Morningstar DBRS Assigns Provisional Credit Ratings to FREMF 2024-K166 Mortgage Trust, Series K-166

DBRS, Inc. (Morningstar DBRS) assigned provisional credit ratings to following classes of Multifamily Mortgage Pass-Through Certificates, Series 2024-K166 (the Certificates) to be issued by FREMF 2024-K166 Mortgage Trust, Series 2024 K-166 (FREMF 2024-K166):

-- Class A-1 at (P) AAA (sf)
-- Class A-2 at (P) AAA (sf)
-- Class X1 at (P) AAA (sf)

All trends are Stable.

Class X1 balance is notional.

The collateral consists of 32 fixed-rate loans secured by 32 commercial properties, including 17 garden-style multifamily properties, six mid-rise apartment complexes, six age-restricted properties, two townhome properties, and one manufactured housing community. All loans in the pool have 10-year loan terms. 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 1.45 times (x), which is indicative of moderate midterm default risk. None of the loans in the pool have a Morningstar DBRS Term DSCR at or less than 1.00x, a threshold indicative of a higher likelihood of midterm default. Eight loans have a Morningstar DBRS Term DSCR greater than 1.75x, a threshold indicative of a lower likelihood of midterm default.

Classes A-1, A-2, A-M, X1, and XAM of the FREMF 2024-K166 transaction will be conveyed into a trust by Freddie Mac to issue corresponding classes of Structured Pass-Through Certificates guaranteed by Freddie Mac. 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 Certificates and the Freddie Mac Structured Pass-Through Certificates, Series K-166 (Freddie Mac SPCs K-166) without giving effect to the Freddie Mac guarantee.

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 June 2024. This compares favorably with the delinquency rate of approximately 2.36% for commercial mortgage-backed securities (CMBS) multifamily loans over the same period. From the inception of its K-Program through June 2024, Freddie Mac has securitized 26,721 loans, totaling approximately $572.2 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 $55.69 million in total losses, representing less than 2.0 basis points (0.02%) of total issuance.

The pool exhibits Morningstar WA Issuance and Balloon Loan-to-Value Ratios (LTVs) of 62.4% and 58.5%, respectively, both of which are comparable with the recent Freddie Mac transactions rated by Morningstar DBRS. Furthermore, 21 loans, representing 65.8% of the pool balance, exhibit Morningstar DBRS Issuance LTVs of less than 67.1%, resulting in a decreased probability of default. Please see the Comparable Transactions table for additional details.

Morningstar DBRS assigned every loan in the pool 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.

There are 10 loans, representing 36.6% of the pool, in a Morningstar DBRS metropolitan statistical area (MSA) Group of 3, which is the best-performing group in terms of historic CMBS default rates among the top 25 MSAs. MSA Group 3 historical default rate is considerably lower than the overall CMBS historical default rate.

Five loans, comprising 41.6% of the pool, are considered Average+ property quality based on physical attributes and/or a desirable location within their respective markets. All five of these loans (Avion at Spectrum, Reata Oakbrook Village Apartments, Blue and Lime, Bexley Arcadia, and Abode at Geneva) are included in the top 10 loans in the pool. 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 -5.8% across the 17 loans that Morningstar DBRS sampled, representing 84.0% of the pool. The sampled average NCF variance is in line with the recent Freddie Mac transactions rated by Morningstar DBRS and generally low when compared with other CMBS multi-borrower transactions.

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 some recent Freddie Mac transactions Morningstar DBRS has rated, specifically FREMF 2023-K158 Mortgage Trust, Series 2023-K158, FREMF 2022-K152 Mortgage Trust, Series 2022-K152, FREMF 2022-K145 Mortgage Trust, Series 2022-K145, and FREMF 2022-K144 Mortgage Trust, Series 2022-K144, and substantially lower than the general multi-borrower CMBS universe. The pool's WA expected loss is greater than those of Morningstar DBRS-rated FREMF 2024-K164 Mortgage Trust, Series 2024-K164 and FREMF 2024-K163 Mortgage Trust, Series 2024-K163 Freddie Mac transactions.

Morningstar DBRS' credit rating on the Certificates addresses 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/or Interest Distribution amounts for the rated classes.

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

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, AND GOVERNANCE CONSIDERATIONS
ESG Considerations had a relevant effect on the credit analysis.

Environmental (E) Factors
The following Environmental factor had a relevant effect on the credit analysis: The Environmental Site Assessments identified one Business Environmental Risk with an estimated total remediation cost of $136,500. As a mitigant, Morningstar DBRS increased the loss-given default on the relevant loan to mitigate the risk. Morningstar DBRS considered the environmental remediation expense a relevant environmental ESG factor.

There were no Social or 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 Factors in Credit Ratings at https://dbrs.morningstar.com/research/437781 (August 13, 2024).

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 ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

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 the final credit ratings on the above-mentioned securities are 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.

-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283
-- Legal Criteria for U.S. Structured Finance (October 28, 2024), https://dbrs.morningstar.com/research/441840
-- Rating North American CMBS Interest-Only Certificates (June 28, 2024), https://dbrs.morningstar.com/research/435294
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- 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.