DBRS Morningstar Finalizes Provisional Ratings on FREMF 2020-K106 Mortgage Trust, Series 2020-K106

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Multifamily Mortgage Pass-Through Certificates, Series 2020-K106 issued by FREMF 2020-K106 Mortgage Trust, Series 2020-K106 (FREMF 2020-K106):

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

All trends are Stable.

The collateral consists of 52 fixed-rate loans secured by 43 garden-style properties, four mid-rise properties, two high-rise properties, one townhome property, one independent living property, and one manufactured housing community (MHC). One group of loans, comprising Torrente, Park West 205, and Marquis Place, is cross-collateralized and DBRS Morningstar’s analysis of this transaction incorporates this group of loans as a single loan, resulting in a modified loan count of 50. Of the 50 loans, 48 have 10-year loan terms and two have 11-year loan terms. Loans with more than a 10-year term are typically part of Freddie Mac’s prestabilization lending program. The transaction employs a sequential-pay pass-through structure. DBRS Morningstar analyzed the conduit pool to determine the provisional ratings, reflecting the long-term probability of loan default within the term and its liquidity at maturity. Measuring the cutoff loan balances against the DBRS Morningstar Stabilized net cash flow and their respective actual constants results in nine loans, representing 14.4% of the trust balance, with a DBRS Morningstar Term debt service coverage ratio (DSCR) at or above 1.80 times (x), a threshold indicating a lower likelihood of midterm default.

Classes A-1, A-2, A-M, X1, XAM, and X3 of the FREMF 2020-K106 transaction have been conveyed into a trust by Freddie Mac to issue corresponding classes of Structured Pass-Through Certificates (SPCs) guaranteed by Freddie Mac. DBRS Morningstar assigned the provisional ratings to the FREMF 2020-K106 certificates and the Freddie Mac Structured Pass-Through Certificates, Series K-106 (Freddie Mac SPCs K-106) without giving effect to the Freddie Mac guarantee.

The deal has favorable credit metrics, as evidenced by a DBRS Morningstar Issuance loan-to-value ratio (LTV) and DBRS Morningstar Balloon LTV of 67.6% and 62.3%, respectively. Three loans, comprising 8.3% of the trust balance, have DBRS Morningstar Issuance LTVs greater than 75%, which is a lower proportion than several other recently analyzed Freddie Mac transactions. In addition, the weighted-average (WA) DBRS Morningstar Term DSCR is moderate at 1.39x and 24.3% of the pool has a DBRS Morningstar Term DSCR over 1.75x, which is a higher proportion of several recently analyzed deals.

The pool has strong occupancy metrics, with a WA occupancy rate of 93.6% based on the most recent rent rolls provided to DBRS Morningstar. Furthermore, only seven loans have an occupancy rate below 90.0%.

Twenty-six loans, representing 62.3% of the pool by 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.

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 0.05% as of January 1, 2020. This compares favorably with the delinquency rate for commercial mortgage-backed securities (CMBS) multifamily loans of approximately 0.35% as of January 2020.

As of December 31, 2019, Freddie Mac has securitized 17,668 loans, totaling approximately $308.41 billion in guaranteed issuance balance. To date, Freddie Mac has not realized any credit losses on its guaranteed issuances, although B-piece investors have realized a combined $18.8 million in total losses, representing fewer than 1.0 basis points of total issuance.

The loans in the transaction benefit from experienced and financially strong borrowers compared with typical CMBS multifamily loans. In addition, many of the borrowers are repeat clients of Freddie Mac that have performed as agreed.

Only two loans, 1.8% of the pool, are secured by a nontraditional property type (MHC and independent living).

Eleven loans, representing 12.6% of the pool, are secured by properties in DBRS Morningstar Market Ranks of 1 and 2, which are more rural or tertiary in nature. Furthermore, only three loans, representing 7.4% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 6 or higher, which are typically more urban in nature. Properties in tertiary and rural markets have higher loss severities than those in urban markets.

Twelve loans, representing 30.5% of the pool, including six of the top 15 loans in the pool, are structured with full-term interest-only (IO) payments. An additional 33 loans, comprising 63.3% of the pool, have remaining partial IO periods ranging from 12 months to 60 months. Only seven loans, representing 6.3% of the pool, amortize over the full loan term. The IO period, including partial IO terms and the balloon LTV, affects a loan’s probability of default.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Classes X1, X2-A, XAM, 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.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:

-- ProspectusID#1 – 10x Living At Columbia Town Center (8.11% of the pool)
-- ProspectusID#2 – Marc San Marcos (6.85% of the pool)
-- ProspectusID#3 – Belvoir Square (5.04% of the pool)
-- ProspectusID#4 – Torrente, Park West 205 & Marquis Place (4.78% of the pool)
-- ProspectusID#5 – 210 St. Paul (4.12% of the pool)
-- ProspectusID#6 – The Muse (4.10% of the pool)
-- ProspectusID#7 – Springhouse Apartment Homes (3.44% of the pool)
-- ProspectusID#8 – Las Palmas (3.29% of the pool)
-- ProspectusID#9 – Atler At Brookhaven (3.11% of the pool)
-- ProspectusID#10 – The Avenue Apartments (2.90% of the pool)
-- ProspectusID#11 – Rivera Apartments (2.84% of the pool)
-- ProspectusID#12 – Aperture (2.72% of the pool)
-- ProspectusID#13 – Polo Glen Apartments (2.71% of the pool)
-- ProspectusID#14 – 88Twenty (2.61% of the pool)
-- ProspectusID#15 – Stratford Green Apartments (2.60% of the 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 Methodology, 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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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@dbrsmorningstar.com.

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

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