DBRS Morningstar Finalizes Provisional Ratings to Freddie Mac Structured Pass-Through Certificates, Series K-145

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Structured Pass-Through Certificates (SPCs), Series 2022-K145 issued by Freddie Mac Structured Pass-Through Certificates, Series K-145 (Freddie Mac SPCs K-145 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 42 fixed-rate loans secured by 42 multifamily properties, including 32 garden-style multifamily properties, one high-rise apartment complex, three mid-rise apartment complexes, two townhome apartment complexes, two military properties, and two student housing properties. 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 cut-off date balances were measured against DBRS Morningstar’s NCF and their respective actual constants, 11 loans, representing 21.2% of the pool, had a DBRS Morningstar Term DSCR at or above 1.75x, 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-K145 Mortgage Trust, Series K145 (FREMF 2022-K145) transaction have been conveyed into a trust by Freddie Mac to issue corresponding classes of Structured Pass-Through Certificates (SPCs) guaranteed by Freddie Mac. (See the Transaction Structural Features section for more information.) All DBRS Morningstar-rated classes will be subject to ongoing surveillance, including ratings confirmation, upgrade, or downgrade by DBRS Morningstar after the date of issuance. DBRS Morningstar assigned the initial ratings to the FREMF 2022-K145 Certificates and the Freddie Mac Structured Pass-Through Certificates, Series K-145 (Freddie Mac SPCs K-145) without giving effect to the Freddie Mac guarantee. Please see the FREMF 2022-K145 Structural and Collateral Term Sheet for more information about the structure of the Freddie Mac SPCs K-145.

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 Q1 2022. This compares favorably with the delinquency rate of approximately 1.26% for commercial mortgage-backed securities (CMBS) multifamily loans as of Q1 2022. From the inception of its K-Program through March 2022, Freddie Mac has securitized 23,559 loans, totaling approximately $490.5 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 points (0.01%) of total issuance.

Given its overall credit metrics, property quality, and sponsor strength, the pool has a weighted-average (WA) expected loss (EL) of 2.4%, which is in line with the EL seen in recent Freddie Mac transactions that DBRS Morningstar has rated, specifically FREMF 2022-K144, 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 -8.9% across the 32 loans that DBRS Morningstar sampled, representing 77.3% 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 1.50x. Furthermore, approximately 21.2% 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 analysis.

DBRS Morningstar considered six loans, comprising 28.4% 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, The Press at Midtown Quarter, The Metropolitan Rockville Town Center, and Jefferson Square, 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, which may be continued, extended, or expanded.

The pool is concentrated by property type, as multifamily properties represent 100.0% of the pool balance. Two properties, Wellington Place and Hazel 8, representing 2.0% of the pool, are student housing. Sky Terrace (comprising 2.9% of the pool, part of the Starwood Rollup) and Arlington West Apartments (comprising 2.3% of the pool), were observed by DBRS Morningstar 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. All of the loans in the pool, exhibited a recent occupancy rate above 90.0% and 35 loans, representing 80.8% of the pool, exhibited a recent occupancy rate at or above 95.0%.

Twenty-one loans, representing 53.8% 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, nine loans, representing 9.4% 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, while 11 loans, representing 32.4% of the pool balance, are secured by properties with DBRS Morningstar Market Ranks of 5 or 6, which are indicative of more urban settings. One loan, representing 4.4% of the pool balance, is secured by a property with DBRS Morningstar Market Rank of 7, no loans are within DBRS Morningstar Market Rank of 8, and the pool’s DBRS Morningstar WA Market Rank of 3.96 indicates a high concentration of properties in less densely populated areas. DBRS Morningstar analyzed properties in less densely populated markets with higher PODs and loss severity given defaults than those in more urban markets.

Seventeen loans, representing 37.0% of the pool balance, are full-term interest-only (IO) loans. An additional 21 loans, representing 57.5% of the pool balance, are partial IO loans, ranging between 36 and 84 months of IO payments. Four loans, representing 5.5% 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 to each loan. The Issuer provided recent third-party reports for all loans that contained property quality commentary and photos.

There were no environmental, social, governance (ESG) factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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.

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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