DBRS Morningstar Upgrades Ratings on Five Classes of Arbor Realty Commercial Real Estate Notes 2019-FL2, Ltd.

DBRS, Inc. (DBRS Morningstar) upgraded its ratings on the following five classes of floating-rate notes issued by Arbor Realty Commercial Real Estate Notes 2019-FL2, Ltd. as follows:

-- Class B Secured Floating Rate Notes to AAA (sf) from AA (low) (sf)
-- Class C Secured Floating Rate Notes to A (high) (sf) from A (low) (sf)
-- Class D Secured Floating Rate Notes to A (low) (sf) from BBB (high) (sf)
-- Class E Secured Floating Rate Notes to BBB (sf) from BBB (low) (sf)
-- Class F Floating Rate Notes to BB (sf) from BB (low) (sf)

DBRS Morningstar also confirmed the following ratings on three classes:

-- Class A Senior Secured Floating Rate Notes at AAA (sf)
-- Class A-S Senior Secured Floating Rate Notes at AAA (sf)
-- Class G Floating Rate Notes at B (low) (sf)

All trends are Stable.

The rating upgrades reflect the increased credit support to the bonds as a result of successful loan repayment, as there has been collateral reduction of 34.6% since issuance. In addition, the borrowers on the remaining loans are generally progressing with their respective business plans, which DBRS Morningstar expects to ultimately lead to property stabilization and value growth. In conjunction with this press release, DBRS Morningstar has published a Surveillance Performance Update report with in-depth analysis and credit metrics for the transaction and with business plan updates on select loans. For access to this report, please click on the link under Related Documents below or contact us at [email protected].

The initial collateral consisted of 27 floating-rate loans with a cutoff balance totaling $510.9 million, which was subsequently ramped up to the maximum deal balance of $635.0 million. The transaction had a 36-month reinvestment period that expired with the November 2022 Payment Date.

As of the January 2023 remittance, the pool comprised 28 loans secured by 28 properties with a cumulative trust balance of $415.6 million. Since issuance, 52 loans have been repaid from the pool, including six loans with a former trust balance of $101.9 million, which have been repaid since the previous DBRS Morningstar rating action in November 2022. Only two of the original 27 loans, which represent 15.2% of the current trust balance, remain in the transaction.

The transaction is concentrated by multifamily properties as 27 loans, representing 95.2% of the current pool balance, are secured by multifamily properties while the remaining loan is secured by a student-housing property. Through September 2023, the collateral manager advanced $29.4 million in loan future funding to 26 individual borrowers to aid in property stabilization efforts. The majority of this funding ($15.0 million) has been advanced to the borrowers of The Park at Carlyle ($6.7 million) and The Park at Callington ($8.3 million) loans, which share sponsorship and are secured by adjacent multifamily properties in Birmingham, Alabama. The borrower has used the funds to perform capital improvements across the properties in order to increase rental rates to market.

An additional $37.1 million of unadvanced loan future funding allocated to all remaining 28 individual borrowers remains outstanding. The largest portion of unadvanced future funding dollars is allocated to the borrower of the Meadow Crossings loan, which is secured by a 178-unit garden-style property in Dallas. The borrower’s business plan is to institute a capital renovation program across the property to increase rental rates.

Beyond a property type concentration, the transaction is also concentrated by properties in suburban markets, which DBRS Morningstar defines as markets with a DBRS Morningstar Market Rank of 3, 4, or 5. As of January 2023, there were 19 loans, representing 70.4% of the cumulative loan balance, secured by properties in suburban markets. An additional two loans, representing 6.9% of the cumulative loan balance, are secured by properties in urban markets, which historically have shown greater liquidity and demand. In comparison with the pool composition as of July 2022 reporting, there were 26 loans, representing 68.0% of the cumulative loan balance, in suburban markets and five loans, representing 15.9% of the cumulative loan balance, in urban markets.

The collateral pool exhibits similar leverage from issuance with a current weighted-average (WA) appraised loan-to-value ratio (LTV) of 79.3% and WA stabilized LTV of 62.2%. In comparison, these figures were 82.6% and 71.8%, respectively, at closing. As the majority of these appraisals were conducted prior to transaction issuance in 2019, there is the possibility that select property values may have decreased given the current interest rate and capitalization rate environment.

As of January 2023, there are three loans in special servicing, representing 17.3% of the pool balance. The Park at Carlyle (Prospectus ID#3; 8.2% of the pool balance) and The Park at Callington (Prospectus ID#6; 7.0% of the pool balance) are the two largest loans in special servicing and are sister multifamily properties. The loans transferred to special servicing in August 2022, as the servicer identified the loans as credit risks for potential maturity default because the borrower requested multiple short-term loan extensions while attempting to secure takeout financing. According to the servicer, the sponsor is in the process of securing takeout financing for both loans with a third-party lender; however, if the transaction does not close, the servicer will likely extend the loan maturity further with potential terms unknown at this time. There are no loans on the servicer’s watchlist.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (October 3, 2022), 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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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