rate between 90.0% and 94.9%. None of the loans in the pool exhibited an occupancy rate below 90.0%.

Eleven loans, representing 31.2% of the total pool balance, are full-term IO loans, including six loans in the top 15. An additional 30 loans, representing 65.0% of the total pool balance, are partial IO loans, ranging between one and seven years of IO. Only two loans, representing 3.8% of the total pool balance, are scheduled to pay principal for the entire loan term. Based on observed historical performance, partial IO loans received 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.

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 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#01 – The Alastair at Aria Village (7.8% of pool)
-- Prospectus ID#02 – Horizon Ridge Park Apartments (5.7% of pool)
-- Prospectus ID#03 – The Elysian (5.3% of pool)
-- Prospectus ID#04 – Blue at Northline (4.8% of pool)
-- Prospectus ID#05 – Springs at Newnan (4.6% of pool)
-- Prospectus ID#06 – Truman Park (4.3% of pool)
-- Prospectus ID#07 – Bell Lakeshore (3.8% of pool)
-- Prospectus ID#08 – Renew 2900 (3.6% of pool)
-- Prospectus ID#09 – Cobblestone Crossings (3.6% of pool)
-- Prospectus ID#10 – Hermosa Village (3.2% of 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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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