DBRS Morningstar Confirms Ratings of Arbor Realty Commercial Real Estate Notes 2018-FL1, Ltd.

DBRS Limited (DBRS Morningstar) confirmed the ratings of Floating-Rate Notes (the Notes) issued by Arbor Realty Commercial Real Estate Notes 2018-FL1, Ltd. (the Issuer) as follows:

-- 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 AA (low) (sf)
-- Class C Secured Floating Rate Notes at A (low) (sf)
-- Class D Secured Floating Rate Notes at BBB (low) (sf)
-- Class E Floating Rate Notes at BB (low) (sf)
-- Class F Floating Rate Notes at B (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains generally in line with DBRS Morningstar’s expectations at issuance. In its analysis of the transaction, DBRS Morningstar applied probability of default (POD) adjustments to loans with confirmed issues caused in part by the stressed real estate environment associated with the Coronavirus Disease (COVID-19) pandemic. Because of the transitional nature of the underlying collateral, proposed business plans that are necessary to bring the assets to stabilization may be delayed and, in some cases, borrowers may request relief from the Issuer. DBRS Morningstar has built additional POD stress into the analysis for this transaction and, given what is known today, expects that the rated classes are insulated from adverse credit implications at this time, warranting the rating confirmations.

The pool currently consists of 49 floating-rate loans totaling $542.3 million, secured by multifamily and commercial properties. At issuance, the pool consisted of 28 loans totaling $494.4 million. The transaction is structured with an initial 36-month replacement period whereby the Issuer can substitute collateral in the pool, subject to certain eligibility criteria, including the rating agency condition by DBRS Morningstar. As of the May 2020 remittance, there remains $17.7 million in equity that the Issuer can deploy to originate additional loans. The transaction pays sequentially after the replacement period ends.

As of the May 2020 remittance, seven of the original 28 loans, representing 18.5% of the current transaction balance, remain in the pool. The pool composition consists of 37 multifamily properties, three student-housing properties, three healthcare properties, one mixed-use property, and one office property. Most loans have a maximum initial term of two or three years, with extension options generally available to borrowers, subject to criteria. Most of the properties are currently cash-flowing assets in a period of transition with viable plans and loan structures in place to facilitate stabilization and value growth. All of the loans are structured with cash management in place at origination and are also structured with reserves, including several loans that were structured with an initial operating, interest, and renovation reserve.

The Issuer, Servicer, Mortgage Loan Seller, and Advancing Agent are related parties and nonrated entities. Arbor Realty SR, Inc. (Arbor) holds the unrated 11.8% equity piece as Preferred Shares in the transaction. Amid the Coronavirus Disease (COVID-19) pandemic, DBRS Morningstar has made inquiries to Arbor about potential business plan stoppages or delays, as well as foreseeable debt service payment disruptions. With the most recent remit, all loans are current and it is Arbor’s expectation that all borrowers will continue to make debt service payments even if there are shortfalls.

One loan, 331 Park Avenue South, represents 3.0% of the current trust balance and is secured by a 12-story, mixed-use property located in the Midtown South submarket of Manhattan. The collateral consists of both office and retail space, and with lockdown restrictions as a result of the coronavirus, the property remains closed, although tenants can access their respective space on a limited basis. The restaurant tenant, which was anticipated to open in early 2020 has delayed its plans to open until Summer 2020. The property was originally renovated into a co-working office space; however, the borrower has shifted its business plan to include traditional office tenants. The occupancy rate was 40% as of January 2020 and has likely increased to approximately 48.5% as a new tenant, Ubiquity, had a lease start date of March 2020. The subject loan and associated mezzanine loan are scheduled to mature in June 2020, although the subject loan has a one-year extension option remaining. According to a Q1 2020 update, the borrower is working on selling the property but is facing difficulties in showing the property because of the pandemic. Considering the overall increased risk associated with completing leasing efforts in the current environment and the uncertainty surrounding the outcome of the proposed sale of the subject, DBRS Morningstar analyzed this loan with an elevated POD as it is awaiting further information from the collateral manager.

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.

DBRS Morningstar materially deviated from its principal methodology when determining the rating assigned to Class F as the quantitative results suggest a higher rating. DBRS Morningstar considers a material deviation from a methodology to exist when there may be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider the material deviation to be a significant factor in evaluating the ratings. The material deviation is warranted given the structural features (loan or transaction) and/or provisions in other relevant methodologies outweigh the quantitative output.

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

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

-- Kensington Village (9.0% of the pool)
-- TZA Sioux Falls Portfolio (5.9% of the pool)
-- Preston Hollow II (5.3% of the pool)
-- 3000 Ember Drive (3.5% of the pool)
-- St. Moritz Apartments (3.2% of the pool)
-- Mallard Lake Apartments (3.1% of the pool)
-- Arlay Point (3.0% of the pool)
-- 331 Park Avenue South (3.0% of the pool)
-- Forest Manor Nursing Home (2.7% of the pool)
-- 160 Van Brunt Street (2.2% 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.

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

The principal methodology is North American CMBS Surveillance Methodology (March 6, 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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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

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