DBRS Morningstar Finalizes Provisional Ratings on MF1 2021-FL7 Ltd.

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes issued by MF1 2021-FL7 Ltd. (MF1 or 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 (high) (sf)
-- Class G at BB (low) (sf)
-- Class H at B (low) (sf)

All trends are Stable.

Coronavirus Overview

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 initial collateral consists of 49 floating-rate mortgage loans secured by 67 transitional multifamily properties and six senior housing properties. The pool totals $1.9 billion (70.6% of the fully funded balance), excluding $159.5 million of remaining future funding commitments and $626.4 million of pari passu debt. SF Multifamily Portfolio III, representing 1.2% of the trust balance, allows the borrower to acquire and bring properties into the trust post closing through future funding up to a maximum whole-loan balance of $100.0 million, which is accounted for in figures and metrics throughout the report. Of the 49 loans, two are unclosed, delayed-close loans as of September 7, 2021: Crane Chinatown (#15) and 90th Avenue (#31), together representing 3.4% of the total initial pool balance. The Issuer has 45 days post closing to acquire the delayed-close assets, otherwise, the delayed-close loans may be acquired through the ramp-up period.

In addition, the transaction is structured with a 120-day ramp-up acquisition period, whereby the Issuer plans to acquire up to $360.4 million of additional collateral, as well as a 24-month reinvestment period. After the 120-day ramp-up acquisition period and the 24-month reinvestment period, the Issuer projects a target pool balance of $2.3 billion. DBRS Morningstar assessed the ramp loans using a conservative pool construct and, as a result, the ramp loans have expected losses above the pool weighted average (WA) loan expected losses. Reinvestment of principal proceeds during the reinvestment period is subject to Eligibility Criteria which, among other criteria, include a no-downgrade rating agency confirmation (RAC) by DBRS Morningstar for all new mortgage assets and the acquisition of companion participations exceeding $500,000. If a delayed-close loan is not expected to close or fund prior to the purchase termination date, the expected purchase price will be credited to the unused proceeds amount to be used by the Issuer to acquire ramp-up mortgage assets during the ramp-up acquisition period. Any funds in excess of $5.0 million after the ramp-up completion date will be transferred to the payment account and applied as principal proceeds in accordance with the priority of payments. The Eligibility Criteria indicate that all loans acquired within the ramp-up period must be secured by either multifamily, student, or senior housing properties. Furthermore, certain events within the transaction require the Issuer to obtain RAC. DBRS Morningstar will confirm that a proposed action or failure to act or other specified event will not, in and of itself, result in the downgrade or withdrawal of the current rating. The Issuer is not required to obtain RAC for acquisitions of companion participations less than $500,000.

The loans are mostly secured by cash-flowing assets, many of which are in a period of transition with plans to stabilize and improve the asset value. In total, 38 loans, representing 77.9% of the pool, have remaining future funding participations totaling $159.5 million, which the Issuer may acquire in the future. Please see the chart below for the participations that the Issuer will be allowed to acquire.

For the floating-rate loans, DBRS Morningstar used the one-month Libor index, which is based on the lower of a DBRS Morningstar stressed rate that corresponded to the remaining fully extended term of the loans or the strike price of the interest rate cap with the respective contractual loan spread added to determine a stressed interest rate over the loan term. When the debt service payments were measured against the DBRS Morningstar As-Is Net Cash Flow (NCF), 32 loans, comprising 64.8% of the pool, had a DBRS Morningstar As-Is Debt Service Credit Ratio (DSCR) below 1.00 times (x), a threshold indicative of elevated default risk. However, the DBRS Morningstar Stabilized DSCR for only one loan, representing 1.2% of the initial pool balance, is below 1.00x. 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 other structural features in place are insufficient to support such treatment. Furthermore, even with the structure provided, DBRS Morningstar generally does not assume the assets will stabilize above market levels.

MF1 has issued six securitizations of more than $4.0 billion and the lending platform is led by seasoned multifamily professionals from Berkshire Residential Investments and Limekiln Real Estate. MF1 has originated more than $8.3 billion of loans since Q3 2018 and has strong origination practices that include comprehensive credit memorandums. The Issuer will retain the most subordinate portion of the capital structure totaling 15.0%, including Notes F, G, and H in addition to the Preferred Shares. This provides protection to the Offered Notes as the Issuer will incur first losses up to 15.0%.

The pool contains a relatively high number of properties in primary markets, which have historically demonstrated a lower probability of default (POD) and loss severity given default (LGD) characteristics. Ten loans, representing 32.9% of the pool, are in areas identified as DBRS Morningstar Market Ranks of 6, 7, or 8, which are generally characterized as highly dense urbanized areas. These areas benefit more from increased liquidity driven by consistently strong investor demand and lower default frequencies than do less dense suburban, tertiary, and rural markets. Urban markets represented in the deal include New York City, San Francisco, Seattle, Washington, D.C., and Brooklyn, New York. Seventeen loans, representing 47.6% of the pool balance, have collateral in metropolitan statistical area (MSA) Group 3, which is the best-performing group in terms of historical commercial mortgage-backed security (CMBS) default rates among the top 25 MSAs. MSA Group 3 has a historical default rate of 17.2%, which is nearly 11 percentage points lower than the overall CMBS historical default rate of 28.0%.

The pool exhibits a diversity Herfindahl score of 31.2, which is favorable for a commercial real estate collateralized loan obligation (CRE CLO) and notably higher than those of the Issuer’s previous transactions that DBRS Morningstar rated, including MF1 2021-FL6 with a Herfindahl score of 27.4, MF1 2021-FL5 with a Herfindahl score of 26.9, MF1 2020-FL4 with a Herfindahl score of 13.9, and MF1 2021-FL3 with a Herfindahl score of 23.1. Per the transaction’s Eligibility Criteria, the Herfindahl score is permitted to be as low as 16.0 at the conclusion of the ramp-up acquisition period, though a no-downgrade confirmation must be obtained from DBRS Morningstar in order to add new loans during this period. The 16.0 Herfindahl score minimum is slightly higher than recent CRE CLO transactions, which typically have a 14.0 Herfindahl score minimum. Given the subject pool's high initial Herfindahl score of 31.2, raising the minimum appears appropriate and is viewed as credit neutral overall.

The loans are secured by properties that are generally in very good physical condition as evidenced by six loans, representing 21.4% of the initial pool balance, being secured by properties that DBRS Morningstar deemed to be Above Average in quality. An additional nine loans, representing 21.3% of the initial pool balance, are secured by properties of Average + quality. Furthermore, only one loan, representing 1.9% of the initial pool balance, is backed by a property that DBRS Morningstar considered to be of Average – quality.

The #4 loan, Civitas Portfolio (4.8% of pool), is a 767-unit/801-bed Senior Housing portfolio. The portfolio’s performance has suffered as a result of coronavirus restrictions imposed by the State of Texas, including bans on visitors and tours for potential new residents. Occupancy was most recently reported to be 54.3% across the portfolio. (See page 43 of the related presale report for additional information.) DBRS Morningstar took a conservative approach in estimating NCF, including lower rent and occupancy projections than the Issuer’s. In addition, because of the operationally intense nature of the property, the loan was modeled similar to a hotel, with higher PODs and LGDs. The loan’s expected loss is elevated and the highest in the pool. The loan is structured with an interest reserve equal to approximately 12 months of debt service. However, the properties in the portfolio are licensed by the State of Texas and the Centers for Disease Control to administer vaccinations. Coronavirus vaccines were administered across the portfolio in early 2021, and leasing has recently averaged 21.9 leases per month.

DBRS Morningstar analyzed the loans to a stabilized cash flow that is, 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 its business plan could result in a term default or the inability to refinance the fully funded loan balance. DBRS Morningstar made relatively conservative stabilization assumptions and, in each instance, considered the business plan to be rational and the future funding amounts to be sufficient to execute such plans. In addition, DBRS Morningstar analyzed LGD based on the as-is loan-to-value ratio (LTV), assuming the loan is fully funded.

The ongoing coronavirus pandemic continues to pose challenges and risks to the CRE sector and, while DBRS Morningstar expects multifamily to fare better than most other property types, its long-term effects on the general economy and consumer sentiment are still unclear. Furthermore, the pandemic has nearly halted leasing activity for senior housing properties in the short term and will continue to hamper this sector. All loans were originated after the beginning of the pandemic in March 2020. All loans include timely property performance reports and recently completed third-party reports, including appraisals. Twenty-three loans, representing 51.3% of the initial pool balance, are secured by newly built or recently renovated properties with relatively simple business plans that primarily involve the completion of an initial lease-up phase. The sponsors behind these assets are using the loans as traditional bridge financing, enabling them to secure more permanent financing once the properties reach stabilized operations. Given the uncertainty and elevated execution risk stemming from the coronavirus pandemic, nine loans, representing 26.8% of the initial pool balance, are structured with substantial upfront interest reserves, some of which are expected to cover one year or more of interest shortfalls. The two loans securitized by six assisted-living properties, representing 5.3% of the initial pool balance, were modeled with increased POD and LGD.

Based on the initial pool balances (excluding future funding), the overall WA DBRS Morningstar As-Is DSCR of 0.95x and WA As-Is LTV of 75.0% generally reflect high-leverage financing. Most of the assets are generally well positioned to stabilize, and any realized cash flow growth would help offset a rise in interest rates and improve the overall debt yield of the loans. DBRS Morningstar associates its LGD based on the assets’ as-is LTV, which does not assume that the stabilization plan and cash flow growth will ever materialize. The DBRS Morningstar As-Is DSCR at issuance does not consider the sponsor’s business plan, as the DBRS Morningstar As-Is NCF was generally based on the most recent annualized period. The sponsor’s business plan could have an immediate impact on the underlying asset performance that the DBRS Morningstar As-Is NCF does not account for. When measured against the DBRS Morningstar Stabilized NCF, the WA DBRS Morningstar DSCR is estimated to improve to 1.31x, suggesting that the properties are likely to have improved NCFs once the sponsor’s business plan has been implemented. While leverage is considered high compared with stabilized conduit and Freddie Mac securitized multifamily loans, it is actually fairly modest by CRE CLO multifamily loan standards.

All loans have floating interest rates and are interest-only (IO) during their initial terms, which range from 24 months to 36 months, creating interest rate risk. The borrowers of all 49 loans have purchased Libor rate caps, ranging between 0.1% and 3.0%, to protect against rising interest rates over the terms of the loans. All loans are short term and, even with extension options, have a fully extended loan term of five years maximum. Additionally, all loans have extension options and, in order to qualify for these options, the loans must meet minimum DSCR and LTV requirements. Thirty loans, representing 62.9% of the initial trust balance, amortize on 30-year schedules during all or a portion of their extension options.

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.

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.

-- Prospectus ID#1 – Riverpoint (12.1% of the pool)
-- Prospectus ID#2 – The Northwest Washington D.C. Collection (7.4% of the pool)
-- Prospectus ID#3 – Greybarn (5.1% of the pool)
-- Prospectus ID#4 – Civitas Portfolio (4.8% of the pool
-- Prospectus ID#5 – Tides at Grand Terrace (3.8% of the pool)
-- Prospectus ID#6 – The Piedmont (3.2% of the pool)
-- Prospectus ID#7 – Bristol Station Apartments (3.0% of the pool)
-- Prospectus ID#8 – Sea Breeze Tower (2.9% of the pool)
-- Prospectus ID#9 – Incline 45 (2.8% of the pool)
-- Prospectus ID#10 – Infinity at the Rim (2.7% of the pool)
-- Prospectus ID#15 – Crane Chinatown (2.1% 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.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

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

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