DBRS Assigns Ratings to Arbor Realty Commercial Real Estate Notes 2016-FL1, 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 2016-FL1, Ltd. (the Issuer):

-- Class A Senior Secured Floating-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 trends are Stable.

All classes have been privately placed.

The transaction is a managed collateralized loan obligation pool that totals $325.0 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 2019. Reinvestment is subject to Eligibility Criteria, which includes a rating agency condition (RAC) by DBRS. The initial pool consists of 18 loans with a total of $275.4 million of participation. Most of the loans are secured by current cash flowing assets in a period of transition, with viable plans and a viable loan structure to stabilize and improve the asset value. DBRS analyzed and modeled the existing loan pool in addition to loans that can be purchased subject to the Eligibility Criteria in the Post Closing Acquisition Period (PCAP); DBRS assumes that the loans purchased within the PCAP will migrate to the least-favorable criteria, as defined in the Eligibility Criteria. DBRS also anticipates that the pool could become more concentrated in the future in terms of sponsor concentrations or additional concentrations (property type, loan size and geography); as a result, DBRS will have the ability to provide a RAC on loans that are being added to the pool during the replacement period in order to evaluate any credit drift caused by loan concentrations. 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 13 properties, totaling 78.5% 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 17 initial loans, representing 97.0% 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 13 loans, representing 75.3% 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 replacement period, the transaction will have 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, which initially holds 23.0% equity of the preferred shares in the transaction, with strong processes. 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. One seasoned performing loan, the largest loan of the initial pool (representing 11.0%), is secured by an office property with a very desirable location in Manhattan, New York City. Additionally, two loans, representing 2.7% of the initial pool, are secured by self-storage properties. 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 funds are redeployed, the Issuer is required to meet Eligibility Criteria, which include a 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 and non-rated entities. 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 three transactions, Arbor Realty Collateralized Loan Obligation 2014-1, Ltd., Arbor Realty Commercial Real Estate Notes 2015-FL1, Ltd. and Arbor Realty Commercial Real Estate Notes 2015-FL2, Ltd. DBRS has reviewed Arbor Multifamily Lending, 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 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 September 2026. 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.

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

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