DBRS Morningstar Assigns Provisional Ratings to Freddie Mac Structured Pass-Through Certificates, Series K-748

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Structured Pass-Through Certificates (SPCs), Series K-748 to be issued by Freddie Mac Structured Pass-Through Certificates, Series K-748 (Freddie Mac SPCs K-748):

-- 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 26 fixed-rate loans secured by 26 commercial properties, including 22 garden-style multifamily properties, one mid-rise apartment complex, one student housing property, one townhome property, and one mobile home community property. Five loans (Rising Glen, Softwind Point Apartments, Tuscany Ridge, Parc One at Santee, and The Missions at Rio Vista II), which collectively represent 24.1% of the trust balance, are associated with the same sponsor and located in southern California. While these loans are not cross-collateralized, DBRS Morningstar’s analysis of this transaction incorporates these five loans as a single loan, resulting in a modified loan count of 22. All figures below and throughout this report reflect the modified loan count. All of the loans in the trust have seven-year loan terms. The transaction is a sequential-pay pass-through structure. DBRS Morningstar analyzed the pool 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 date balances were measured against DBRS Morningstar’s net cash flow (NCF) and their respective actual constants, 14 loans, representing 66.6% of the pool, had a DBRS Morningstar Term Debt Service Coverage Ratio (DSCR) at or above 1.75 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 2022-K748 Mortgage Trust, Series 2022-K748 (FREMF 2022-K748) transaction have been conveyed into a trust by Freddie Mac to issue corresponding classes of Structured Pass-Through Certificates (SPCs) guaranteed by Freddie Mac. 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 2022-K748 Certificates and the Freddie Mac Structured Pass-Through Certificates, Series K-748 (Freddie Mac SPCs K-748) without giving effect to the Freddie Mac guarantee. Please see the FREMF 2022-K748 Structural and Collateral Term Sheet for more information about the structure of the Freddie Mac SPCs K-748.

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 0.03% as of December 2021. This compares favorably with the delinquency rate of
approximately 2.13% for commercial mortgage-backed security (CMBS) multifamily loans as of January 2021. Since the inception of the K-Program through November 2021, Freddie Mac has securitized 22,736 loans, totaling approximately $471.7 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 $40.4 million in total losses, representing less than 1 basis point (0.01%) of total issuance.

The pool exhibits DBRS Morningstar Weighted Average (WA) Issuance and Balloon Loan-to-Value Ratios (LTVs) of 68.0% and 66.0%, respectively, both of which are comparable with the recent Freddie Mac transactions rated by DBRS Morningstar. Furthermore, eight loans, representing 46.5% of the pool balance, exhibit DBRS Morningstar Issuance LTVs below 67.1%, resulting in a decreased probability of default (POD).

The transaction’s Herfindahl score of 10.3 is low compared with other transactions recently rated by DBRS Morningstar and indicates the pool is fairly concentrated. The subject’s Herfindahl score is below the range of Herfindahl scores for the past four DBRS Morningstar-rated Freddie Mac seven-year K-Series securitizations, which ranged from 13.1 in FREMF 2022-K747 to 20.6 in FREMF 2021-K741. DBRS Morningstar elected to roll up five loans into one portfolio loan (San Diego Rollup) to stress the concentration of the pool in determining the credit ratings and treated them as one portfolio in its analysis. This put substantial downward pressure on the Herfindahl score to 10.3 from 19.1 in the DBRS Morningstar analysis. Subsequently, the lack of diversification negatively affected the pool-level expected loss because of elevated concentration risks. The San Diego Rollup loan has a low expected loss compared with the rest of the pool and has a DBRS Morningstar DSCR of 2.50x, which indicates that term default is unlikely.

The pool is concentrated by property type as multifamily properties represent 97.4% of the pool balance. 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 respond when the market improves. All 20 multifamily loans exhibited a recent occupancy rate of more than 90.0%, and 15 loans, representing 67.8% of the pool, exhibited a recent occupancy rate at or above 95.0%.

The pool is also concentrated by state, as there is one loan, representing 24.1% of the pool balance, secured by five properties in California; there are three loans, representing 15.7% of the pool balance, secured by properties in Florida; and there are two loans, representing 14.7% of the pool balance, in Maryland. Collectively, the top three states account for 54.5% of the pool balance. California, Florida, and Maryland have historically been attractive states for multifamily lenders and investors within the CMBS market, as evidenced by the high volume of securitized debt and the particularly strong historical performance in the agency CMBS sector in these states.

Five loans, representing 38.8% of the pool balance, are in DBRS Morningstar MSA Group 3, which is the best-performing group in terms of historical CMBS default rates among the top 25 MSAs. MSA Group 3 has a historical default rate of 17.2%, which is considerably lower than the overall CMBS historical default rate of 28.0%. Eleven loans, representing 64.3% of the pool balance, are secured by a property with a DBRS Morningstar Market Rank of 3 or 4, which, although generally suburban in nature, have historically had higher default and loss rates. Additionally, seven loans, representing 21.2% of the pool balance, are secured by a property with a DBRS Morningstar Market Rank of 1 or 2, which are more rural or tertiary. DBRS Morningstar WA Market Rank of 3.2 indicates a high concentration of properties in less densely populated areas.

Five loans, representing 23.8% of the pool balance, had Average + property quality scores based on physical attributes and/or a desirable location within their respective markets. Higher-quality properties are more likely to retain existing tenants and more easily attract new tenants, resulting in a more stable performance.

Given the pool’s overall credit metrics, property quality, and MSA concentration strength, the pool has a WA expected loss of 2.3%, which is in line with the expected loss seen in recent Freddie Mac transactions DBRS Morningstar has rated, specifically FREMF 2022-K747, FREMF 2021-K746, and FREMF 2021-K742, and substantially lower than the general multiborrower CMBS universe.

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. 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. 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.

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.

Class X1 is an 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#01 – San Diego Rollup (24.1% of pool)
-- Prospectus ID#02 – Lighthouse At Twin Lakes (10.0% of pool)
-- Prospectus ID#03 – Latitude At Mallard Creek (7.0% of pool)
-- Prospectus ID#04 – Oakleaf Apartments (7.0% of pool)
-- Prospectus ID#05 – The Grove At South Shore (5.0% of pool)
-- Prospectus ID#06 – Versailles North (4.8% of pool)
-- Prospectus ID#07 – Rocket Pointe Apartments (4.8% of pool)
-- Prospectus ID#08 – Alta Liberty Mill (4.7% of pool)
-- Prospectus ID#09 – Versailles Oakbrook (4.6% of pool)
-- Prospectus ID#10 – Tapestry Westland Village (3.7% of 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.

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.

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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