DBRS Morningstar Assigns Provisional Ratings to MF1 2020-FL3, Ltd.

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of notes to be issued by MF1 2020-FL3, 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 (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable. Classes F and G will be privately placed.

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 Issuer provided coronavirus and business plan updates for all loans in the pool, confirming that all April and May 2020 debt service payments were received in full. Furthermore, no loans are in forbearance or other debt service relief and no loan modifications were requested, except for Peanut Factory (#23; 1.5% of the initial pool balance). In early April, the sponsor for the Peanut Factory submitted a formal request for forbearance, which the lender denied based on the adequacy of current cash flow. Since then, the April and May debt service payments for this loan were made in full and the loan is current.

The initial collateral consists of 26 floating-rate mortgage loans secured by 51 transitional multifamily properties totaling $803.0 million (70.1% of the total fully funded balance), excluding $113.3 million of remaining future funding commitments and $171.4 million of pari passu debt. Of the 26 loans, there are two unclosed, delayed-close loans as of June 10, 2020, representing 5.9% of the initial pool balance, including Avilla Prairie (#8) and Pennsylvania Place (#22). Additionally, two loans, SF Multifamily Portfolio I (#3) and New Orleans Portfolio (#12), have delayed-close mortgage assets, which are identified in the data tape and included in the DBRS Morningstar analysis. If a delayed-close loan or asset is not expected to close or fund prior to the purchase termination date, then any amounts remaining in the unused proceeds account up to $5.0 million will be deposited into the replenishment account. Any funds in excess of $5.0 million will be transferred to the payment account and applied as principal proceeds in accordance with the priority of payments. Additionally, during a 90-day period following the closing date, the Issuer can bring an estimated $17.0 million of future funding participations into the pool, resulting in a target deal balance of $820.0 million.

The loans are mostly secured by currently cash flowing assets, many of which are in a period of transition. The Issuer is planning to stabilize these assets and improve the asset value. Of these loans, 18 have remaining future funding participations totaling $113.3 million, which the Issuer may acquire in the future. Please see the chart below for participations that the Issuer will be allowed to acquire.

Given the floating-rate nature of the loans, the index DBRS Morningstar used (one-month Libor) was the lower of DBRS Morningstar’s stressed rates that corresponded to the remaining fully extended term of the loans; the strike price of the interest rate cap with the respective contractual loan spread added to determine a stressed interest rate of the loan term. When measuring the cut-off date balances against the DBRS Morningstar As-Is Net Cash Flow (NCF), 20 loans, representing 75.1% of the cut-off date pool balance, had a DBRS Morningstar As-Is Debt Service Coverage Ratio (DSCR) of 1.00 time (x) or below, a threshold indicative of default risk. Additionally, the DBRS Morningstar Stabilized DSCR for 11 loans, comprising 48.9% of the initial pool balance, was 1.00x or below, which indicates 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 the other loan structural features are insufficient to support such treatment. Furthermore, even if the structure is acceptable, DBRS Morningstar generally does not assume 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 (collectively representing 15.0% of the initial pool balance) will be purchased by a wholly owned subsidiary of MF1 REIT II LLC.

All loans in the pool are secured by multifamily properties located across 17 states with no state representing more than 12.6% of the cut-off date pool balance. The pool's Herfindahl score of 23.1 is favorable for a commercial real estate collateralized loan obligation and indicates strong diversity. 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-rise/high-rise buildings, with only one loan secured by an age-restricted facility (#10, Overture Sugar Land).

Seventeen loans, comprising 64.7% of the initial trust balance, represent acquisition financing wherein sponsors contributed significant 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, many of which are sourced through a strategic partnership with CBRE, the largest government-sponsored enterprise lender. Only one loan, representing 5.4% of the cut-off date pool balance, has a sponsor with negative credit history and/or limited financial wherewithal that DBRS Morningstar deemed to be Weak, effectively increasing the probability of default (POD) for this loan.

DBRS Morningstar has analyzed the loans to a stabilized cash flow for the loans that are, in some instances, above the in-place cash flow. It is possible that the sponsors will not successfully execute their business plans and that the higher stabilized cash flow will not materialize during the loan term, particularly with the ongoing coronavirus pandemic and its impact on the overall economy. A sponsor’s failure to execute the business plan could result in a term default or the inability to refinance the fully funded loan balance.

Only two loans (14.4% of the pool) are secured by properties in markets with a DBRS Morningstar Market Rank of 7 or 8 (SF Multifamily Portfolio I and LA Multifamily Portfolio I), which are considered dense urban in nature and benefit from increased liquidity with consistently strong investor demand, even during times of economic stress. Furthermore, 16 loans, representing 68.0% of the initial trust balance, are secured by properties in markets with a DBRS Morningstar Market Rank of 3 or 4, which, although generally suburban in nature, have historically had higher PODs. The pool’s Weighted-Average DBRS Morningstar Market Rank of 4.02 indicates a high concentration of properties in less densely populated suburban areas.

The loan collateral were built between 1929 and 2020 with an average year built of 1983. 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. Three loans, comprising 7.6% of the initial trust balance, are secured by properties with Average (-) quality, including New Orleans Portfolio (#12), Grand Oaks (#16), and Ansley at Harts Road (#20). Lower-quality properties are less likely to retain existing tenants and may require additional capital expenditure, resulting in less-than-stable performance.

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.

Because the loans were originated prior to the onset of the coronavirus pandemic—and, as a result, the appraised values and cash flows do not reflect the full extent of the impact of the current environment—DBRS Morningstar believes that the transaction may be exposed to losses beyond the base case pool loss captured within the CMBS Insight Model described in the “North American CMBS Multi-Borrower Rating Methodology.” DBRS Morningstar materially deviated from its “North American CMBS Multi-Borrower Rating Methodology” when determining the ratings assigned to Class G, which deviated from the higher ratings implied by the quantitative results. DBRS Morningstar typically expects a substantial likelihood that a reasonable investor or other user of the credit ratings would consider a three-notch or more deviation from the rating stresses implied by the predictive model to be a significant factor in DBRS Morningstar ratings.

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#1 – AVE Portfolio (12.5% of the pool)
-- Prospectus ID#2 – Fairland Crossing (9.5% of the pool)
-- Prospectus ID#3 – SF Multifamily Portfolio I (8.0% of the pool)
-- Prospectus ID#4 – Portola Apartments (7.1% of the pool)
-- Prospectus ID#5 – LA Multifamily Portfolio I (6.5% of the pool)
-- Prospectus ID#6 – Iron Rock Ranch (5.4% of the pool)
-- Prospectus ID#7 – Fox & Hounds Apartments (5.0% of the pool)
-- Prospectus ID#8 – Avilla Prairie (4.0% of the pool)
-- Prospectus ID#9 – The Darlington (3.7% of the pool)
-- Prospectus ID#10 – Overture Sugar Land (3.5% of the pool)
-- Prospectus ID#11 – Avilla Meadows (3.0% of the pool)
-- Prospectus ID#12 – New Orleans Portfolio (3.0% of the pool)
-- Prospectus ID#13 – Millspring Commons (2.8% of the pool)
-- Prospectus ID#14 – Fairway Oaks (2.7% of the pool)
-- Prospectus ID#15 – The Monticello (2.6% of the pool)
-- Prospectus ID#16 – Grand Oaks (2.6% of the pool)
-- Prospectus ID#17 – Wave Lakeview (2.6% of the pool)
-- Prospectus ID#20 – Ansley at Harts Road (2.0% of the pool)
-- Prospectus ID#24 – Hoyt Street (1.5% 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.

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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