DBRS Morningstar Finalizes Provisional Ratings on Freddie Mac Structured Pass-Through Certificates, Series K-122

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Structured Pass-Through Certificates, Series K-122, issued by Freddie Mac Structured Pass-Through Certificates, Series K-122:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class X1 at 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 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 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 69 fixed-rate loans secured by 55 garden or mid-rise properties, nine MHC properties, two townhomes, and one age-restricted property. All loans within the transaction are structured with 10-year loan terms. 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 NCF and their respective actual constants, 10 loans, representing 23.9% of the pool, had a DBRS Morningstar Term DSCR at or above 1.80x, a threshold indicative of a lower likelihood of term default.

In response to the ongoing coronavirus pandemic, Freddie Mac made changes to its standard servicing practices to permit a temporary deferral of loan payments and forbearance of various remedies that could, among other things, adversely affect cash flow. While DBRS Morningstar views the inclusion of coronavirus-related upfront debt service reserves (DSRs) for a majority of the loans as a positive mitigant of some of the potential coronavirus-related disruptions, the economic fallout from the ongoing pandemic continues to evolve. DBRS Morningstar generally expects multifamily properties to fare better than hospitality and retail properties; however, 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, government programs, such as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which provided, among other things, supplemental unemployment benefits to displaced employees, expired on July 31, 2020. This 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: December Update” and is projecting generalized commercial real estate (CRE) asset value declines for the U.S. of approximately 15% under its moderate scenario and 30% under its adverse scenario.

The pool has a WA expected loss of 2.31%, which is slightly higher than that of FREMF 2020-K118 at 2.29% but below the WA expected loss of 2.66%, 2.53%, 2.86%, 2.86%, and 2.91% exhibited by FREMF 2020-K117, FREMF 2020-K115, FREMF 2020-K114, FREMF 2020-K113, and FREMF 2020-K112, respectively, all of which were previously rated by DBRS Morningstar.

The deal has favorable overall credit metrics as evidenced by an Issuance WA LTV and Balloon WA LTV of 70.7% and 63.5%, respectively. These metrics are comparable with the FREMF 2020-K118 transaction WA DBRS Morningstar Issuance LTV of 69.4% and WA DBRS Morningstar Balloon LTV of 63.3%; FREMF 2020-K117 transaction WA DBRS Morningstar Issuance LTV of 70.0% and WA DBRS Morningstar Balloon LTV of 62.6%; the FREMF 2020-K114 WA DBRS Morningstar Issuance LTV of 73.9% and WA DBRS Morningstar Balloon LTV of 68.1%; the FREMF 2020-K113 WA DBRS Morningstar Issuance LTV of 69.9% and WA DBRS Morningstar Balloon LTV of 64.5%; and the FREMF 2020-K112 WA DBRS Morningstar Issuance LTV of 70.1% and WA DBRS Morningstar Balloon LTV of 64.9%. Only 15 loans, comprising 20.7% of the trust balance, have Issuance LTVs of 75.0% or higher, which is a similar proportion to other recently analyzed Freddie Mac transactions. In addition, the WA DBRS Morningstar Term DSCR is 1.62x. While lower than that of FREMF 2020-K118 at 2.00x and FREMF 2020-K117 at 1.78x, it is in line with FREMF 2020-K113 at 1.64x, and higher than that of FREMF 2020-K114 at 1.52x, , and FREMF 2020-K112 at 1.58x.

Underlying collateral cash flow analysis is prudent, as evidenced by an average DBRS Morningstar NCF variance of -6.9% on the sampled loans. In general, revenue has been set to levels similar to the recent T-12 amount and lower than a recent annualized rent roll.

The pool is generally well-diversified from both a loan balance and geographical perspective. The portfolio’s loan Herf of 39.1 is among the highest of any recently analyzed transactions, and the state Herf of 14.2 represents geographic granularity.

The pool has generally strong occupancy metrics, with a WA occupancy rate of 95.6%, based on the most recent rent rolls provided to DBRS Morningstar. Furthermore, only one loan has an occupancy rate below 90%.

Sixty loans, representing 85.2% of the pool by balance, are structured with an upfront debt service reserve designed to mitigate any potential impact of the ongoing coronavirus pandemic. Coronavirus-related reserves are generally being required by Freddie Mac based on the property subtype and loan metrics at origination and can be released back to the borrower if certain conditions are met.

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:

Prospectus ID#1-- Artwalk City Center (6.7% of the pool)
Prospectus ID#2-- The Cosmopolitan at Reston Town Center (5.6% of the pool)
Prospectus ID#3-- Piazza D’Oro Townhomes (4.7% of the pool)
Prospectus ID#4-- Princeton Bradford (3.9% of the pool)
Prospectus ID#5-- 100 Park at Wyomissing Square (3.6% of the pool)
Prospectus ID#6-- Hilltop By Princeton (3.6% of the pool)
Prospectus ID#7-- Grand Highlands (3.4% of the pool)
Prospectus ID#8-- Andover Place (3.1% of the pool)
Prospectus ID#9-- Parkside Commons (3.1% of the pool)
Prospectus ID#10-- Oak Vale Apartments (2.4% of the pool)
Prospectus ID#11-- Laurel Heights (2.3% of the pool)
Prospectus ID#12-- Park Heights Apartments (2.2% of the pool)
Prospectus ID#13-- Lullwater at Riverwood (2.1% of the pool)
Prospectus ID#14-- Vista Pointe (2.0% of the pool)
Prospectus ID#16-- Reserve at Kenton Place (1.9% of the pool)
Prospectus ID#17-- Collection at Overlook (1.8% of the pool)
Prospectus ID#18-- Echelon Luxury Apartments (1.8% of the pool)
Prospectus ID#20-- Westridge Gardens (1.7% of the pool)
Prospectus ID#22-- Huntington Apartment Homes (1.6% of the pool)
Prospectus ID#23-- Dogwood Gardens (1.6% of the pool)
Prospectus ID#24-- Grandview Apartments (1.5% of the pool)
Prospectus ID#30-- Chateau Avalon of Austin Apartments (1.0% of the pool)
Prospectus ID#35-- Davidson Apartments Homes (0.9% of the pool)
Prospectus ID#38-- Village Park (0.9% of the pool)
Prospectus ID#39-- Highlands at Red Hawk Apartments (0.9% of the pool)
Prospectus ID#41-- Bear Creek Apartments (0.8% of the pool)
Prospectus ID#45-- Boxer Apartments (0.7% of the pool)
Prospectus ID#46-- Chelsea Place (0.7% 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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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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