DBRS Morningstar Finalizes Provisional Ratings on Freddie Mac Structured Pass-Through Certificates, Series K-132

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Structured Pass-Through Certificates (SPCs), Series K-132 issued by Freddie Mac Structured Pass-Through Certificates, Series K-132 (Freddie Mac SPCs K-132):

-- 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.

The collateral consists of 53 fixed-rate loans secured by 53 commercial properties, including 42 garden-style multifamily properties; four manufactured home communities (MHCs); three high-rise, mid-rise, or townhome properties; and four senior housing properties that are age restricted or offer assisted-living services. The transaction has 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.

Classes A-1, A-2, A-M, X1, XAM, and X3 of the FREMF 2021-K132 Mortgage Trust, Series 2021-K132 (FREMF 2021-K132) transaction have been conveyed into a trust by Freddie Mac to issue corresponding classes of SPCs guaranteed by Freddie Mac. (See the Transaction Structural Features section in the related Presale 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. DBRS Morningstar assigned the initial ratings to the FREMF 2021-K132 Certificates and Freddie Mac SPCs K-132 without giving effect to the Freddie Mac guarantee. Please see the FREMF 2021-K132 Structural and Collateral Term Sheet for more information about the structure of the Freddie Mac SPCs K-132.

This transaction represents a change from prior Freddie Mac issuance under its When Issued (WI) K-Series. The WI program introduces a class of WI Certificates that are initially backed by cash assets and exchanged for Class A-M certificates of the transaction once it is issued. The program is designed to transfer market risk from Freddie Mac to investors in the certificates while Freddie Mac aggregates and pools the mortgages for the transaction. The new certificates are not rated by DBRS Morningstar and the program represents no change to the credit metrics of the transaction. DBRS Morningstar did not apply any adjustments to account for this new program feature.

Freddie Mac has strong origination practices and the K-Series exhibits strong historical loan performance. 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 0.06% as of August 2021. This compares favorably with the delinquency rate of approximately 3.89% for CMBS multifamily loans. Since the inception of the K-Program through August 2021, Freddie Mac has securitized 22,144 loans, totaling approximately $456.4 billion in issuance balance. To date, Freddie Mac has not realized any credit losses on its guaranteed issuances, although B-piece investors have realized a combined $33.7 million in total losses, representing fewer than 1 basis point (0.01%) of total issuance.

Given the pool’s overall credit metrics, property quality, and sponsor strength, the deal has a weighted-average (WA) expected loss of 2.0%, which is lower than most recent Freddie Mac transactions rated by DBRS Morningstar. Contributing factors for the low expected loss can be viewed in the Comparable Transaction table. The key drivers are low loan-to-value ratio (LTV), high debt service coverage ratio (DSCR), low net cash flow (NCF) variance, and strong loan sponsors. Twenty-four loans, representing 56.0% of the total balance, have a DBRS Morningstar Issuance LTV of 67.1% or less, resulting in a decreased probability of default (POD). The overall pool has a WA DBRS Morningstar Issuance LTV of 67.6% and a WA DBRS Morningstar Balloon LTV of 64.4%. These credit metrics compare favorably with recent FREMF transactions rated by DBRS Morningstar and are indicative of lower leverage. Please see the Comparable Transactions table in the related Presale Report for additional details. The pool exhibits a strong WA DBRS Morningstar Term DSCR of 2.02 times (x), with 12 loans, comprising 26.6% of the pool, having a DBRS Morningstar Term DSCR in excess of 2.25x. The high DSCR is credit positive in the DBRS Morningstar model; however, DBRS Morningstar notes that the high DSCR is in part because many of the loans are interest only (IO) throughout the loan term. Please see the Comparable Transactions table in the related Presale Report for more information on how the credit characteristics of this transaction compare with recent Freddie Mac deals. The NCF variance between FREMF and DBRS Morningstar NCFs was low, with an average sampled haircut of 7.0% across 20 loans, representing 62.7% of the total pool balance. Across the pool, 86.7% of loans received a DBRS Morningstar Haircut of less than 10.0%. The average sampled NCF variance of the subject transaction is fairly comparable with recent Freddie Mac transactions rated by DBRS Morningstar. The loans in the transaction benefit from experienced and financially strong borrowers compared with typical CMBS multifamily loans, with 48 of the 53 loans (87.1% of pool balance) having Strong DBRS Morningstar sponsor strength scores. Additionally, many of the borrowers are repeat clients of Freddie Mac that have performed as agreed on prior loans.

In response to the ongoing Coronavirus Disease (COVID-19) 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. DBRS Morningstar also published its “Global Macroeconomic Scenarios: September 2021 Update” and is projecting generalized commercial real estate asset value declines for the U.S. of approximately 15% under its moderate scenario and 30% under its adverse scenario.

Seven loans, representing 8.3% of the pool, did not have customary due diligence performed by the mortgage loan seller. This includes an in-person site inspection and the completion of a property condition report. These loans have an average vintage of 1993 with two loans having had renovations in 2019 and 2020. These properties have a low WA DBRS Morningstar Issuance and Balloon LTV of 67.5% and 62.7%, respectively. Additionally, the seven properties demonstrated strong occupancy levels with an average occupancy rate of 95.3% (ranging from 86.7% to 99.5%). DBRS Morningstar also reviewed third-party reports, asset summary reports, and other online information to determine the appropriate property quality score for each remaining property.

Thirty-one loans, representing 58.8% of the total pool balance, are in suburban markets (defined as DBRS Morningstar Market Ranks of 3 or 4), which have experienced higher default rates historically. Accordingly, the loans in a DBRS Morningstar Market Rank of 3 or 4 have higher PODs and loss given defaults (LGDs). Seven loans, representing 18.2% of the total balance, are in urban markets (defined as DBRS Morningstar Market Ranks of 5 or greater). These markets historically indicate a lower POD and a smaller LGD.

The pool is split between multifamily properties, which encompass 95.7% of the pool; MHC properties representing 2.6% of the pool; and senior housing properties, totaling 1.7% of the pool. Nine properties in the pool, representing 21.9% of the total pool balance, have disclosed a military or student tenant concentration ranging from 1.0% to 15.0%. Compared with other property types, multifamily assets generally benefit from staggered lease rollover and lower expense ratios. While revenue is quick to decline in a downturn because of the short-term nature of the leases, it is also quick to rebound when the market improves. Forty-two loans, representing 92.8% of the pool, exhibited a recent occupancy rate above 95.0%, while only four loans, representing 5.3% of the pool, exhibited an occupancy rate between 90.0% and 94.9%. Two loans, representing 1.9% of the pool, exhibited an occupancy less than 90.0%.

Twenty-five loans, representing 61.6% of the total pool balance, are full-term IO loans, including 10 in the top 15. An additional 27 loans, representing 37.7% of the pool, are partial IO loans, ranging between three and nine years of IO. Only one loan, representing 0.7% of the pool, is fully amortizing. Based on observed historical performance, partial IO loans receive an increased POD adjustment in the model, with the most severe adjustment applied to loans with 12 to 84 months of IO. Fully amortizing and full-term IO loans receive a decreased POD adjustment.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Classes X1 and X2-A 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:

-- Prospectus ID#01 – Park Vista Apartments I (8.9% of the pool)
-- Prospectus ID#02 – McClurg Court (8.3% of the pool)
-- Prospectus ID#03 – Beachwood Apartments (5.3% of the pool)
-- Prospectus ID#04 – Green Leaf on Bell (4.6% of the pool)
-- Prospectus ID#05 – Fairway Vista (3.7% of the pool)
-- Prospectus ID#06 – The Pavilions (3.4% of the pool)
-- Prospectus ID#07 – Indy West (3.3% of the pool)
-- Prospectus ID#08 – Messina by the Lake (3.0% of the pool)
-- Prospectus ID#09 – The Residences at Century Park (2.8% of the pool)
-- Prospectus ID#10 – California Palms Apartments (2.7% 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 (March 26, 2021), 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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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