DBRS Morningstar Finalizes Provisional Ratings on FREMF 2021-K136 Mortgage Trust, Series 2021-K136

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Multifamily Mortgage Pass-Through Certificates, Series 2021-K136 issued by FREMF 2021-K136 Mortgage Trust, Series 2021-K136 (FREMF 2021-K136):

-- 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 40 fixed-rate loans secured by 40 commercial properties, including 30 garden-style multifamily properties, six mid-rise or townhome properties, two manufactured housing community properties, one student-housing property, and one age-restricted property. The transaction has a sequential-pay pass-through structure. DBRS Morningstar analyzed the conduit pool to finalize its 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-K136 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-K136 Certificates and the Freddie Mac Structured Pass-Through Certificates, Series K-136 (Freddie Mac SPCs K-136) without giving effect to the Freddie Mac guarantee. Please see the FREMF 2021-K136 Structural and Collateral Term Sheet for more information about the structure of the Freddie Mac SPCs K-136.

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 0.05% as of October 2021. This compares favorably with the delinquency rate of approximately 1.77% for commercial mortgage-backed security (CMBS) multifamily loans as of December 9, 2021. Since the inception of the K-Program through October 2021, Freddie Mac has securitized 22,489 loans, totaling approximately $464.3 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 one basis point (0.01%) of total issuance.

Eight loans, comprising 44.3% of the DBRS Morningstar sample (33.5% of the pool), were considered to be of Above Average or Average+ property quality based on physical attributes and/or a desirable location within their respective markets. Four of these loans are within the top 10 (Elite North Scottsdale, Audubon Square, The Cottages Of Fort Collins, and Axio 8400). Higher-quality properties are more likely to retain existing tenants and more easily attract new tenants, resulting in a more stable performance. Only one loan, comprising 4.7% of the DBRS Morningstar sample (0.4% of the pool), was considered to be of Average (-) property quality. No site inspections were conducted as part of DBRS Morningstar’s due diligence because of coronavirus restrictions and precautions. As a result, DBRS Morningstar relied primarily on third-party reports, asset summary reports, and other online information to determine the property quality square for each remaining property in lieu of site inspections.

The net cash flow (NCF) variance between the FREMF and DBRS Morningstar NCFs was low, with an average sampled haircut of -8.9% across 20 loans, representing 75.6% of the total pool balance. Across the pool, 34 loans, representing 72.1% 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 pool exhibits a favorable DBRS Morningstar Weighted Average (WA) Debt Service Coverage Ratio (DSCR) of 1.49 times (x). Furthermore, approximately 42.3% of the total pool balance exhibits a DBRS Morningstar DSCR above 1.25x and approximately 21.8% 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 partially due to the high number of loans that are interest only (IO) throughout the loan term.

Twelve loans, representing 34.9% of the total pool balance, are full-term IO loans, including four loans in the top 15. An additional 26 loans, representing 63.4% of the total pool balance, are partial IO loans, ranging between one and nine years of IO. Only two loans, representing 1.7% 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 probability of default (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.

Nineteen loans, representing 42.4% of the total pool balance, have a DBRS Morningstar Issuance Loan-to-Value Ratio (LTV) of 67.1% or below, resulting in a decreased POD. The overall pool has a DBRS Morningstar WA Issuance LTV of 68.2% and a DBRS Morningstar WA Balloon LTV of 63.1%. These credit metrics compare with those of recent FREMF transactions rated by DBRS Morningstar and are indicative of lower leverage.

Twenty-five loans, representing 62.2% 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. 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.

The loans in the transaction benefit from experienced and financially strong borrowers compared with typical CMBS multifamily loans, with 39 of the 40 loans (87.9% 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.

Given the pool’s overall credit metrics, property quality, and sponsor strength, the deal has a WA expected loss of 2.8%, which is slightly 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.

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.

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 – Westdale Hills (12.1% of pool)
-- Prospectus ID#02 – Elite North Scottsdale (7.0% of pool)
-- Prospectus ID#03 – Audubon Square (6.5% of pool)
-- Prospectus ID#04 – The Cottages Of Fort Collins (5.1% of pool)
-- Prospectus ID#05 – Sycamore Village (5.1% of pool)
-- Prospectus ID#06 – Reflections Apartments (4.7% of pool)
-- Prospectus ID#07 – Axio 8400 (4.1% of pool)
-- Prospectus ID#08 – Copper Ridge Apartments (4.0% of pool)
-- Prospectus ID#09 – The Woods Of Hoover (4.0% of pool)
-- Prospectus ID#10 – Parc At Wesley Chapel (3.5% 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 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.

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.

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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