DBRS Morningstar Confirms Ratings of Arbor Realty Commercial Real Estate Notes 2017-FL3, Ltd.

DBRS Limited (DBRS Morningstar) confirmed the ratings of Floating-Rate Notes (the Notes) issued by Arbor Realty Commercial Real Estate Notes 2017-FL3, Ltd. (the Issuer) as follows:

-- Class A 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 (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 the analysis for this review, DBRS Morningstar applied probability of default (POD) adjustments to a few loans to reflect increased risks observed since issuance, particularly in light of the Coronavirus Disease (COVID-19) impact to the economy and general unknowns with regard to timing for recovery. 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. Based on the information received thus far with regard to relief requests and payment statuses for the underlying loans, DBRS Morningstar believes the rated classes are generally insulated from adverse credit implications at this time, warranting the rating confirmations.

The pool currently consists of 36 floating-rate loans totaling $419.6 million, secured by multifamily and commercial properties. At issuance, the pool consisted of 16 loans totaling $368.3 million. The transaction is structured with an initial replacement period (which ends December 2020) 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 $60.4 million in equity that the Issuer can deploy to originate additional loans. The transaction pays sequentially after the replacement period ends.

The loans are predominantly secured by multifamily properties, most of which are located in urban and suburban markets that benefit from greater liquidity and/or are affordable offerings in stable communities. The pool composition consists of 29 multifamily properties (76.7% of the pool), three student-housing properties (12.8% of the pool), two office properties (7.6% of the pool), one self-storage property (2.1% of the pool), and one retail property (0.8% of the pool). 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 19.1% equity piece as Preferred Shares in the transaction. DBRS Morningstar has communicated with Arbor regarding the potential for business plan stoppages or delays, as well as foreseeable debt service payment disruptions resulting from the pandemic. 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 3.4% of the fully funded trust balance and is secured by a 12-story, mixed-use property 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 have limited access to their respective spaces. 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. 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.

The 114 East 25th Street loan, representing 4.2% of the fully funded trust balance, is secured by an office property adjacent to the 331 Park Avenue South asset and shares sponsorship. The borrower initially planned to implement the same renovation and business plan, and as of the February 2020 update, the property was 27.0% occupied based on membership capacity. Similar to the 331 Park Avenue South loan, the loan on the collateral matures in July 2020 with a one-year extension option available to the borrower. As the original business plan has been ineffective for both properties, the borrower has shifted its plan to include leasing to traditional office tenants for both buildings. Considering the uncertainty surrounding both loans’ exit strategies combined with the near-term maturities during the coronavirus environment and overall increased risk associated with completing leasing efforts prior to maturity, DBRS Morningstar analyzed these loans with elevated POD levels 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.

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:

-- Preston Hollow II (10.4% of the pool)
-- Bellemeade Apartments (6.2% of the pool)
-- The Factory I & II (5.0% of the pool)
-- 114 East 25th Street (4.2% of the pool)
-- Bridges on Travis Apartments (4.0% of the pool)
-- 331 Park Ave South (3.4% 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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