DBRS Morningstar Finalizes Provisional Ratings on FREMF 2023-K751 Mortgage Trust, Series 2023-K751

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Multifamily Mortgage Pass-Through Certificates, Series 2023-K751 issued by FREMF 2023-K751 Mortgage Trust, Series 2023-K751 (FREMF 2023-K751):

-- 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 Class X2-A balances are notional.

The collateral consists of 20 fixed-rate loans secured by 20 multifamily properties, including one age-restricted property, one corporate housing property, 11 garden-style properties, three high-rise properties, two manufactured housing community (MHC) properties, and two mid-rise properties. All the loans in the pool, except for two, have seven-year loan terms: Durham Apartments Permanent (4.4% of the overall pool balance) has a 78-month (6.5 years) original loan term and Pinyon Point (3.3% of the pool balance) has a 132-month (11 years) term. 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 at maturity. When the cutoff date balances were measured against DBRS Morningstar’s net cash flow and their respective actual constants, there are three loans in the pool, comprising approximately 25.9% of the overall pool balance, with a DBRS Morningstar Term debt service coverage ratio (DSCR) at or below1.00 times (x), a threshold indicative of a higher likelihood of midterm default. None of the loans in 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 2023-K751 Mortgage Trust, Series K751 (FREMF 2023-K751) 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, confirmation, upgrade, or downgrade by DBRS Morningstar after the date of issuance. DBRS Morningstar assigned the initial ratings to the FREMF 2023-K751 Certificates and the Freddie Mac Structured Pass-Through Certificates, Series K-751 (Freddie Mac SPCs K-751) without giving effect to the Freddie Mac guarantee. Please see the FREMF 2023-751 Structural and Collateral Term Sheet for more information about the structure of the Freddie Mac SPCs K 751.

Freddie Mac has strong origination practices and the K-Program exhibits a 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 31, 2022. This compares favorably with the delinquency rate of approximately 3.49% for commercial mortgage-backed security (CMBS) multifamily loans over the same period. From the inception of its K-Program through December 31, 2022, Freddie Mac has securitized 25,098 loans, totaling approximately $527.4 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 13 loans, representing 62.7% of the total pool balance, that have a DBRS Morningstar Issuance loan-to-value ratio (LTV) of 67.1% or below, resulting in a decreased probability of default (POD). The overall pool has a DBRS Morningstar weighted-average (WA) Issuance LTV of 64.9% and a DBRS Morningstar WA Balloon LTV of 61.7%. These credit metrics are comparable with those of recent FREMF transactions rated by DBRS Morningstar and are indicative of lower leverage. Please see the Comparable Transactions table for additional details.

Seventeen loans, representing 87.4% of the pool, had a DBRS Morningstar sponsor strength of Strong, which is credit positive. Sponsors generally represent large, financially capable individuals or companies led by experienced professionals with minimal prior credit issues. In many cases, sponsors are repeat borrowers of FREMF and have a proven credit record with no performance issues. DBRS Morningstar considered four loans, comprising 31.3% of the pool, to be of Average + property quality based on physical attributes and/or a desirable location within their respective markets. Higher-quality properties are more likely to retain existing tenants and more easily attract new tenants, resulting in a more stable performance.

The average haircut was 12.4% across the 20 loans that DBRS Morningstar sampled, representing 100% of the overall pool. The sampled NCF variance was higher than recent Freddie Mac transactions that DBRS Morningstar has rated. DBRS Morningstar sampled all of the loans in the pool.

The transaction’s Herfindahl score of 9.1 is low compared with other transactions recently rated by DBRS Morningstar and indicates the pool is fairly concentrated. Additionally, the two largest loans in the pool comprise 41.1% of the cut-off date pool balance. The subject transaction’s Herfindahl score is below the range of Herfindahl scores for the past four DBRS Morningstar-rated Freddie Mac seven-year K-Series securitizations, which ranged from 10.3 in FREMF 2022-K748 to 20.6 in FREMF 2021-K741. The lack of diversification negatively affected the pool-level expected loss because of elevated concentration risks.

The pool is concentrated by property type, as multifamily properties represent 99.3% of the pool balance. Two properties, representing 0.7% of the pool, are MHCs. 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. All multifamily loans in the pool, except for two that comprise 2.8% of the cut-off date pool balance, exhibited a recent occupancy rate of more than 90.0%. Additionally, 13 loans, representing 72.1% of the pool, exhibited a recent occupancy rate at or above 95.0%.

Ten loans, representing 32.7% of the pool balance, are secured by a property with a DBRS Morningstar Market Rank of 3 or 4, which means the properties, although generally suburban in nature, have historically had higher default and loss rates. Additionally, three loans, representing 4.4% of the pool balance, are secured by a property with a DBRS Morningstar Market Rank of 1 or 2, which means the properties are more rural or tertiary. DBRS Morningstar analyzed properties in less densely populated markets with higher PODs and losses given default (LGDs) than those in more urban markets. Two loans, representing 41.1% of the total pool balance, are within DBRS Morningstar Market Rank 7, which historically indicates a lower POD and LGD.

Nine loans, representing 33.2% of the pool balance, are full-term interest-only (IO) loans. An additional seven loans, representing 57.5% of the pool balance, are partial IO loans, ranging between 24 and 84 months of IO payments. Only four loans, representing 9.4% of the 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 months to 84 months of IO. Fully amortizing and full-term IO loans receive a decreased POD adjustment.

Given the pool’s overall credit metrics, property quality, and concentration of properties in MSA Group 3 , 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 2022-K748, FREMF 2022-K747, FREMF 2021-K746, and FREMF 2021-K742, and substantially lower than the general multiborrower CMBS universe.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
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 (May 17, 2022).

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.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the North American CMBS Multi-Borrower Rating Methodology (March 16, 2023); https://www.dbrsmorningstar.com/research/410913).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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].

DBRS, Inc.
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Chicago, IL 60602 USA
Tel +1 312 332-3429

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies

Rating North American CMBS Interest-Only Certificates (December 19, 2022)
https://www.dbrsmorningstar.com/research/407577

Legal Criteria for U.S. Structured Finance (December 7, 2022)
https://www.dbrsmorningstar.com/research/407008

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022)
https://www.dbrsmorningstar.com/research/402646

North American Commercial Mortgage Servicer Rankings (September 8, 2022)
https://www.dbrsmorningstar.com/research/402499

North American CMBS Insight Model v 1.1.0.0
https://www.dbrsmorningstar.com/research/410913