DBRS Morningstar Assigns Provisional Ratings to Freddie Mac Structured Pass-Through Certificates, Series K-144

Please note that on May 18, 2022, DBRS Morningstar updated all DBRS Morningstar DSCR references in its press release to reflect the correct figures. The previous references to DBRS Morningstar DSCR were inadvertently based on the issuer DSCR.

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Structured Pass-Through Certificates (SPCs), Series 2022-K144 to be issued by Freddie Mac Structured Pass-Through Certificates, Series K-144 (Freddie Mac SPCs K-144 or the Issuer):

-- 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 51 fixed-rate loans secured by 51 multifamily properties, including 34 garden-style multifamily properties, eight mid-rise apartment complexes, three age-restricted properties, two manufactured housing communities (MHCs), one military property, one townhome property, one student housing, and one MHC age-restricted property. All of the loans in the trust have 10-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 and maturity. When the cutoff date balances were measured against DBRS Morningstar’s net cash flow (NCF) and their respective actual constants, 11 loans, representing 29.0% 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-K144 Mortgage Trust, Series 2022-K144 (FREMF 2022-K144) 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 of the presale report for more information). All DBRS Morningstar-rated classes will be subject to ongoing surveillance, confirmation, upgrade, or downgrade by DBRS Morningstar after the date of issuance. DBRS Morningstar assigned the initial ratings to the FREMF 2022-K144 Certificates and the Freddie Mac SPCs K-144 without giving effect to the Freddie Mac guarantee. Please see the FREMF 2022-K144 Structural and Collateral Term Sheet for more information about the structure of the Freddie Mac SPCs K-144.

Freddie Mac has strong origination practices, and the K-Program 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 0.08% as of December 2021. This compares favorably with the delinquency rate of approximately 1.77% for commercial mortgage-backed securities (CMBS) multifamily loans as of December 9, 2021. From the inception of its K-Program through January 2022, Freddie Mac has securitized 23,135 loans, totaling approximately $480.9 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 $40.6 million in total losses, representing fewer than 1.0 basis point (0.01%) of total issuance.

Given the pool’s overall credit metrics, property quality, and sponsor strength, the pool has a weighted-average (WA) expected loss (EL) of 2.6%, which is in line with the EL seen in recent Freddie Mac transactions that DBRS Morningstar has rated, specifically FREMF 2022-K143, FREMF 2022-K141, FREMF 2021-K136, FREMF 2021-K134, FREMF 2021-K133, FREMF 2021-K132, and FREMF 2021-K131.

The average haircut was -7.5% across the 32 loans that DBRS Morningstar sampled, representing 74.0% of the pool. The sampled average NCF variance is in line with the recent Freddie Mac transactions rated by DBRS Morningstar and generally low when compared with other CMBS multiborrower transactions.

The pool exhibits a favorable DBRS Morningstar WA Term DSCR of 1.47x. Furthermore, approximately 29.0% of the total pool balance exhibits a DBRS Morningstar DSCR at or above 1.75x. The high DSCR is credit positive in the DBRS Morningstar model.

DBRS Morningstar considered nine loans, comprising 28.2% of the pool, to be of Average + property quality based on physical attributes and/or a desirable location within their respective markets. Four of these loans (Alston Station Square, Paseos at Ontario, Vernazza, and Kirkwood Place) are included in the top 10. Higher-quality properties are more likely to retain existing tenants and more easily attract new tenants, resulting in a more stable performance.

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 pool is concentrated by property type as multifamily properties represent 97.0% of the pool balance. One property, Isl 1220, representing 0.4% of the pool, is student housing, and three loans, representing 0.6% of the pool, are MHCs (including one age-restricted MHC). DBRS Morningstar observed Pointe at Stafford, comprising 2.0% of the pool, to have a high military tenant concentration. 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. Forty-nine loans, representing 97.3% of the pool, exhibited a recent occupancy rate of more than 90.0% and 42 loans, representing 81.9% of the pool, exhibited a recent occupancy rate at or above 95.0%.

Twenty-three loans, representing 60.3% of the pool balance, are secured by properties with DBRS Morningstar Market Ranks of 3 or 4, which represent areas that are generally suburban in nature and have historically had higher default and loss rates. Additionally, 19 loans, representing 30.1% of the pool balance, are secured by properties with DBRS Morningstar Market Ranks of 1 or 2, which are indicative of more rural or tertiary settings. No loans are within DBRS Morningstar Market Ranks 7 or 8, and the pool’s DBRS Morningstar WA Market Rank of 3.1 indicates a high concentration of properties in less densely populated areas. DBRS Morningstar analyzed properties in less densely populated markets with higher probability of defaults and loss severity given defaults than those in more urban markets.

Eleven loans, representing 29.5% of the pool balance, are full-term interest-only (IO) loans. An additional 37 loans, representing 67.7% of the pool balance, are partial IO loans, ranging between 24 and 84 months of IO payments. Three loans, representing 2.9% of the pool balance, are scheduled to pay principal for the entire loan term.

Because of health and safety constraints associated with the ongoing coronavirus pandemic, DBRS Morningstar was unable to perform site inspections on any of the properties in the pool. As a result, DBRS Morningstar relied more heavily on third-party reports, online data sources, and information provided by the Issuer to determine the overall DBRS Morningstar property quality score for each loan. The Issuer provided recent third-party reports for all loans that contained property quality commentary and photos.

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.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

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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