DBRS Assigns Ratings to Arbor Realty Commercial Real Estate Notes 2015-FL2, Ltd.

DBRS, Inc. (DBRS) has today assigned final ratings to the following classes of secured floating-rate notes (the Notes) to be issued by Arbor Realty Commercial Real Estate Notes 2015-2, Ltd. (ARCLO 2015-FL2). All trends are Stable.

-- Class A Senior Secured Floating-Rating Rate Notes at AAA (sf)
-- Class B Secured Floating-Rate Notes at AA (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 $350 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 2018. Reinvestment is subject to Eligibility Criteria, which includes a rating agency condition (RAC) by DBRS. The initial pool consists of 17 loans with a total of $302.6 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 an RAC on loans that are being reinvested as loans that are better than or equal to the loan or loans they are replacing, DBRS analyzed and modeled the existing loan pool; however, based on some of the sponsor concentrations and additional concentrations (property type, loan size and geography), DBRS assumed 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 11 properties, totaling 76.3% of the initial pool. When the cut-off balances were measured against the DBRS stabilized net cash flow and their respective stressed constants, there were 12 initial loans, representing 69.2% 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 11 loans comprising 77.0% 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 23.5% equity of the Preferred Shares in the transaction. The properties are predominantly multifamily, located primarily in core (urban and suburban) markets that benefit from greater liquidity or are affordable offerings in stable communities. Two seasoned performing loans, representing 13.4% 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 it 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. Arbor Realty SR, Inc. has a proven track record with several collateralized loan obligation platforms that performed well in 2004, 2005 and 2006. In addition to recently issued transactions in 2012 and 2013, DBRS rated two transactions, Arbor Realty Collateralized Loan Obligation 2014-1, Ltd. and Arbor Realty Commercial Real Estate Notes 2015-FL1, Ltd. 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 the timely receipt of interest and the ultimate payment of principal by the Stated Maturity Date, defined as September 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 applicable methodologies are North American CMBS Rating Methodology and Unified Interest Rate Model for Rating U.S. Structured Finance Transactions, which can be found on our website under Methodologies.

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains the description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not rely on the due diligence services outlined in Form-15E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

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