Freddie Mac’s latest multifamily CMBS 'K' deal tops $1.4B in notes

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Freddie Mac is selling $1.44 billion in commercial mortgage-backed bonds in a new multiborrower conduit deal featuring mortgages acquired through its “K-Series” affordable multifamily housing development program.

FREMF 2017-K67 Mortgage Trust consists of both guaranteed senior and nonguaranteed mezzanine certificates backed by 67 recently originated mortgage loans that funded the acquisition, development or rehabilitation of apartment complexes across the country. The loans were originated and acquired under guidelines set by the K-Series program under Freddie, or the Federal Home Loan Mortgage Corp.

The transaction itself consists of 12 tranches of notes: five principal and interest bonds series, five interest-only tranches, one class of principal-only receivables and a residual interest class.

The guaranteed senior structure includes a $1.19 billion in Class A-1 and A-2 bonds with 17.38% credit enhancement and expected triple-A ratings from Kroll Bond Rating Agency and Moody’s Investors Service. A Class A-M notes series totaling $48.47 million is also guaranteed, and rated AA by KBRA and Aa3 by Moody’s.

Freddie Mac purchases all the senior guaranteed bonds issued by the third-party trust and securitizes the senior bonds via a Freddie Mac trust.

The transaction features three classes of nonguaranteed subordinate bonds totaling $201 million. The nonguaranteed bonds sold to investors are intended to offload taxpayer risk of the government services enterprise (GSE) into the private sector.

The properties securing the loans are primarily urban-centric apartments — only 3.1% are in secondary or tertiary markets— and are highly leveraged with adequate debt-service coverage ratios. Moody’s established a weighted average loan-to-value ratio of 119.9% for the pool (compared to the average CMBS conduit rate of 112.9% in 2016), while KBRA assigned an initial LTV of 115.8% based on current appraisals.

Nearly 58% of the loans have an LTV above 120%, but are supported by net cash flows equating to a 1.47x DSCR, according to Moody’s.

The largest loan in the collateral is the $132 million mortgage for the 537-unit high-rise Crystal Plaza Apartments in the Crystal City neighborhood of Arlington, Va., comprising 9.2% of the pool. Crystal Plaza is a 51-year-old complex that underwent a $6.9 million renovation in 2016, and with monthly cash flow of $8.96 million, according to Moody’s.

The Crystal Plaza loan is among 13 interest-only loans in the collateral; another 39 have partial interest-only periods and 15 will amortize with a scheduled balloon payment. All but one of the loans have a 10-year maturity.

The loans were purchased from 16 originators, according to presale reports.

Most of the properties (22%) are in California. The pool has some exposure with five properties in regions of Texas and Florida that were impacted by Hurricanes Harvey and Irma, but the ratings agencies did not have information on the extent of any damage to those five complexes.

Freddie Mac's multifamily line of business securitizes loans through multiple shelf programs, including the K-Series (or K-Deals) platform that has placed 9,400 commercial mortgages into the asset-backed market since 2009. It funded $14.9 billion in multifamily housing development in the second quarter this year, in deals that are securitized into the K-Series or SB certificates program.

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