DBRS Morningstar Assigns Provisional Ratings to Freddie Mac Structured Pass-Through Certificates, Series K-141

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Structured Pass-Through Certificates, Series K-141 to be issued by Freddie Mac Structured Pass-Through Certificates, Series K-141 (Freddie Mac SPCs K-141):

-- 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 46 fixed-rate loans secured by 46 commercial properties, including 24 garden-style multifamily properties, nine mid-rise apartment complexes, three manufactured housing communities, three high-rise apartment complexes, three townhome properties, three student housing properties, and one assisted living community. All of the loans in the trust have 10-year loan terms except for two loans (Lazul Apartments and Luxe at The Highlands) that have 11-year loan terms. The transaction is a sequential-pay pass-through structure. DBRS Morningstar analyzed the pool to determine the provisional ratings, reflecting the long-term probability of loan default within the term, and its liquidity and maturity. When the cut-off date balances were measured against DBRS Morningstar’s net cash flow (NCF) and their respective actual constants, 16 loans, representing 41.2% 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-K141 Mortgage Trust, Series K-141 (FREMF 2022-K141) 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 in the presale for more information). All DBRS Morningstar-rated classes will be subject to ongoing surveillance, confirmation, upgrade, or downgrade by DBRS Morningstar after the date of issuance. DBRS Morningstar assigned the initial ratings to the FREMF 2022-K141 Certificates and Freddie Mac SPCs K-141 without giving effect to the Freddie Mac guarantee. Please see the FREMF 2022-K141 Structural and Collateral Term Sheet for more information about the structure of Freddie Mac SPCs K-141.

This transaction, part of the new When Issued (WI) K-Series, represents a change from prior Freddie Mac issuance. The WI program introduces a class of WI Certificates that is initially backed by cash assets and is exchanged for the Class A-M certificates of the transaction once those are issued. The program is designed to transfer market risk from Freddie Mac to investors in the certificates while Freddie Mac aggregates and pools the mortgage 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-Program 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 0.08% as of December 2021. This compares favorably with the delinquency rate of approximately 1.77% for commercial mortgage-backed securities (CMBS) multifamily loans as of December 9, 2021. From the inception of its K-Program through January 2022, Freddie Mac has securitized 23,135 loans, totaling approximately $480.9 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 $40.6 million in total losses, representing fewer than 1.0 basis point (0.01%) of total issuance.

The pool exhibits DBRS Morningstar weighted-average (WA) issuance and balloon loan-to-value ratios (LTVs) of 68.3% and 64.0%, respectively, both of which are comparable with the recent Freddie Mac transactions rated by DBRS Morningstar. Furthermore, 17 loans, representing 37.8% of the pool balance, exhibit DBRS Morningstar Issuance LTVs below 67.1%, resulting in a decreased probability of default.

The average haircut was 8.4% across the 20 loans that DBRS Morningstar sampled, representing 70.7% 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 1.55x. Furthermore, approximately 41.2% 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.

Seven loans, representing 33.6% of the pool, are of Above Average or Average + property quality based on physical attributes and/or a desirable location within their respective markets. Four of these loans (Downtown 5th, Lazul Apartments, Escape at Harbor Point, and The Eddy at Riverview Landing) are included in the top 10. Higher-quality properties are more likely to retain existing tenants and more easily attract new tenants, resulting in a more stable performance.

Given the pool’s overall credit metrics, property quality, and sponsor strength, the pool has a WA expected loss (EL) of 2.7%, which is in line with the EL seen in recent Freddie Mac transactions that DBRS Morningstar has rated, specifically FREMF 2021-K136, FREMF 2021-K134, FREMF 2021-K133, FREMF 2021-K132, and FREMF 2021-K131. Furthermore, these losses are 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.

Class X1 is an interest-only (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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#01 – Downtown 5th (A-2) (9.4% of pool)
-- Prospectus ID#02 – Escape at Harbor Point (A-1) (9.1% of pool)
-- Prospectus ID#03 – Lazul Apartments (5.4% of pool)
-- Prospectus ID#04 – Woodland Acres Townhomes (5.1% of pool)
-- Prospectus ID#05 – Dobson Mills Apartments (4.9% of pool)
-- Prospectus ID#06 – The Eddy at Riverview Landing (4.6% of pool)
-- Prospectus ID#07 – The Drake (4.3% of pool)
-- Prospectus ID#08 – The Arlington (4.0% of pool)
-- Prospectus ID#09 – Landmark at Auburn Lakes (3.6% of pool)
-- Prospectus ID#10 – Oxford Manor Apartments (3.0% of pool)
-- Prospectus ID#11 – Congress Apartments (2.9% of pool)
-- Prospectus ID#12 – Riverside Palms (2.4% of pool)
-- Prospectus ID#13 – The Aria (2.4% of pool)
-- Prospectus ID#14 – The Enclave (2.1% of pool)
-- Prospectus ID#15 – Riverton Knolls (2.0% of pool)
-- Prospectus ID#17 – Laurentide at Mashpee Commons (1.9% of pool)
-- Prospectus ID#23 – Quakertown West Apartments (1.5% of pool)
-- Prospectus ID#36 – The Corridor South (0.9% of pool)
-- Prospectus ID#43 – Bahia Apartments (0.6% of pool)
-- Prospectus ID#45 – The Social Row (0.5% of pool)

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

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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