DBRS Morningstar Finalizes Provisional Ratings on FREMF 2020-K107 Mortgage Trust, Series 2020-K107

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Multifamily Mortgage Pass-Through Certificates, Series 2020-K107 issued by FREMF 2020-K107 Mortgage Trust, Series 2020-K107 (FREMF 2020-K107):

-- Class A-1 rated AAA (sf)
-- Class A-2 rated AAA (sf)
-- Class X1 rated AAA (sf)

All trends are Stable.

The Class X1 balance is notional.

With regard to the Coronavirus Disease (COVID-19) pandemic, the magnitude and extent of performance stress posed to global structured finance transactions remains highly uncertain. This considers the fiscal and monetary policy measures and statutory law changes that have already been implemented or will be implemented to soften the impact of the coronavirus crisis on global economies. Some regions, jurisdictions, and asset classes are, however, feeling more immediate effects. Accordingly, DBRS Morningstar may apply additional short-term stresses to its rating analysis by, for example, front-loading default expectations and/or assessing the liquidity position of a structured finance transaction with more stressful operational risk and/or cash flow timing considerations.

DBRS Morningstar is aware that Freddie Mac will offer forbearance for up to 90 days based on certain criteria and restrictions. Forborne borrower debt service amounts will be advanced by the master servicer, which will advance those forborne payments in the traditional manner. The only way to cut off or reduce such advancing obligations is through a nonrecoverability determination (NRD). Master servicers will not make an NRD in connection with forborne amounts during the forbearance period (three months). They have all agreed to follow the Freddie Mac Servicing Standard during such period as communicated to them by Freddie Mac. Once the forborne repayment period begins on the fourth month, should a borrower experience difficulty in payment of either scheduled payments or repayment of forborne amounts, master servicers can determine whether to make an NRD. Borrowers will be required to repay any such advances over a 12-month period immediately following the forbearance period. As of the date of this press release, DBRS Morningstar is aware that one loan within this transaction, The Village at Western Branch (representing 0.5% of the total cut-off date pool balance), has initiated the forbearance process with Freddie Mac but is not yet in forbearance. Because of the lack of information regarding this one loan, DBRS Morningstar has not applied any stresses to its modeling assumptions.

Furthermore, as of the date of the related report, DBRS Morningstar does not have any specific market or loan-level data that would support an adjustment to its loan-level net cash flow (NCF) analysis.

The collateral consists of 50 fixed-rate loans secured by 56 multifamily properties. All loans within the transaction are structured with 10-year loan terms. The transaction employs a sequential-pay pass-through structure. The conduit pool was analyzed to determine the 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 NCF and their respective actual constants, 12 loans, representing 48.8% 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 midterm default.

Classes A-1, A-2, and X1 of the FREMF 2020-K107 transaction have been conveyed into a trust by Freddie Mac to issue corresponding classes of structured pass-through certificates guaranteed by Freddie Mac (see the Transaction Structural Features section for more information). All DBRS Morningstar-rated classes will be subject to ongoing surveillance, confirmations, upgrades, or downgrades by DBRS Morningstar after the date of issuance. The initial ratings of the FREMF 2020-K107 certificates and the Freddie Mac Structured Pass-Through Certificates, Series K-107 (Freddie Mac SPCs K-107) were assigned without giving effect to the Freddie Mac guarantee. Please see the FREMF 2020-K107 Structural and Collateral Term Sheet for more information about the structure of the Freddie Mac SPCs K-107.

The deal has favorable credit metrics as evidenced by an issuance weighted-average (WA) loan-to-value (LTV) and balloon WA LTV of 64.9% and 60.7%, respectively. In addition, the WA DBRS Morningstar Term DSCR is strong for a Freddie K-series transaction at 1.73x and is substantially higher than FREMF 2020-K106 at 1.39x, FREMF 2020-K105 at 1.49x, FREMF 2019-K101 at 1.47x, and FREMF 2019-K100 at 1.49x. This is the result of 48.1% of the pool being structured as full-term interest only (IO), which comparatively is well above FREMF 2020-K106 at 30.5%, FREMF 2020-K105 at 26.8%, FREMF 2019-K101 at 21.2%, and FREMF 2019-K100 at 30.5%. This DSCR cushion provided by the full-term IO could be beneficial in the current economic conditions and uncertainty surrounding the ultimate impact of the coronavirus on the economy.

The pool has strong occupancy metrics, with a WA occupancy rate of 94.6% based on the most recent rent rolls provided to DBRS Morningstar. Furthermore, only six loans, representing 7.7% of the pool, have occupancy rates below 90.0%.

Nineteen loans, representing 35.4% 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, had an extremely low delinquency rate of 0.05% as of January 1, 2020. This compared favorably with the delinquency rate for commercial mortgage-backed security (CMBS) multifamily loans of approximately 0.35% as of January 2020.

As of December 31, 2019, Freddie Mac had 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.

The pool is concentrated by property type, as multifamily properties represent 100.0% of the collateral.

Two loans, representing 16.6% of the pool, exhibit Above Average property quality; eight loans, representing 22.9% of the pool, exhibit Average (+) property quality, six of which are in the top 15. Furthermore, only three loans, representing 1.1% of the pool, was exhibited Average (-) or Below Average property quality.

Fifteen loans, representing 19.6% of the pool, are secured by properties located in DBRS Morningstar Market Ranks 1 or 2, which are considered more rural or tertiary in nature. This includes three of the top 15 loans in the pool (Carlton Arms of Winter Haven, Avana on Second, and Sycamore Terrace Apartments), representing 10.8% of the pool.

Eleven loans, representing 48.1% of the pool and including eight of the top 15 loans, are structured with full-term IO payments. An additional 33 loans, comprising 48.2% of the pool, have remaining partial-IO periods ranging from 24 months to 60 months.

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 and XAM 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#01–Art Plaza (13.0% of the pool)
-- ProspectusID#02–Cascades at Northlake (6.6% of the pool)
-- ProspectusID#03–Carlton Arms of Winter Haven (6.3% of the pool)
-- ProspectusID#04–Cool Springs I (5.7% of the pool)
-- ProspectusID#05–Tenby Chase Apartments (4.9% of the pool)
-- ProspectusID#06–Cumberland Pointe Apartments (4.2% of the pool)
-- ProspectusID#07–Oasis at Montclair (4.0% of the pool)
-- ProspectusID#08–Canterra Apartments (3.9% of the pool)
-- ProspectusID#09–Berkeley Trace Apartments (3.7% of the pool)
-- ProspectusID#10–1880 Little Raven (3.6% of the pool)
-- ProspectusID#11–The Gramercy at New Albany (3.3% of the pool)
-- ProspectusID#12–Avana on Second (2.4% of the pool)
-- ProspectusID#13–Camden Place (2.3% of the pool)
-- ProspectusID#14–Circle City Apartments (2.2% of the pool)
-- ProspectusID#15–Sycamore Terrace Apartments (2.1% of the pool)
-- ProspectusID#16–Avery Place Villas (2.1% of the pool)
-- ProspectusID#17–Orleans Village (2.1% of the pool)
-- ProspectusID#18–Reveal on Cumberland (1.9% 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 the North American CMBS Multi-Borrower Rating Methodology (March 9, 2020), 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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