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

DBRS Limited (DBRS Morningstar) confirmed the ratings of the 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. The pool currently consists of 44 floating-rate loans totaling $529.5 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 April 2021 remittance, there remains $30.5 million in equity that the Issuer can deploy to originate additional loans. The transaction pays sequentially after the replacement period ends.

As of the April 2021 remittance, the pool composition consists of loans secured by 39 multifamily properties, two office properties, and three healthcare properties. 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 collateral 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. Given the potential for disruptions to business plan executions amid the Coronavirus Disease (COVID-19) pandemic, DBRS Morningstar is monitoring the impact on loans in the subject transaction and has requested information on any developments from Arbor as part of this review. As of the April 2021 remittance, four loans are less than 30 days delinquent and no loans are in special servicing. Arbor has advised that no extended periods of delinquency are expected at this time.

One loan, 331 Park Avenue South, represents 6.7% 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 traditional office and retail space, and the sponsor’s original business plan included converting the office portion of the property into a shared workspace format. However, that plan has since shifted and the leasing efforts have since targeted traditional office users. In addition, the retail portion’s slated restaurant tenant, which was initially anticipated to open in early 2020, has since delayed the opening until late 2021 due to the ongoing coronavirus pandemic. The overall occupancy rate was 40.0% as of January 2020 and had increased to 50.0% as of December 2020. Although the lease-up of the property has been delayed amid the pandemic, the sponsor expects traction to improve as the social distancing measures continue to ease and New York and the country overall move toward a quasi-normal state of affairs later in 2021.

The second-largest loan in the pool, Preston Hollow II, represents 6.9% of the current trust balance and is secured by a 526-unit Class A multifamily complex and 24,000 square feet (sf) of retail space located in Dallas, Texas. The subject consists of three buildings: The Preston, an ultra-luxury building; The Royal, aimed at a young professional demographic; and The Royalton, which is generally intended for a younger demographic and has a lower-quality finish. The collateral is part of a larger development, Preston Hollow Village, which will consist of the subject as well as office, townhomes, multifamily properties, and retail space, with the overall development expected to be completed in 2022. The subject property is fully finished and received its final certificates of occupancy. At closing, the loan had a $40.0 million renovation reserve, a $1.9 million operating reserve, and a $5.7 million interest reserve. As of the Q4 2020 update, the borrower has drawn the bulk of the renovation and operating reserves, and the interest reserve remains fully intact. As of February 2021, the collateral was 91.0% occupied at an average rental rate of $2,321 per unit, which is below the appraiser’s stabilized estimate of $2,771 per unit; however, the borrower does believe that once the larger development is complete, stabilized rents should increase to appraiser’s estimate. The retail portion of the collateral is 62.0% occupied at an average rental rate of $42.26 psf with a tenant mix focused on restaurants to serve the surrounding residential area.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

DBRS Morningstar materially deviated from its principal methodology when determining the ratings assigned to Classes A-S and F. The material deviations 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.

The DBRS Morningstar Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data. 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 the North American CMBS Surveillance Methodology (March 26, 2021), 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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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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