DBRS Finalizes Provisional Ratings on Arbor Realty Commercial Real Estate Notes 2019-FL1, Ltd.

DBRS, Inc. (DBRS) finalized its provisional ratings on the following classes of notes issued by Arbor Realty Commercial Real Estate Notes 2019-FL1, Ltd. (the Issuer):

-- Class A Senior Secured Floating Rate Notes at AAA (sf)
-- Class A-S Senior Secured Floating Rate Notes at AAA (sf)
-- Class B Secured Floating Rate Notes at AAA (sf)
-- Class C Secured Floating Rate Notes at A (sf)
-- Class D Secured Floating Rate Notes at BBB (sf)
-- Class E Floating Rate Notes at BBB (low) (sf)
-- Class F Floating Rate Notes at BB (low) (sf)
-- Class G Floating Rate Notes at B (low) (sf)

All trends are Stable.

The transaction is a managed collateralized loan obligation pool that totals $650.0 million. The initial collateral consists of loans backed primarily by multifamily properties, though there is also one hospitality property, one office property and one manufactured housing property. Additionally, there are six health-care properties underlying one portfolio loan, which represents approximately 2.0% of the reference date portfolio balance. The vast majority of these properties have some level of transition or stabilization, which is the premise for seeking floating-rate short-term debt. The transaction has a reinvestment period expected to expire in May 2022. Reinvestment is subject to Eligibility Criteria that includes a rating agency condition (RAC) by DBRS. The initial pool consists of 28 loans totaling $520.4 million secured by current cash-flowing assets in various states of transition. DBRS analyzed and modeled the existing loan pool in addition to loans that can be purchased subject to the Eligibility Criteria in the reinvestment period; DBRS assumes that the loans purchased within the reinvestment period will migrate to the least-favorable criteria, as defined in the Eligibility Criteria, with consideration given to the initial pool composition as well. 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 RAC on loans that are being added to the pool during the reinvestment period in order to evaluate any credit drift caused by loan concentrations. Following the reinvestment period, the transaction will have a sequential-pay structure.

As a result of the floating-rate nature of the loans, the index used (one-month LIBOR) was the lower of a DBRS stressed rate that corresponded to the remaining fully extended term of the loans or the strike price of the interest rate cap with the respective contractual loan spread added to determine a stressed interest rate over the loan term. When the cut-off balances were measured against the DBRS In-Place Net Cash Flow (NCF) and their respective stressed constants, 22 loans, or 83.7% of the initial pool, have term debt service coverage ratios (DSCRs) below 1.0 times (x), a threshold indicative of a higher likelihood of term default. Additionally, the DBRS Stabilized DSCR for nine loans, representing 33.1% of the initial pool balance, are below 1.00x, which is indicative of elevated refinance risk. The properties are often transitioning with potential upside in the cash flow; however, DBRS does not give full credit to the stabilization if there are no holdbacks or if other loan structural features in place were insufficient to support such treatment. Furthermore, even with the structure provided, DBRS generally does not assume the assets to stabilize above market levels.

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 eight transactions: Arbor Realty Collateralized Loan Obligation 2014-1, Ltd.; Arbor Realty Commercial Real Estate Notes 2015-FL1, Ltd.; Arbor Realty Commercial Real Estate Notes 2015-FL2, Ltd.; Arbor Realty Commercial Real Estate Notes 2016-FL1, Ltd.; Arbor Realty Commercial Real Estate Notes 2017-FL1, Ltd.; Arbor Realty Commercial Real Estate Notes 2017-FL2, Ltd.; Arbor Realty Commercial Real Estate Notes 2017-FL3, Ltd.; and Arbor Realty Commercial Real Estate Notes 2018-FL1, Ltd. DBRS has reviewed Arbor Multifamily Lending, LLC’s servicing platform (and special servicing) and finds it to be an acceptable servicer. The Class E, F and G Notes and the preferred shares will be retained by ARMS Equity, an affiliate of the trust asset seller. The non-offered notes and preferred shares represent 18.0% of the transaction balance.

All but four loans in the initial pool are secured by multifamily properties. Although multifamily properties make up 81.1% of the initial collateral pool, exposure to industrial properties, retail properties, office properties, self-storage properties, hospitality properties or health-care properties in the trust is capped at 30.0% during the reinvestment period per the Eligibility Criteria. Twenty loans, totaling 64.2% of the initial pool balance, represent acquisition financing with borrowers contributing equity to the transaction. The properties are predominately located in suburban markets with the overall pool’s weighted-average (WA) DBRS Market Rank at 4.1. Eight loans, totaling 34.6% of the pool, are located in markets with a DBRS Market Rank of 3; six loans, totaling 20.9% of the pool, are in markets with a DBRS Market Rank of 4; and one loan, totaling 7.6% of the pool, is in a market with a Market Rank of 5. The DBRS Market Ranks correspond to zip codes that are more suburban in nature.

All loans have floating interest rates, and all loans are interest-only during both the original term and extension periods, which range from 24 months to 60 months, creating interest rate risk. All but three loans have extension options between six and 24 months. Based on the weighted initial pool balances, the overall WA DBRS As-Is DSCR and DBRS Stabilized DSCR of 0.77x and 1.05x, respectively, are reflective of high-leverage financing.

The DBRS As-Is DSCR is based on the DBRS In-Place NCF and debt service calculated using a stressed interest rate. The WA stressed rate used is 6.8%, which is greater than the current WA interest rate of 6.2% (based on a WA mortgage spread and an assumed 2.5% one-month LIBOR index). The assets are generally well positioned to stabilize, and any realized cash flow growth would help to offset a rise in interest rates and improve the overall debt yield of the loans. DBRS associates its loss given default (LGD) based on the assets’ DBRS As-Is Loan-to-Value (LTV), which does not assume that the stabilization plan and cash flow growth will ever materialize. The DBRS As-Is LTV is considered reasonable at 77.3% given the credit enhancement levels at each rating category and the strong, established track record of the originator.

DBRS has analyzed the loans to a stabilized cash flow that is, in some instances, above the current in-place cash flow. There is a possibility that the sponsors will not execute their business plans as expected and that the higher stabilized cash flow will not materialize during the loan term. Failure to execute the business plan could result in a term default or the inability to refinance the fully funded loan balance. DBRS made relatively conservative stabilization assumptions and, in each instance, considered the business plan to be rational and the future funding amounts to be sufficient to execute such plans. In addition, DBRS analyzes LGD based on the DBRS As-Is LTV assuming the loan is fully funded.

Eight loans, totaling only 35.8% of the initial pool balance, represent refinance financing. The refinance financings within this securitization generally do not require the respective sponsor(s) to contribute material cash equity as a source of funding in conjunction with the mortgage loan, resulting in a lower sponsor cost basis in the underlying collateral. Of the eight refinance loans, five, representing 26.7% of the pool, have a current occupancy of less than 80.0%, and none of these are structured with future funding. This suggests that a large majority of the refinance loans have already executed business plans and are closer to stabilization, which would partially mitigate the higher risk associated with a sponsor’s lower cost basis.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrs.com.

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

With regard to due diligence services, 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 DBRS’s methodology, DBRS used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is the North American CMBS Multi-borrower Rating Methodology, which can be found on www.dbrs.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document, which can be found on www.dbrs.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

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

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