Morningstar DBRS Assigns Provisional Ratings to Freddie Mac Structured Pass-Through Certificates, Series K-168

DBRS, Inc. (Morningstar DBRS) assigned provisional credit ratings to following classes of Structured Pass-Through Certificates (SPCs), Series K-168 to be issued by Freddie Mac Structured Pass-Through Certificates, Series K-168 (Freddie Mac SPCs K-168):

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

All trends are Stable.

The Class X1 balance is notional.

The collateral consists of 26 fixed-rate loans secured by 26 commercial properties, including 20 garden-style multifamily properties, four mid-rise apartment complexes, and two townhomes. The top two loans (Rosslyn Heights and The Sutton Apartments), which collectively represent 23.0% of the trust balance, have the same sponsor and are in the Washington-Arlington-Alexandria, DC-VA-MD-WV metropolitan statistical area (MSA). Morningstar DBRS' analysis of this transaction incorporates these two loans as a single loan, resulting in a modified loan count of 25. All figures below and throughout this report reflect the modified loan count. All the loans in the trust 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 and 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 1.40 times (x), which is indicative of moderate midterm default risk. Eleven loans, representing 66.0% of the pool, have a Morningstar DBRS Term DSCR at or less than 1.25x, a threshold indicative of a higher likelihood of midterm default; however, no loans have a DSCR of less than 1.10x. There are eight loans, representing 12.3% of the pool, that have a Morningstar DBRS Term DSCR at or less 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 2025-K168 transaction will be conveyed into a trust by Freddie Mac to issue corresponding classes of Structured Pass-Through Certificates (SPCs) guaranteed by Freddie Mac (see the 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 2025-K168 Certificates and the Freddie Mac SPCs, Series K-168 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 September 2024. This compares favorably with the delinquency rate of approximately 4.2% for corporate mortgage-backed security (CMBS) multifamily loans over the same period. From the inception of its K-Program through September 2024, Freddie Mac has securitized 27,041 loans, totaling approximately $579.5 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 $55.69 million in total losses, representing less than 2.0 basis points (0.02%) of total issuance.

The pool has a WA expected loss of 0.9%, which is lower than the expected loss seen in recent Freddie Mac transactions Morningstar DBRS has rated, specifically FREMF 2024-K166, FREMF 2024-K164, FREMF 2024-K163, FREMF 2023-K158, FREMF 2022-K152, and FREMF 2022-K145, and substantially lower than the general multi-borrower CMBS universe.

The pool exhibits Morningstar WA Issuance and Balloon Loan-to-Value Ratios (LTVs) of 63.4% and 59.9%, respectively, both of which are comparable with the recent Freddie Mac transactions rated by Morningstar DBRS. Furthermore, 21 loans, representing 58.5% of the pool balance, exhibit Morningstar DBRS Issuance LTVs of less than 67.1%, resulting in a decreased probability of default.

Strong Sponsorship: Twenty-four loans, representing 96.1% of the pool balance, 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.

The average haircut was -6.1% across the 18 loans that Morningstar DBRS sampled, representing 86.9% 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.

There are eight loans, representing 57.0% of the pool, in a Morningstar DBRS 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.

There were four loans, comprising 25.0% of the pool, that were considered Average (+) property quality based on physical attributes and/or a desirable location within their respective markets. All four of these loans (149 Kent Avenue Apartments, The Gabriel, Reserve at Kirkwood, and Elan Park) 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.

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

Morningstar DBRS' credit ratings do not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, Static Prepayment Premiums, and 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
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 Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781

Class X1 is an interest-only (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 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 (December 13, 2024)
https://dbrs.morningstar.com/research/444616

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 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 these credit rating actions.

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.

North American Commercial Mortgage Servicer Rankings (August 23, 2024)
https://dbrs.morningstar.com/research/438283

Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024)
https://dbrs.morningstar.com/research/439702

Legal Criteria for U.S. Structured Finance (December 03, 2024)
https://dbrs.morningstar.com/research/444064

North American CMBS Insight Model v 1.2.0.0
https://dbrs.morningstar.com/research/444616

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