DBRS Morningstar Finalizes Provisional Ratings on Arbor Multifamily Mortgage Securities Trust 2021-MF2

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Mortgage Pass-Through Certificates, Series 2021-MF2 issued by Arbor Multifamily Mortgage Securities Trust 2021-MF2 (AMMST 2021-MF2):

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AAA (sf)
-- Class X-B at AA (sf)
-- Class C at AA (low) (sf)
-- Class D at A (sf)
-- Class X-D at A (low) (sf)
-- Class E at BBB (high) (sf)

All trends are Stable.

With regard to the Coronavirus Disease (COVID-19) pandemic, the magnitude and extent of performance stress posed to global structured finance transactions remains 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. DBRS Morningstar continues to monitor the ongoing coronavirus pandemic and its impact on both the commercial real estate sector and the global fixed-income markets. Accordingly, DBRS Morningstar may apply additional short-term stresses to its rating analysis, for example by front-loading default expectations and/or assessing the liquidity position of a structured finance transaction with more stressful operational risk and/or cash flow timing considerations.

The collateral consists of 32 fixed-rate loans secured by 48 multifamily properties, one mixed-use property, and one manufactured housing property. Thirty loans within the transaction have 10-year loan terms, one loan is structured with a seven-year term, and one loan is structured with a five-year term. 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 33.9% 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. Twenty-seven loans, representing 80.3% of the pool, were connected with the borrower’s refinancing of an existing mortgage loan. The remaining five loans, representing 19.7% of the pool balance, were connected with the borrower’s acquisition of the related mortgage property.

All of the rated classes of the AMMST 2021-MF2 transaction have been conveyed into a trust by Arbor to issue corresponding classes of Mortgage Pass-Through Certificates. All DBRS Morningstar-rated classes will be subject to ongoing surveillance, confirmations, upgrades, or downgrades by DBRS Morningstar after the date of issuance. 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.

The pool’s weighted-average (WA) expected loss is 2.21%, which is in line with Freddie Mac pools recently rated by DBRS Morningstar. The deal has favorable credit metrics as evidenced by a WA DBRS Morningstar Issuance loan-to-value (LTV) ratio and DBRS Morningstar Balloon LTV of 70.7% and 65.7%, respectively. The pool exhibits a relatively strong WA DSCR of 1.59x, with 33.9% of the pool balance having DSCRs in excess of 1.75x; however, DBRS Morningstar notes that the high DSCR is in part due to many loans being structured with interest-only (IO) terms. The pool has strong occupancy metrics with an in-place WA occupancy of 96.6% based on the most recent rent rolls provided to DBRS Morningstar. Furthermore, only two loans have an occupancy below 90.0%. About 63.5% of the loans are in DBRS Morningstar metropolitan statistical area (MSA) Group 3, which is credit positive and results in a lower probability of default than other MSA groups. The MSAs in Group 3 cover cities including New York and Washington, D.C., and their greater metro areas. Ten loans, representing 37.4% of the pool, are secured by properties in DBRS Morningstar Market Ranks of 3 or 4, which are suburban in nature, including four within the top 15. Furthermore, five loans, representing 13.7% 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 (Lofts at Beacon and Little Torch Cottages), representing 9.2% of the pool. Properties in tertiary and rural markets typically have higher loss severities than those in urban markets.

DBRS Morningstar treated 26 loans (75.5% of pool balance) with Average sponsorship and identified six loans with Weak sponsor scores because of a negative credit history, lack of warm body guarantor, or net worth and liquidity levels below DBRS Morningstar’s standards. Two of these loans, Pavion and Village Key, were in the top 10 largest loans in the pool.

All loans are structured with a coronavirus debt service reserve (DSR) equal to three months of debt service. While DBRS Morningstar views the inclusion of coronavirus-related upfront DSRs for all of the loans as a positive mitigant of some of the potential coronavirus-related disruptions, the economic fallout from the ongoing pandemic continues to evolve. DBRS Morningstar generally expects multifamily properties to fare better than hospitality and retail properties; however, short- and medium-term challenges still exist in this sector. In addition to imposing various containment-related restrictions, certain jurisdictions have also placed temporary moratoriums on the eviction of tenants that may be continued, extended, or expanded. Furthermore, government programs, such as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), provided, among other things, supplemental unemployment benefits to displaced employees. An additional coronavirus relief bill was signed in March 2021 that extended supplemental unemployment benefits to displaced employees until September 2021. This could result in additional stress on properties whose residents have been disproportionately affected by furloughs and layoffs. In addition, the resurgence of coronavirus cases has created additional uncertainty and increased stress on the planned reopening of businesses. DBRS Morningstar also published its “Global Macroeconomic Scenarios: March 2021 Update” and is projecting generalized commercial real estate asset value declines for the U.S. of approximately 15% under its moderate scenario and 30% under its adverse scenario.

ESG CONSIDERATIONS
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.

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 reference tranche adjusted upward by one notch if senior in the waterfall.

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 – Pavion (10.9% of the pool)
-- Prospectus ID#2 – Century Summerfield (8.9% of the pool)
-- Prospectus ID#3 – Cue at Luxury (6.3% of the pool)
-- Prospectus ID#4 – Lofts at Beacon (4.9% of the pool)
-- Prospectus ID#5 – Little Torch Cottages (4.4% of the pool)
-- Prospectus ID#6 – 740 E 178 - Clinton Towers (4.2% of the pool)
-- Prospectus ID#7 – 730 Oakland - Clinton Towers (4.1% of the pool)
-- Prospectus ID#8 – Village Key (4.0% of the pool)
-- Prospectus ID#9 – 750 E 179 - Clinton Towers (3.9% of the pool)
-- Prospectus ID#10 – NewRo Studios (3.8% of the pool)
-- Prospectus ID#11 – 125 Magnolia at Journal Square (3.8% of the pool)
-- Prospectus ID#12 – 188-192 Lafayette St (3.8% of the pool)
-- Prospectus ID#13 – 372 Kosciuszko (3.7% of the pool)
-- Prospectus ID#14 – Pointe 1620 (3.3% of the pool)
-- Prospectus ID#15 – 83-67 116th (3.2% 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.

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 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 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.

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

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