DBRS Morningstar Finalizes Provisional Ratings of Freddie Mac Structured Pass-Through Certificates, Series K-747

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Structured Pass-Through Certificates (SPCs), Series K-747 issued by Freddie Mac Structured Pass-Through Certificates, Series K-747 (Freddie Mac SPCs K-747):

-- 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 31 fixed-rate loans secured by 31 commercial properties, including 23 garden-style multifamily properties, three mid-rise apartment complexes, one high-rise apartment complex, one townhome property, two age-restricted properties, and two garden-style properties with a military tenant concentration. Four loans (Park Pointe (A-2), Casa Capricorn I & II and Capricorn Square, Terra Vista, and Casa Ruiz & Mira Crest), which collectively represent 21.3% of the trust balance, are associated with the same sponsor and are within the same MSA. While these loans are not cross-collateralized, DBRS Morningstar’s analysis of this transaction incorporates these four loans as a single loan, resulting in a modified loan count of 28. All figures below and throughout this report reflect the modified loan count. All of the loans in the trust have seven-year loan terms. The transaction is a sequential-pay pass-through structure. DBRS Morningstar analyzed the pool to determine the ratings, reflecting the long-term probability of loan default within the term and its liquidity at maturity. When the cut-off date balances were measured against DBRS Morningstar’s net cash flow (NCF) and their respective actual constants, eight loans, representing 42.6% of the pool, had a DBRS Morningstar Term Debt Service Coverage Ratio (DSCR) at or above 1.75 times (x), a threshold indicative of a lower likelihood of midterm default.

Classes A-1, A-2, A-M, X1, XAM, and X3 of the FREMF 2022-K747 Mortgage Trust, Series K-747 (FREMF 2022-K747) 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 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 2022-K747 Certificates and the Freddie Mac Structured Pass-Through Certificates, Series K-747 (Freddie Mac SPCs K-747) without giving effect to the Freddie Mac guarantee. Please see the FREMF 2022-K747 Structural and Collateral Term Sheet for more information about the structure of the Freddie Mac SPCs K-747.

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 the Class A-M certificates of the transaction once it’s 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 0.04% as of November 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 November 2021, Freddie Mac has securitized 22,736 loans, totaling approximately $471.2 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 $40.4 million in total losses, representing less than one basis point (0.01%) of total issuance.

The pool exhibits DBRS Morningstar Weighted Average (WA) Issuance and Balloon Loan-To-Value ratios (LTVs) of 69.6% and 64.9%, respectively, both of which are comparable to the recent Freddie Mac transactions rated by DBRS Morningstar. Furthermore, eight loans, representing 38.2% of the pool balance, exhibit DBRS Morningstar Issuance LTVs below 67.1%, resulting in a decreased probability of default.

The variance between FREMF and DBRS Morningstar NCFs was low, with an average sampled haircut of 9.5% across 15 loans, representing 77.0% of the pool. The sampled average NCF variance is in line with the recent Freddie Mac transactions rated by DBRS Morningstar and generally low when compared with other CMBS multiborrower transactions.

The pool exhibits a favorable DBRS Morningstar WA Term DSCR of 1.64x. Furthermore, approximately 42.6% of the total pool balance exhibits a DBRS Morningstar DSCR at or above 1.75x. The high DSCR is credit positive in the DBRS Morningstar model.

Five loans, representing 32.3% of the pool balance, are in MSA Group 3, which is the best-performing group in terms of historical CMBS default rates among the top 25 MSAs. MSA Group 3 has a historical default rate of 17.2%, which is considerably lower than the overall CMBS historical default rate of 28.0%.

The loans in the transaction benefit from experienced and financially strong borrowers compared with typical CMBS multifamily loans, with 27 of the 28 loans (98.3% 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 metric, property quality, and sponsor strength, the pool has a WA expected loss of 2.4%, which is in line with the expected loss seen in recent Freddie Mac transactions DBRS Morningstar has rated, specifically FREMF 2021-K746 and FREMF 2021-K742, and substantially lower than the general multiborrower CMBS universe.

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 – San Diego Rollup (21.3% of pool)
-- Prospectus ID#02 – Saddleworth Green (5.8% of pool)
-- Prospectus ID#03 – Egate Apartments (5.5% of pool)
-- Prospectus ID#04 – Midtown (5.4% of pool)
-- Prospectus ID#05 – The Village at Bronxville (4.8% of pool)
-- Prospectus ID#06 – The Ivy (4.6% of pool)
-- Prospectus ID#07 – Oro Stone Oak (4.6% of pool)
-- Prospectus ID#08 – The Monarch Medical District Apartments (4.6% of pool)
-- Prospectus ID#09 – Sorrel Apartments (4.6% of pool)
-- Prospectus ID#10 – Falcon Landing Apartments (4.5% 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 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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