DBRS Morningstar Assigns Provisional Ratings to MF1 2019-FL2, Ltd.

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of notes to be issued by MF1 2019-FL2, Ltd. (the Issuer):

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable.

The initial collateral consists of 38 floating-rate mortgage loans secured by 39 transitional multifamily properties totaling $654.6 million, representing 67.4% of the total fully funded balance, excluding $68.4 million of remaining future funding commitments and $248.2 million of pari passu debt. Of the 38 loans, there are two unclosed, delayed-close loans as of November 20, 2019, representing 4.1% of the initial pool balance, including Bella Solano Apartments (#18) and Timberland Apartments (#23). If a delayed-close loan is not expected to close or fund prior to the purchase termination date, then the Issuer can use unused proceeds to acquire a replacement mortgage asset referred to as Haven Garden & Hidden Chalet with a cut-off date balance of $6.5 million. Additionally, during a 90-day period following the closing date, the Issuer can bring an estimated $15.4 million of future funding participations into the pool, resulting in a target deal balance of $670.0 million. The loans are mostly secured by currently cash flowing assets, most of which are in a period of transition with plans to stabilize and improve the asset value. Of these loans, 32 have remaining future funding participations totaling $68.4 million, which the Issuer may acquire in the future.

Given the floating-rate nature of the loans, the index DBRS Morningstar used (one-month LIBOR) was the lower of a DBRS Morningstar 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 date balances were measured against the DBRS Morningstar As-Is Net Cash Flow, 26 loans, representing 76.5% of the mortgage loan cut-off date balance, had a DBRS Morningstar As-Is Debt Service Coverage Ratio (DSCR) below 1.00 times (x), a threshold indicative of default risk. Additionally, the DBRS Morningstar Stabilized DSCRs for ten loans, comprising 39.7% 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 cash flow; however, DBRS Morningstar does not give full credit to the stabilization if there are no holdbacks or if other loan structural features in place are insufficient to support such treatment. Furthermore, even with the structure provided, DBRS Morningstar generally does not assume that the assets will stabilize above market levels.

The transaction will have a sequential-pay structure.

The loans were all sourced by an affiliate of the Issuer, which has strong origination practices and substantial experience in the multifamily industry. Classes F and G and the Preferred Shares (representing 14.0% of the initial pool balance) will be purchased by a wholly owned subsidiary of MF1 REIT LLC.

All loans in the pool are secured by multifamily properties located across 15 states, including Texas, California, Colorado and Pennsylvania, among others. Multifamily properties benefit from staggered lease rollover and generally low expense ratios compared with other property types. While revenue is quick to decline in a downturn because of the short-term nature of the leases, it is also quick to respond when the market improves. Additionally, most loans are secured by traditional multifamily properties, such as garden-style communities or mid-/high-rise buildings, with only one loan secured by an independent living/assisted living/memory care facility (#30, Brookside Seniors Portfolio) and a second loan secured by student housing (#37, The Lux at Cornell). Independent living/assisted living/memory care facilities and student-housing properties are modeled with an elevated probability of default (POD) compared with traditional multifamily properties.

Thirty loans, comprising 69.1% of the initial trust balance, represent acquisition financing wherein sponsors contributed material cash equity as a source of funding in conjunction with the mortgage loan, resulting in a moderately high sponsor cost basis in the underlying collateral.

The loans in the transaction benefit from experienced and financially stable borrowers, several of which were securitized in MF1 2019-Q009, a transaction sponsored by Freddie Mac. Only two loans, representing 6.4% of the initial pool balance, have sponsors with negative credit history and/or loan collateral associated with a borrowing structure that DBRS Morningstar deemed to be Weak. Such sponsors were associated with a prior DPO, loan default, limited net worth and/or liquidity or a historical negative credit event. DBRS Morningstar increased the POD for loans with identified sponsorship concerns.

DBRS Morningstar has analyzed the loans to a stabilized cash flow that is, in some instances, above the current in-place cash flow. It is possible 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 Morningstar 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 Morningstar analyzes loss given default based on the as-is loan-to-value (LTV) ratio, assuming the loan is fully funded.

No loans are secured by properties located in markets ranked seven or eight, which are considered dense urban in nature and benefit from increased liquidity that is driven by consistently strong investor demand, even during times of economic stress. Furthermore, 25 loans, representing 69.2% of the initial trust balance, are secured by properties located in markets ranked three or four, which have historically been found to have higher PODs. The pool’s weighted-average (WA) market rank of 3.8 is indicative of a high concentration of properties located in less densely populated suburban areas. Properties located in less densely populated markets were analyzed with higher loss severities than those located in more urban markets. Three loans totaling 12.8% of the initial trust balance, including Lotus 315 (#3), Wave Lakeview (#4) and Lure at Cedar Springs (#39), are secured by properties located in markets ranked six. These markets include Chicago; East Orange, New Jersey; and Dallas.

Loan collateral was built between 1949 and 2019 with a WA year built of 1988. Given the older vintage of the assets, no loans are secured by properties that DBRS Morningstar deemed to be Above Average or Excellent in quality. Six loans, comprising 17.9% of the initial trust balance, are secured by properties with Average (-) quality, including Alvista Terrace (#1) and Rancho Verde Apartments (#13). Lower-quality properties are less likely to retain existing tenants, resulting in less than stable performance. DBRS Morningstar increased the POD for loans with Average (-) quality to account for the elevated risk. Thirty-two loans have $68.4 million of remaining future funding participations, ranging from $409,900 to $8.0 million. The sponsors will use these funds to facilitate their respective capital improvement plans, which should help to enhance the quality of the properties and improve overall value.

All loans have floating interest rates and are interest only during the initial loan term, which ranges from 24 months to 36 months, creating interest-rate risk. The borrowers of all 38 loans have purchased LIBOR rate caps, ranging between 2.50% and 3.50%, to protect against rising interest rates over the term of the loan. All loans are short term and, even with extension options, have a fully extended loan term of five years maximum. Additionally, all loans have extension options and, in order to qualify for these options, the loans must meet minimum DSCR and LTV requirements. Twenty-three loans, representing 66.9% of the total pool, amortize on 30-year schedules during all or a portion of their extension period.

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

For supporting data and more information on this transaction, please log into www.viewpoint.dbrs.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#1 – Alvista Terrace (9.0% of pool)
-- Prospectus ID#2 – Trinity Residences (7.0% of pool)
-- Prospectus ID#3 – Lotus 315 (6.4% of pool)
-- Prospectus ID#4 – Wave Lakeview (6.4% of pool)
-- Prospectus ID#5 – Avia 266 (5.6% of pool)
-- Prospectus ID#6 – Bayou Park Apartments (5.1% of pool)
-- Prospectus ID#7 – Lenox Portfolio (5.0% of pool)
-- Prospectus ID#8 – Avilla – Buffalo Run (4.4% of pool)
-- Prospectus ID#9 – Bella Madera (4.2% of pool)
-- Prospectus ID#10 – Town Center (4.2% of pool)
-- Prospectus ID#11 – Avilla Lehi Crossing (3.4% of pool)
-- Prospectus ID#12 – Tides on 28th (formerly Sterling on 28th; 3.1% of pool)
-- Prospectus ID#13 – Rancho Verde Apartments (3.1% of pool)
-- Prospectus ID#14 – Windridge Apartments (2.6% of pool)
-- Prospectus ID#15 – Crimson Point Villas (2.6% of pool)
-- Prospectus ID#16 – Timbermill Apartments (2.4% of pool)
-- Prospectus ID#19 – Landing Point Apartments (2.2% of pool)
-- Prospectus ID#22 – Pinebrook Apartments (1.9% of pool)
-- Prospectus ID#24 – The Bradford Park Apartments (1.6% of pool)
-- Prospectus ID#29 – Adair Oaks (1.3% of pool)
-- Prospectus ID#33 – The Oaks on Monument (formerly The Moncler; 0.2% of pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrs.com. The platform includes issuer and servicer data for most outstanding commercial mortgage-backed security transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

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

The principal methodology is 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 Morningstar 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 Morningstar 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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

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