DBRS Morningstar Finalizes Provisional Ratings on Freddie Mac Structured Pass-Through Certificates, Series K-152

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Structured Pass-Through Certificates (SPCs), Series 2022-K152 issued by Freddie Mac Structured Pass-Through Certificates, Series K-152 (Freddie Mac SPCs K-152 or the Issuer):

-- 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 52 fixed-rate loans secured by 55 commercial properties, including 38 garden-style multifamily properties, eight MHC properties, five mid-rise apartment complexes, one student housing property, one assisted living property, one age-restricted property, and one independent living property. Three groups of two loans (5iftyone At Tradan Heights and River Pointe, Glen At Polo Park and Reserve At Long Point and Marsh Point Mobile Home Park and Silver Creek), which collectively represent 10.9% of the trust balance, are cross-collateralized, DBRS Morningstar’s analysis of this transaction incorporates these six loans as three loan, resulting in a modified loan count of 49. All figures below and throughout this disclosure reflect the modified loan count, and all of the loans in the trust have ten-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 cutoff date balances were measured against DBRS Morningstar’s NCF and their respective actual constants, one loan, representing 1.1% of the pool, had a DBRS Morningstar Term DSCR at or above 1.75x, 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-K152 Mortgage Trust, Series K152 (FREMF 2022-K152) 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, confirmation, upgrade, or downgrade by DBRS Morningstar after the date of issuance. DBRS Morningstar assigned the initial ratings to the FREMF 2022-K152 Certificates and the Freddie Mac Structured Pass-Through Certificates, Series K-152 (Freddie Mac SPCs K-152) without giving effect to the Freddie Mac guarantee. Please see the FREMF 2022-K152 Structural and Collateral Term Sheet for more information about the structure of the Freddie Mac SPCs K-152.

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 0.07% as of June 30, 2022. This compares favorably with the delinquency rate of approximately 1.12% for commercial mortgage-backed securities (CMBS) multifamily loans as of June 30, 2021. From the inception of its K-Program through June 2022, Freddie Mac has securitized 24,209 loans, totaling approximately $500.5 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 $56.1 million in total losses, representing less than 1.0 basis point (0.01%) of total issuance.

There are 37 loans, representing 87.8% of the total pool balance, that have a DBRS Morningstar Issuance LTV of 67.1% or below, resulting in a decreased probability of default (POD). The overall pool has a DBRS Morningstar WA Issuance LTV of 62.8% and a DBRS Morningstar WA Balloon LTV of 59.2%. These credit metrics are more favorable than those of recent FREMF transactions rated by DBRS Morningstar and are indicative of lower leverage.

DBRS Morningstar considered one loan, comprising 6.2% of the pool, to be of Above Average property quality, and four loans, comprising 18.9% of the pool, to be of Average + property quality based on physical attributes and/or a desirable location within their respective markets. Four of these loans (Loudoun Station, Icon Apartment Homes At Hardin Valley, Bridge At Balcones, and Artistry KC) 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.

Eleven loans, representing 34.9% of the pool balance, are in a DBRS Morningstar metropolitan statistical area Group of 2 or 3, which represent MSAs with below-average historical default rates. More specifically, there are eight loans, representing 25.5% of the pool, in a DBRS Morningstar MSA Group of 3, which is the best-performing group in terms of historic CMBS default rates among the top 25 MSAs. The transaction’s MSAs are stronger than the FREMF 2022-K144 and FREMF 2022-K143 transactions, which had 17.6% and 3.5% of pool balance, respectively, in a DBRS Morningstar MSA Group of 3.

The increase in both fixed and floating interest rates over the past year has led to an increase in loans displaying negative leverage, in which the interest rate charged by the lender is higher than the property’s capitalization rate, a measure of the property’s return based upon its income-generating potential. The increase in rates is likely to result in lower property values and reduced leverage when refinancing a loan. DBRS Morningstar identified 20 loans in the pool as exhibiting negative leverage, and adjusted the issuer’s implied cap rate upwards for the respective properties to be in alignment with the respective mortgage interest rates. This increases the LTV and the DBRS Morningstar EL in some cases.

The pool is concentrated by property type, as multifamily properties represent 95.5% of the pool balance. Eight properties, representing 3.8% of the pool, are MHCs. DBRS Morningstar observed Highgate Senior Living Wenatchee, comprising 0.4% of the pool, to be an assisted living facility. 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 respond when the market improves. Forty-eight loans, representing 97.3% of the pool, exhibited a recent occupancy rate of more than 90.0%, and 36 loans, representing 62.5% of the pool, exhibited a recent occupancy rate at or above 95.0%.

The average haircut was -11.1% across the 30 loans that DBRS Morningstar sampled, representing 84.6% of the overall pool. The sampled NCF variance was higher than recent Freddie Mac transactions that DBRS Morningstar has rated, specifically FREMF 2022-K145, FREMF 2022-K144, FREMF 2022-K143, and FREMF 2022-K141. DBRS Morningstar applied a -10.0% haircut to nonsampled loans.

Nine loans, representing 36.2% of the pool balance, were modeled with Average or Weak sponsor strength. This compares with FREMF 2022-K145 and FREMF 2022-K144, which had 8.8% and 11.8% modeled with Average or Weak sponsor strength, respectively. DBRS Morningstar increased the POD for these loans.

Twelve loans, representing 20.1% of the pool balance, are full-term interest-only (IO) loans. An additional 35 loans, representing 77.8% of the pool balance, are partial IO loans, ranging between 24 and 84 months of IO payments. Two loans, representing 2.1% of the pool balance, are scheduled to pay principal for the entire loan term. Based on the observed historical performance, partial IO loans received an increased POD adjustment in the model, with the most severe adjustment applied to loans with 36 to 84 months of IO. Fully amortizing and full-term IO loans received a decreased POD adjustment.

There were no Environmental/ Social/Governance factors that had a significant or relevant effect on the credit analysis

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

Classes X1 is 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.

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 (November 4, 2022), 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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