DBRS Morningstar Assigns Provisional Ratings to FREMF 2019-K101 Mortgage Trust, Series 2019-K101

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Multifamily Mortgage Pass-Through Certificates, Series 2019-K101 to be issued by FREMF 2019-K101 Mortgage Trust, Series 2019-K101:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-M at AA (high) (sf)
-- Class X1 at AAA (sf)
-- Class XAM at AAA (sf)
-- Class X2-A at AAA (sf)
-- Class X2-B at A (low) (sf)
-- Class B at A (low) (sf)
-- Class C at BBB (high) (sf)

All trends are Stable.

The collateral consists of 58 fixed-rate loans secured by 42 garden-style properties, six mid-rise properties, three manufactured housing communities (MHCs), three student-housing complexes, two townhome communities and two age-restricted properties. Of the 58 loans, 55 have ten-year loan terms and three have 11-year loan terms. Loans with more than ten-year terms are typically part of Freddie Mac’s pre-stabilization lending program. The transaction is a sequential-pay pass-through structure. The conduit pool was analyzed to determine the provisional ratings, reflecting the long-term probability of loan default within the term and its liquidity at maturity. When the cut-off loan balances were measured against the DBRS Morningstar Stabilized Net Cash Flow and their respective actual constants, 12 loans, representing 18.9% of the trust balance, had a DBRS Morningstar Term Debt Service Coverage Ratio (DSCR) at or above 1.80 times (x), a threshold indicative of a lower likelihood of mid-term default.

The loans benefit from strong origination practices. Loans on Freddie Mac’s balance sheet, which are originated according to the same policies as those for securitization, have an extremely low delinquency rate of 0.03% as of June 2019. This compares favorably with the delinquency rate for commercial mortgage-backed securities (CMBS) multifamily loans of approximately 2.47% as of August 2019. As of June 30, 2019, Freddie Mac has securitized 16,188 loans totaling approximately $317.4 billion in guaranteed issuance balance. To date, Freddie Mac has not realized any credit losses on its guaranteed issuances, although a combined $15.33 million in total losses has been realized by B-piece investors, representing less than one basis point of total issuance.

The deal has favorable credit metrics as evidenced by an issuance weighted-average (WA) loan-to-value ratio (LTV) and balloon WA LTV of 66.8% and 60.9%, respectively. Only nine loans, comprising 5.9% of the trust balance, have issuance LTVs of 75.0% or higher, which is a lower proportion than other recently analyzed Freddie Mac transactions. In addition, the WA DBRS Morningstar Term DSCR is reasonable at 1.47x.

The pool has strong occupancy metrics, with a WA occupancy rate of 94.5% based on the most recent rent rolls provided to DBRS Morningstar. Furthermore, only two loans have occupancy rates below 90%. Twenty loans, representing 36.7% of the pool balance, were for the purpose of acquisition. Acquisition loans are favorable because the sponsor is usually required to contribute a significant amount of cash equity as a part of the transaction. Acquisition financing is also generally based on actual transaction values rather than an appraiser’s estimate of market value.

Nineteen loans, representing 28.2% of the pool, are secured by properties located in market rank one and two, which are considered more rural or tertiary in nature, including two of the top 15 loans (The Kenley and Waterstone at Kiley Ranch). Only two loans, representing 2.9% of the pool, are secured by properties located in markets ranked six, which are typically lighter urban in nature. A further two loans, representing 2.1% of the pool, are secured by properties located in markets ranked higher than six, which are typically more urban in nature. Markets ranked seven and eight are generally denser urban areas and benefit from greater liquidity, even during times of economic stress.

Properties located in tertiary and rural markets were analyzed with higher loss severities than those located in urban markets. Ten loans, representing 21.2% of the pool, including four of the top 15 loans in the pool, are structured with full-term interest-only (IO) payments. An additional 38 loans, comprising 71.4% of the pool, have remaining partial IO periods ranging from 12 months to 60 months. Ten loans, representing 7.4% of the pool, are amortizing. The probability of default (POD) is calculated using a DSCR that includes amortizing debt service. The balloon LTV is also incorporated into the POD. Furthermore, partial IO loans are penalized in the model. Seven loans (6.6% of the pool) are secured by non-traditional property types (MHC, student housing, cooperatives, age-restricted housing and assisted living) including Avenue Auburn, the 24th-largest loan in the pool (1.5%), which is a student housing property. Traditional multifamily properties, which typically are less volatile than those mentioned above, represent the remaining 93.4% of the pool by balance. Compared with other property types, multifamily properties benefit from staggered lease rollover and generally low 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. The analysis performed on the 28 sampled loans indicates that most markets are displaying strong occupancy and rent growth figures with positive year-over-year trends established. Student housing properties are modeled with higher PODs than traditional multifamily properties and MHCs have historically performed very well, despite not being a core asset class.

Classes X1, XAM, X2-A and X2-B 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.dbrs.com.

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

-- Ocean Club (6.7% of pool)
-- Home at the Battery (6.2% of pool)
-- LC Middletown (5.9% of pool)
-- Park Place III (4.6% of pool)
-- Beacon 430 (3.9% of pool)
-- Alvista Long Beach (3.2% of pool)
-- Junction at Galatyn Park (3.2% of pool)
-- Radius at the Domain (3.0% of pool)
-- 10x Living at Panama City Beach (2.9% of pool)
-- Elan 99 West (2.8% of pool)
-- Park Rowe Village (2.7% of pool)
-- Tempo Evergreen Walk Apartments (2.7% of pool)
-- Waterstone at Kiley Ranch (2.5% of pool)
-- The Kenley (2.4% of the pool)
-- Preserve at Riverwalk (2.4% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrs.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, which can be found on dbrs.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 www.dbrs.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 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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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