Fitch Affirms FREMF 2011-K704 and Freddie Mac Structured Pass-Through Certificates, Series K-704
KEY RATING DRIVERS
The affirmations of FREMF 2011-K704 are based on the stable performance of the underlying collateral since issuance. The pool has experienced no realized losses to date. Fitch has designated two loans (1.7% of the pool) as Fitch Loans of Concern due to either declining occupancy or increased operating expenses. Since issuance only one loan (2.4% of the pool) has been in special servicing, due to an SEC investigation relating to the sponsors, and was subsequently disposed in March 2015 with no realized loss.
As of the August 2015 distribution date, the pool's aggregate principal balance has been reduced by 6% to \\$1.13 billion from \\$1.2 billion at issuance. There are no specially serviced or delinquent loans. Per the servicer reporting, eight loans (11% of the pool) are defeased, including the second largest loan. Defeasance of the tenth largest loan (2.4% of the pool) was expected to close Sept. 10, 2015. However, the 17g-5 information provider did not provide confirmation that this has occurred.
The largest loan (6.3% of the pool) is secured by a 366-unit mid-rise apartment complex located in the Rosslyn neighborhood of Arlington, VA. The property was built in 1985 and approximately 30% of the units were renovated in 2010. The servicer-reported debt service coverage ratio (DSCR) decreased to 1.28x at year-end (YE) 2014 from 1.40x at YE 2013. Occupancy decreased to 90% from 96% during the same period.
The largest Fitch Loan of Concern (0.9% of the pool) is secured by an 88-unit mid-rise apartment building with two ground floor commercial units located in Baltimore, MD. One of the commercial spaces is vacant, while the other is occupied by Potbelly Sandwich Works. The loan has been on the servicer's watchlist since May 2014 due to deteriorating DSCR caused by significant increases in operating expenses. At YE 2014, servicer-reported occupancy was 94%, compared to 89% at YE 2013. Despite the 5% increase in occupancy, rental revenue remained flat and operating expenses increased 4.7% over the same period. As a result, the servicer-reported DSCR decreased to 0.98x at YE 2014 from 1.03x at YE 2013. Fitch will continue to monitor the loan for operating expense fluctuations and leasing status updates with respect to the commercial space.
RATING SENSITIVITIES
The Rating Outlooks remain Stable for all classes due to stable performance of the pool and continued paydown. Additional defeasance and continued stable performance could allow for future upgrades to Class B, although Fitch has some concerns with loan concentrations in softer markets including suburban Virginia. Additional information on rating sensitivity is available in the report 'FREMF 2011-K704 Multifamily Mortgage Pass-Through Certificates and Freddie Mac Structured Pass-Through Certificates, Series K704' (Nov 08, 2011), available at www.fitchratings.com.
DUE DILIGENCE USAGE
No third-party due diligence was provided or reviewed in relation to this rating action.
Fitch has affirmed the following ratings:
FREMF 2011-K704 Multifamily Mortgage Pass-Through Certificates
--\\$7.8 million class A-1 at 'AAAsf'; Outlook Stable;
--\\$929.5 million class A-2 at 'AAAsf'; Outlook Stable;
--\\$937.3 million class X1 at 'AAAsf'; Outlook Stable;
--\\$103.8 million class B at 'BBB+sf'; Outlook Stable.
Fitch does not rate classes C-1, C-2, interest-only class X2, and interest-only class X3.
Freddie Mac Structured Pass-Through Certificates, Series K-704
--\\$7.8 million class A-1 at 'AAAsf'; Outlook Stable;
--\\$929.5 million class A-2 at 'AAAsf'; Outlook Stable;
--\\$937.3 million class X1 at 'AAAsf'; Outlook Stable.
Fitch does not rate interest-only class X3.
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