DBRS Assigns Ratings to Arbor Realty Commercial Real Estate Notes 2015-FL1, Ltd.

DBRS, Inc. (DBRS) has today assigned ratings to the following classes of secured floating-rate notes (the Notes) issued by Arbor Realty Commercial Real Estate Notes 2015-1, Ltd. (ARCLO 2015-FL1A). All trends are Stable.

-- Class A Senior Secured Floating-Rate Notes at AAA (sf)
-- Class B Secured Floating-Rate Notes at A (low) (sf)
-- Class C Secured Floating-Rate Notes at BBB (low) (sf)

All classes have been privately placed.

The transaction is a managed collateralized loan obligation pool that totals $300 million. The initial collateral consists of primarily multifamily properties that have some level of transition or stabilization, which is the premise for seeking floating-rate short-term debt. The transaction has a replacement period expected to expire in September 2017. Reinvestment is subject to Eligibility Criteria, which includes rating agency condition (RAC) by DBRS. The initial pool consists of 17 loans with a total of $249.7 million of participation. Most of the loans are secured by current cash flowing assets in a period of transition, with viable plans and loan structure to stabilize and improve the asset value. Because DBRS will get to provide RAC on loans that are being reinvested to a standard of loans being better than or equal to the loan or loans it is replacing, DBRS analyzed and modeled the existing loan pool; however, DBRS did assume, based on some of the sponsor concentrations and additional concentrations (property type, loan size and geography), that the pool in the future could and would look more like six equally sized loans, which results in an elevated probability of default for all loans in the pool. Because of the floating-rate nature of the loans, DBRS applied a stress to the base rate (one-month LIBOR) that corresponded to the remaining fully extended term of the loans and added the respective contractual loan spread to determine a stressed constant over the loan term. DBRS performed site inspections and met with the on-site property manager, leasing agent or representative of the borrowing entity for eight properties, totaling 65.6% of the initial pool, and completed a loan-level review on ten initial loans, representing 79.8% of the initial collateral. When the cut-off balances were measured against the DBRS stabilized net cash flow and their respective stressed constants, there were 13 initial loans, representing 89.5% of the initial pool, with term debt service coverage ratios (DSCRs) below 1.15 times (x), a threshold indicative of a higher likelihood of term default. Additionally, to assess refinance risk, DBRS applied its refinance constants to the balloon amounts, resulting in ten loans comprising 75.4% of the initial pool having refinance DSCRs below 1.00x. The properties are often transitioning, with potential upside in cash flow; however, DBRS does not give any credit to the stabilization if there are no holdbacks or other loan structural features in place to support such treatment.

Following the reinvestment period, the transaction is a sequential-pay structure.

DBRS considered the following rating considerations when assigning ratings to the pool. The loans were sourced by a commercial mortgage originator with strong processes, which initially holds 27.0% equity of the Preferred Shares in the transaction. The properties are predominantly multifamily, located primarily in core (urban and suburban) markets which benefit from greater liquidity or are affordable offerings in stable communities. Two seasoned performing loans, representing 17.4% of the initial pool, are secured by office properties with very desirable locations in Manhattan. One of these loans, 5 Times Square, represents a junior position in the property’s debt stack; thus, the loan has a very high loss profile. All loans are structured with cash management in place from origination. The loans are structured with reserves, including several with an initial debt service reserve. The originator’s core business is multifamily lending and has a substantial government-sponsored enterprise (GSE) platform; therefore, the loans are originated with an eye for GSE exit.

While the entire pool can change as loans pay off and the funds are redeployed, the Issuer is required to meet Eligibility Criteria, which include RAC for each Additional Loan Obligation prior to reinvestment, to mitigate volatility. DBRS finds that upgrades may be limited during this replacement period.

The Issuer, Servicer, Mortgage Loan Seller and Advancing Agent are related parties, a non-rated entity. In addition to recently issued transactions (one in 2012, one in 2013 and one transaction in 2014) rated by DBRS, Arbor Realty SR, Inc. has a proven track record with several collateralized loan obligation platforms that performed well in 2004, 2005 and 2006. DBRS has reviewed Arbor Commercial Mortgage LLC’s servicing platform (and special servicing) and finds it to be an acceptable servicer.

The DBRS ratings address the likelihood of timely receipt of interest with contemplation of deferral, as allowed for in the transaction documents, and the ultimate payment of principal and interest (including any previously deferred) by the Stated Maturity Date, defined as March 2025. The ratings assigned to the Notes are based exclusively on the credit provided by the transaction structure and underlying trust assets. The Notes will be subject to ongoing surveillance, which could result in upgrades or downgrades by DBRS after the date of issuance.

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

The Rule 17g-7 Report of Representations and Warranties is hereby incorporated by reference and can be found by clicking on the link to the right under Related Research, or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are CMBS Rating Methodology (January 2012) and Unified Interest Rate Model for U.S. and European Structured Credit (January 2013), which can be found on our website under Methodologies.