DBRS Morningstar Finalizes Provisional Ratings on Arbor Multifamily Mortgage Securities Trust 2020-MF1

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Multifamily Mortgage Pass-Through Certificates, Series 2020-MF1 issued by Arbor Multifamily Mortgage Securities Trust 2020-MF1 (AMMST 2020-MF1):

-- Class A-1 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class AS at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (high) (sf)
-- Class X-D at BBB (sf)
-- Class E at BBB (low) (sf)

All trends are Stable.

DBRS Morningstar also discontinued and withdrew the provisional rating on Class X-B.

The Class X-A and Class X-D balances are notional.

With regard to the Coronavirus Disease (COVID-19) pandemic, the magnitude and extent of performance stress posed to global structured finance transactions remain highly uncertain. This considers the fiscal and monetary policy measures and statutory law changes that have already been implemented or will be implemented to soften the impact of the crisis on global economies. Some regions, jurisdictions, and asset classes are, however, feeling more immediate effects. Accordingly, DBRS Morningstar may apply additional short-term stresses to its rating analysis. For example, DBRS Morningstar may front-load default expectations and/or assess the liquidity position of a structured finance transaction with more stressful operational risk and/or cash flow timing considerations.

The collateral consists of 40 fixed-rate loans secured by 46 multifamily and three mixed-use properties. All loans within the transaction have 10-year loan terms. The transaction is a sequential-pay pass-through structure. DBRS Morningstar analyzed the conduit pool to determine the provisional ratings, reflecting the long-term probability of loan default within the term and its liquidity at maturity. When DBRS Morningstar measured the cut-off loan balances against its net cash flow assumptions and their respective actual constants, eight loans representing 25.7% of the trust balance had a DBRS Morningstar Term Debt Service Coverage Ratio (DSCR) at or above 1.75 times (x), a threshold indicating a lower likelihood of mid-term default. Thirty loans, representing 65.5% of the pool, were connected with the borrower’s refinancing of an existing mortgage loan. The remaining 10 loans, representing 34.5% of the pool balance, were connected with the borrower’s acquisition of the related mortgage property.

The deal has favorable credit metrics as evidenced by a weighted-average (WA) DBRS Morningstar Issuance loan-to-value ratio (LTV) and WA DBRS Morningstar Balloon LTV of 68.9% and 63.1%, respectively. The issuance WA LTV is consistent with securitized agency commercial mortgage-backed securities (CMBS) transactions in 2020. Through May 2020, five agency CMBS transactions reported an issuance WA LTV of 66.8%. Eleven loans, representing 26.1% of the pool, exhibit DBRS Morningstar Issuance LTVs that are equal to or less than 67.1%, a threshold historically indicative of relatively low-leverage financing and generally associated with below-average default frequency.

Twenty-four loans, representing 61.1% of the pool, have a DBRS Morningstar Term DSCR at or above 1.32x, a threshold indicating lower likelihood of default as compared with the historical CMBS default mean. About 61.1% of the pool has a term DSCR at or above 1.32x, which is generally higher than recently securitized agency CMBS transactions in 2020. Through May 2020, five agency CMBS transactions reported 51.5% of loans with issuance WA Term DSCRs at or above 1.30x.

Arbor Private Label, LLC’s origination and underwriting practices are similar to its affiliate, Arbor Commercial Funding I, LLC, which is a member of Fannie Mae’s Delegated Underwriting and Servicing program. Furthermore, the transaction’s most subordinate certificates will be held by an affiliate of the Issuer and will be in the first-loss position. Although the loans in the pool are similar to agency loans, DBRS Morningstar did not give any additional credit that it typically incorporates in a pure agency transaction.

One loan (The Atlantic at Cypress Creek), representing 10.2% of the pool, exhibits Above Average property quality, and five loans, representing 28.0% of the pool, exhibit Average (+) property quality.

Twenty-one loans, representing 51.7% of the pool, are secured by properties in DBRS Morningstar Market Ranks of 3 or 4, which are suburban in nature, including seven within the top 15. Furthermore, seven loans, representing 15.9% of the pool, are secured by properties in DBRS Morningstar Market Ranks of 1 or 2, which are more rural or tertiary in nature. This includes two of the top 15 loans in the pool (The Retreat at PCB and Liberty Pointe Apartments), representing 9.2% of the pool. Properties in tertiary and rural markets typically have higher loss severities than those in urban markets. While the number of properties in DBRS Morningstar Market Ranks of 1 or 2 is elevated, 17.7% of the pool is secured by properties with a Market Rank of 6, 7, or 8. Areas with a Market Rank of 7 or 8 are generally more urban and can benefit from greater liquidity, even during times of economic stress. This compares favorably to agency CMBS transactions in 2020, which reported 13.0% of the loans in a Market Rank of 6, 7, or 8 through May 2020.
FREMF 2020-K738 and FREMF 2020-K105 had 7.6% and 10.0% of their pools, respectively, secured by properties with a Market Rank of 6, 7, or 8.

Eleven loans, representing 40.0% of the pool and including six of the top 15 loans, have full-term interest-only (IO) payments. An additional 27 loans, comprising 57.7% of the pool, have remaining partial IO periods ranging from 12 months to 60 months. DBRS Morningstar calculated the probability of default a DSCR that includes amortizing debt service as well as the Balloon LTV. Furthermore, DBRS Morningstar penalizes partial IO loans.

The pool is concentrated by property type, as multifamily properties represent 94.3% of the collateral, while DBRS Morningstar classifies the remaining 5.7% as mixed-use properties. Each of the three mixed-use properties contains no less than 27.9% net commercial income as a component of DBRS Morningstar’s effective gross income. Compared with other property types, multifamily properties benefit from staggered lease rollover and generally low expense ratios. 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. DBRS Morningstar’s analysis of the 24 sampled loans indicates that most markets are displaying strong occupancy and rent growth figures with positive year-over-year trends.

Classes X-A, X-B, and X-D are IO certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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.dbrsmorningstar.com DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

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

-- Prospectus ID#01 – The Atlantic at Cypress Creek (10.2% of the pool)
-- Prospectus ID#02 – Chatham Hills Apartments (10.0% of the pool)
-- Prospectus ID#03 – The Retreat at PCB (6.9% of the pool)
-- Prospectus ID#04 – The Lucas (6.7% of the pool)
-- Prospectus ID#05 – The Loop on Greenfield (6.0% of the pool)
-- Prospectus ID#06 – Summit Apartments (5.2% of the pool)
-- Prospectus ID#07 – LFP Portfolio (4.8% of the pool)
-- Prospectus ID#08 – Vineyards at Arlington (3.0% of the pool)
-- Prospectus ID#09 – The Marconi Apartments (2.6% of the pool)
-- Prospectus ID#11 – Fairhaven Harbor (2.4% of the pool)
-- Prospectus ID#12 – Resort on 35th (2.4% of the pool)
-- Prospectus ID#13 – Liberty Pointe Apartments (2.3% of the pool)
-- Prospectus ID#15 – 75 Baxter (2.1% of the pool)
-- Prospectus ID#16 – Casa Sol (2.1% of the pool)
-- Prospectus ID#17 – 234-236 East 24th St (2.0% of the pool)
-- Prospectus ID#18 – Paces Run (2.0% of the pool)
-- Prospectus ID#19 – The Grand Apartments (1.7% of the pool)
-- Prospectus ID#20 – Prestige Boardwalk (1.7% of the pool)
-- Prospectus ID#21 – The Quails (1.6% of the pool)
-- Prospectus ID#22 – Brynn Marr Village (1.5% of the pool)
-- Prospectus ID#25 – 1208 Franklin Avenue (1.4% of the pool)
-- Prospectus ID#26 – Carter Park Apartments (1.3% of the pool)

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

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 the North American CMBS Multi-Borrower Rating Methodology (March 9, 2020), which can be found on dbrsmorningstar.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 dbrsmorningstar.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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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.

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

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