DBRS Morningstar Finalizes Provisional Ratings on Freddie Mac Structured Pass-Through Certificates, Series K-117

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Structured Pass-Through Certificates, Series K-117 issued by Freddie Mac Structured Pass-Through Certificates, Series K-117:

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

All trends are Stable.

The Class X1 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 remain 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 crisis on global economies. Some regions, jurisdictions, and asset classes are, however, feeling more immediate effects. DBRS Morningstar continues to monitor the ongoing coronavirus pandemic and its impact on both the commercial real estate (CRE) sector and the global fixed-income markets. 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.

The collateral consists of 58 fixed-rate loans secured by 55 garden-style, mid-rise, high-rise, or townhome-style multifamily properties; two student housing properties; and one assisted living facility. The pool includes two sets of crosscollateralized loans, and DBRS Morningstar’s analysis of this transaction incorporates these sets of crosscollateralized loans as a single loan, resulting in a modified loan count of 51. However, all figures below and throughout this report reflect the nonmodified loan count. The first set of crosscollateralized loans includes Madelyn Oaks Apartments, Hatteras Sound Apartments, The Reserves At Arboretum, and Stone Creek, which collectively total 6.2% of the cut-off date pool balance. The second set of crosscollateralized loans includes Robert O. Townsend, Kendall Drive Apartments, Kendall Park Apartments, Desert Village Apartments, and Acacia Apartments, which collectively total 0.9% of the cut-off date pool balance. All but two loans within the transaction are structured with 10-year loan terms. The other two loans (The Atlas and The Baldwin) are structured with 11-year loan terms. The transaction is a sequential-pay pass-through structure. The pool was analyzed to determine the DBRS Morningstar ratings, reflecting the long-term risk that the Issuer will default and fail to satisfy its financial obligations in accordance with the terms of the transaction. When the cut-off date balances were measured against the DBRS Morningstar net cash flows (NCFs) and their respective actual constants, 18 loans, representing 30.3% of the cut-off date trust balance, had an amortizing debt service coverage ratio (DSCR) at or above 1.8 times (x), a threshold that is generally indicative of a lower likelihood of term default.

In response to the ongoing pandemic, Freddie Mac made changes to its standard servicing practices to permit a temporary deferral of loan payments and forbearance of various remedies which could, among other things, adversely affect cash flow. While DBRS Morningstar views the inclusion of coronavirus-related upfront debt service reserves (DSRs) for a portion of the loans as a positive mitigant of some of the potential coronavirus-related disruptions, the continued economic fallout from the ongoing pandemic continues to evolve. While DBRS Morningstar generally expects multifamily properties to fare better than hospitality and retail properties, short- and medium-term challenges still exist in this sector. In addition to imposing various containment-related restrictions, certain jurisdictions have also placed temporary moratoriums on the eviction of tenants that may be continued, extended, or expanded. Furthermore, the government program the Coronavirus Aid, Relief and Economic Security Act (CARES Act), which provided, among other things, supplemental unemployment benefits to displaced employees, expired on July 25, 2020, which could result in additional stress on properties whose residents have been disproportionately affected by furloughs and layoffs. In addition, the resurgence of coronavirus cases has created additional uncertainty and increased stress on the planned re-opening of businesses. DBRS Morningstar also published its “Global Macroeconomic Scenarios: September Update” and is projecting generalized CRE asset value declines of approximately 15% under its moderate scenario and 30% under its adverse scenario.

The pool has a weighted-average expected loss of 2.66%, which is greater than the 2.53% expected loss exhibited by FREMF 2020-K115 but below the 2.89% average expected loss exhibited by the three Freddie Mac transactions that DBRS Morningstar rated prior (FREMF 2020-K112, FREMF 2020-K113, and FREMF 2020-K114). The loans in the transactions benefit from experienced and financially strong borrowers compared with typical commercial mortgage-backed security (CMBS) multifamily loans, as evidenced by 54 loans (representing 88.8% of the cut-off date pool balance) receiving Strong DBRS Morningstar sponsor strength scores. Additionally, many of the borrowers are repeat clients of Freddie Mac that have performed as agreed. Underlying collateral cash flow analysis is prudent, as evidenced by an average DBRS Morningstar NCF variance of -6.4% on the sampled loans. In general, revenue has been set to levels similar to the recent trailing 12 months (T-12) amount and lower than a recent annualized rent roll.

Ten loans, representing 41.3% of the cut-off date pool balance, exhibit Average + or Above Average property quality, eight of which are in the top 15. This is greater than the FREMF 2020-K115 transaction, which has 12 loans (representing 35.2% of the cut-off date pool balance) with Average + or Above Average property quality. This was also greater than the FREMF 2020-K114 transaction, which had nine loans (representing 25.8% of the cut-off date pool balance) with Average + or Above Average property quality. Thirty-seven loans, representing 60.8% of the pool by cut-off date loan balance, are structured with an upfront DSR designed to mitigate any potential impact of the ongoing coronavirus pandemic on property or loan performance. Freddie Mac is generally requiring coronavirus-related reserves, based on the property subtype and loan metrics at origination, which can be released back to the borrower if certain conditions are met.

The individual loan information provided generally included monthly collection reports through June 2020, which may not fully reflect any reductions to income as a result of coronavirus-related economic conditions. For loans that DBRS Morningstar did not sample, DBRS Morningstar conservatively applied a 10.0% reduction to the Issuer’s cash flow. This reduction was greater than the sample average NCF variance of -6.4%. Additionally, 37 loans, representing 60.8% of the pool by cut-off date loan balance, are structured with an upfront DSR designed to mitigate any potential impact of the ongoing coronavirus pandemic on property or loan performance.

Two loans, representing a combined 8.6% of the cut-off date pool balance and including the largest loan in the pool (The Atlas), are secured by student-housing properties. An additional 12 loans, representing a combined 24.4% of the cut-off date pool balance, are secured by properties with student-tenant concentrations ranging from 1.0% to 29.0%. 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. Student-housing property types are penalized in the model. Additionally, properties with student-housing concentrations in excess of 25.0% were modeled with a probability of default add-on to account for this elevated risk.

The pool contains six loans, representing 14.8% of the cut-off date pool balance, that were originated prepandemic (from June 2019 to February 2020). These loans were not structured with a coronavirus DSR. The six loans include The Atlas, The Reserves At Arboretum, Stone Creek, The Baldwin, Quarters At Mankato, and University Village At Walker Road. The Atlas is the largest loan in the pool (representing 6.9% of the cut-off date pool balance) and is considered student housing. Occupancy rates for assets securing five of the loans originated prepandemic exhibited strong occupancy rates ranging from 93.0% to 97.6% as of their most recent rent rolls. The Atlas exhibited an 85.9% occupancy rate as of July 2020, but exhibited an appraised loan-to-value of 69.0% at issuance and achieved an amortizing DSCR of 1.42x based on the NCF achieved over the T-12 ended July 31, 2020.

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.

Class X1 is an interest-only (IO) certificate that references 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:

-- One South Market (6.9% of the pool)
-- The Atlas (6.9% of the pool)
-- Madelyn Oaks Apartments (2.2% of the pool)
-- Hatteras Sound Apartments (2.0% of the pool)
-- BLVD Reston Station (5.7% of the pool)
-- Trend! (5.0% of the pool)
-- Aster At Lely Resort Apartments (4.0% of the pool)
-- Highland Meadows (3.7% of the pool)
-- The Baldwin (3.7% of the pool)
-- Westwood Reserve Apartments (3.1% of the pool)
-- Highland Square (3.0% of the pool)
-- Venue At Lakewood Ranch (2.9% of the pool)
-- Reflections Of Boca Del Mar (2.5% of the pool)
-- Residences At Veranda Park (2.5% of the pool)
-- Lindenbrooke (2.4% of the pool)
-- Lookout Hollow (2.3% of the pool)
-- The Duffield House (2.3% of the pool)
-- Heritage Hills Apartments (2.3% of the pool)
-- Lvl 4125 (2.2% of the pool)
-- Regency Crest (2.0% of the pool)
-- Mountain Crest Apartments (1.5% of the pool)
-- Robert O. Townsend (0.2% of the pool)
-- Kendall Drive Apartments (0.2% of the pool)
-- Kendall Park Apartments (0.2% of the pool)
-- Acacia Apartments (0.1% 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 Rating Methodology (August 7, 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 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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