DBRS Morningstar Finalizes Provisional Ratings on FREMF 2020-K738 Mortgage Trust, Series 2020-K738

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Multifamily Mortgage Pass-Through Certificates, Series 2020-K738 issued by FREMF 2020-K738 Mortgage Trust, Series 2020-K738 (FREMF 2020-K738):

-- 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 X2-A balances are 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—for example, by 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 Servicing Standard (Freddie Mac Servicing Practices) 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 rating report, 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 this rating 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. As of April 13, 2020, Freddie Mac has reported 327 forborne securitized loans, representing approximately 1.4% of Freddie Mac’s securitized loans and equating to roughly $1.7 billion in outstanding unpaid principal balance. Freddie Mac additionally reported that approximately one-quarter of all securitized deals exhibited at least one forborne loan. The data reported by Freddie Mac was sourced via four different master servicers, including three external servicers and Freddie Mac, which serves as Master Servicer for roughly 85.0% of the reported forborne loans.

The collateral consists of 25 fixed-rate loans secured by 25 multifamily properties. Two loans (IMT Dayton Station and IMT Hyland Hills) are associated with the same sponsorship and are both located in the Denver metropolitan (metro) statistical area, and DBRS Morningstar’s analysis of this transaction incorporates these two loans as a single loan, resulting in a modified loan count of 24. All loans within the transaction are structured with seven-year loan terms, with the exception of one loan that is structured with a 96-month loan term and three loans that are structured with 60-month loan terms. The transaction employs a sequential-pay pass-through structure. The conduit pool was analyzed to determine the final 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 DBRS Morningstar’s NCF and their respective actual constants, 14 loans, representing 59.8% 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, A-M, X1, XAM, and X3 of the FREMF 2020-K738 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 of the related report 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-K738 certificates and the Freddie Mac Structured Pass-Through Certificates, Series K-738 (Freddie Mac SPCs K-738) are assigned without giving effect to the Freddie Mac guarantee. Please see the FREMF 2020-K738 Structural and Collateral Term Sheet for more information about the structure of the Freddie Mac SPCs K-738.

The deal exhibits favorable credit metrics, as evidenced by a weighted-average (WA) issuance loan-to-value (LTV) and WA balloon LTV of 63.9% and 61.5%, respectively. Additionally, the WA DBRS Morningstar Term DSCR of 1.86x is substantially higher than that of FREMF 2019-K736 at 1.37x, FREMF 2019-K735 at 1.35x, FREMF 2020-K107 at 1.73x, FREMF 2020-K106 at 1.39x, and FREMF 2020-K105 at 1.49x. This is the result of 14 loans, representing a combined 59.8% of the cut-off-date loan balance, being structured with full-term interest-only (IO) periods, which is comparatively high relative FREMF 2019-K736 at 32.4%, FREMF 2019-K735 at 28.6%, FREMF 2020-K107 at 48.1%, FREMF 2020-K106 at 30.5%, and FREMF 2020-K105 at 26.8%. This DSCR cushion provided by the full-term IO structure could prove beneficial given current economic conditions and the uncertainty surrounding the ultimate impact of the coronavirus on the economy, though it does come at the cost of not deleveraging the loans modestly over time.

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 0.05% as of January 2020. This compares favorably with the delinquency rate for commercial mortgage-backed security (CMBS) multifamily loans of approximately 0.35% as of January 2020. As of February 29, 2020, Freddie Mac has securitized 17,849 loans, totaling approximately $357.45 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 pool suffers from elevated geographic, sponsor, and loan size concentration risk. Five loans, representing a combined 35.5% of the cut-off-date pool balance and including four of the top five loans, are secured by assets located in the Denver metro area. Additionally, five loans, representing a combined 30.5% of the cut-off-date pool balance and including five of the top 15 loans, are associated with the same sponsor. Furthermore, the pool itself is concentrated with only 25 loans and a relatively low Herfindahl (HERF) score of only 16.7. By contrast, FREMF 2019-K736 included 43 loans secured by 43 properties with a HERF of 26.4 and FREMF 2019-K735 included 49 loans secured by 49 properties with a HERF of 31.5. DBRS Morningstar’s analysis of this transaction incorporates two loans (IMT Dayton Station and IMT Hyland Hills) as a single loan, resulting in a modified loan count of 24 and an even further stressed HERF of 12.9. As a result, the transaction’s AAA credit enhancement of 19.375% equates to a very high 8.14x expected loss multiple. Despite the relatively significant sponsor concentration, the loans in the transactions benefit from experienced and financially strong borrowers compared with typical CMBS multifamily loans.

Ten loans, representing a combined 44.8% of the cut-off-date pool balance and including six of the top 10 loans, are secured by properties with a student tenant concentration. Per the most recent rent rolls provided to DBRS Morningstar, the student concentrations generally ranged from 0.4% to 40.0%. Three loans, representing 8.9% of the cut-off-date pool balance and including one of the top 15 loans, are secured by properties with a reported student tenant concentration of at least 30.0%. Given the current environment in which most universities are not holding in-person classes and the lack of certainty around convening in-person classes in the fall 2020 semester, these properties with high student concentrations could be at higher risk of default. Properties with student housing concentrations in excess of 30.0% were modeled with a probability of default (POD) add-on to account for this risk. Of the 10 loans secured by properties with reported student tenant concentrations, seven loans, representing a combined 35.9% of the cut-off-date pool balance, are secured by properties with student tenant concentrations of no more than 10.0%.

Fourteen loans, representing 59.8% of the cut-off-date pool balance and including 10 of the top 15 loans, are structured with full-term IO periods. An additional 10 loans, representing 40.1% of the cut-off-date pool balance and including five of the top 15 loans, are structured with partial-IO periods ranging from 12 months to 36 months. The 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.

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, 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 updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- ProspectusID#01 – IMT Dayton Station (11.3% of the pool)
-- ProspectusID#02 – Hensley at Corona Pointe (10.9% of the pool)
-- ProspectusID#03 – Solana Olde Town Station (8.7% of the pool)
-- ProspectusID#04 – IMT Hyland Hills (7.8% of the pool)
-- ProspectusID#05 – Sofi Westminster (5.6% of the pool)
-- ProspectusID#06 – 2803 Riverside Apartments (5.1% of the pool)
-- ProspectusID#07 – Renton Sage (4.5% of the pool)
-- ProspectusID#08 – IMT Chimney Rock (3.9% of the pool)
-- ProspectusID#09 – IMT Desert Palm Village Apartments (3.8% of the pool)
-- ProspectusID#10 – South Wind Apartments (3.8% of the pool)
-- ProspectusID#11 – Country Club Verandas Apartments (3.7% of the pool)
-- ProspectusID#12 – IMT Pavilion Place (3.7% of the pool)
-- ProspectusID#13 – Latitude at the Commons (3.2% of the pool)
-- ProspectusID#14 – Woodland Estates Apartment Homes (3.2% of the pool)
-- ProspectusID#15 – Estates at McDonough (3.0% of the pool)
-- ProspectusID#16 – The Mill at Chastain (2.9% of the pool)
-- ProspectusID#20 – Aspenwood Apartments (2.1% of the pool)
-- ProspectusID#21 – Westerly Shores (2.0% 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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