Morningstar DBRS Finalizes Provisional Ratings on Freddie Mac Structured Pass-Through Certificates, Series K-163

DBRS, Inc. (Morningstar DBRS) finalized provisional credit ratings on the following classes of Structured Pass-Through Certificates (SPCs), Series K-163 to be issued by Freddie Mac Structured Pass-Through Certificates, Series K-163 (Freddie Mac SPCs K-163):

-- 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 53 fixed-rate loans secured by 53 commercial properties, including 31 garden-style multifamily properties (including five age restricted multifamily), 10 manufactured housing communities (including two age restricted MHCs), four mid-rise properties, three student housing properties, two townhome style properties, two independent living properties, and one high-rise property. Fifty-two loans in the pool have 10-year loan terms and Kalon Luxury Apartments, comprising 4.2% of the initial pool, has an 11-year loan term. The transaction is a sequential-pay pass-through structure. Morningstar DBRS analyzed the pool to determine the provisional credit 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 Morningstar DBRS' net cash flow (NCF) and their respective actual constants, the resulting weighted-average (WA) Morningstar DBRS Term debt service coverage ratio (DSCR) was 1.31 times (x), which is indicative of moderate midterm default risk. There aren't any loans in the pool with a Morningstar DBRS Term DSCR at or below 1.00x, a threshold indicative of a higher likelihood of midterm default, or any loans with a Morningstar DBRS 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 2024-K163 Mortgage Trust, Multifamily Mortgage Pass-Through Certificates, Series 2024-K163 (FREMF 2024-K163) 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 of the related Presale Report for more information.) All Morningstar DBRS-rated classes will be subject to ongoing surveillance, confirmation, upgrade, or downgrade by Morningstar DBRS after the date of issuance. Morningstar DBRS assigned the initial credit ratings to the FREMF 2024-K163 Certificates and the Freddie Mac Structured Pass-Through Certificates, Series K-163 (Freddie Mac SPCs K-163) without giving effect to the Freddie Mac guarantee. Please see the Freddie Mac SPCs K-163 Structural and Collateral Term Sheet for more information about the structure of the Freddie Mac SPCs K-163.

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 0.4% as of February 2024. This compares favorably with the delinquency rate of approximately 1.83% for CMBS multifamily loans over the same period. From the inception of its K-Program through February 2024, Freddie Mac has securitized 26,417 loans, totaling approximately $560.6 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 $54.9 million in total losses, representing less than 1.0 basis point (0.01%) of total issuance.

There are 44 loans, representing 86.7% of the total pool balance, that have a Morningstar DBRS Issuance loan-to-value ratio (LTV) of 67.1% or below, resulting in a decreased probability of default (POD). The overall pool has a Morningstar DBRS WA Issuance LTV of 60.8% and a Morningstar DBRS WA Balloon LTV of 58.7%. These credit metrics are comparable, but slightly lower, relative to recent FREMF transactions rated by Morningstar DBRS and are indicative of lower leverage. Please see the Comparable Transactions table in the related Presale Report for additional details.

Fifty loans, representing 97.3% of the pool, had a Morningstar DBRS sponsor strength of Strong, which is credit positive. Sponsors generally represent large, financially capable individuals or companies led by experienced professionals with minimal prior credit issues. In many cases, sponsors are repeat borrowers of FREMF and have a proven credit record with no performance issues.

Collectively, there are six loans, representing 21.7% of the deal, that were assessed with favorable property quality. Backing all these loans are Class A multifamily properties that were built (or gut renovated) from 2020 to 2023. Morningstar DBRS considered these loans to be Average + property quality based on physical attributes and/or a desirable location within their respective markets. Four of these loans, Sentio, the James at Canyon Creek, Kalon Luxury Apartments, and Terra Residences, comprising 18.4% of the pool 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.

The average haircut was 6.9% across the 24 loans that Morningstar DBRS sampled, representing 76.4% of the pool. The sampled average NCF variance is lower than the recent Freddie Mac transactions rated by Morningstar DBRS and generally low when compared with that of other CMBS multiborrower transactions.

There are four loans, representing 17.8% of the pool, in a Morningstar DBRS MSA Group of 3, which is the best-performing group in terms of historic commercial mortgage-backed securities (CMBS) default rates among the top 25 metropolitan statistical areas (MSAs). These four loans are secured by properties in the following MSAs: the Los Angeles-Long Beach-Santa Ana, CA MSA, the San Diego-Carlsbad-San Marcos, CA MSA, and the New York-Northern New Jersey-Long Island, NY-NJ-PA MSA. 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%.

Given the pool's overall credit metrics, property quality, and Morningstar DBRS MSA Group 3 concentration, the pool has a WA expected loss of 1.6%, which is lower than the expected loss seen in recent Freddie Mac transactions Morningstar DBRS has rated, specifically FREMF 2023-K158, FREMF 2022-K152, FREMF 2022-K145, FREMF 2022-K143, and FREMF 2022-K141, and substantially lower than the general multiborrower CMBS universe.

Morningstar DBRS' credit ratings on the Certificates address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related Principal Distribution Amounts and Interest Distribution Amounts for the rated classes.

Morningstar DBRS' credit ratings does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, Yield Maintenance Charges and Static Prepayment Premiums.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS   
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024; https://dbrs.morningstar.com/research/427030).

Class X1 is an interest-only (IO) certificate that reference 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 credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Multi-Borrower Rating Methodology (March 1, 2024; https://dbrs.morningstar.com/research/428797).

Other methodologies referenced in this transaction are listed at the end of this press release.

With regard to due diligence services, Morningstar DBRS 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 Morningstar DBRS' methodology, Morningstar DBRS used the data file outlined in the independent accountant's report in its analysis to determine the credit ratings referenced herein.

The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

A provisional credit rating is not a final credit rating with respect to the above-mentioned securities and may change or be different than the final credit rating assigned or may be discontinued. The assignment of final credit ratings on the above-mentioned securities is subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalize the credit ratings.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312-332-3429

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- Rating North American CMBS Interest-Only Certificates (December 13, 2023): https://dbrs.morningstar.com/research/425261
-- Legal Criteria for U.S. Structured Finance (April 15, 2024): https://dbrs.morningstar.com/research/431205
-- DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023): https://dbrs.morningstar.com/research/420982
-- North American Comercial Mortgage Servicer Rankings (August 23, 2023): https://dbrs.morningstar.com/research/419592
-- North American CMBS Insight Model v 1.2.0.0: https://dbrs.morningstar.com/research/428797

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.