DBRS Morningstar Confirms Ratings on Arbor Realty Commercial Real Estate Notes 2021-FL4, Ltd.

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of commercial mortgage-backed notes issued by Arbor Realty Commercial Real Estate Notes 2021-FL4, Ltd. as follows:

-- 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.

The rating confirmations reflect the overall stable performance of the transaction, which has remained in line with DBRS Morningstar’s expectations since issuance. 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 transaction closed in December 2021 with the initial collateral consisting of 50 floating-rate mortgages and senior participations secured by 87 transitional multifamily properties with a cut-off date balance totaling approximately $1.71 million. Most of the loans are in a period of transition with plans to stabilize performance and improve the asset value. The transaction included a 180-day ramp-up acquisition period, which allowed the issuer to contribute additional loan collateral up to the maximum principal balance of $2.1 billion.

The transaction includes a 30-month reinvestment period, which is expected to expire with the March 2024 Payment Date. During this period, reinvested principal proceeds are subject to Eligibility Criteria, which includes the stipulation that all new loans will be secured by multifamily collateral. Since the last DBRS Morningstar rating action in November 2022, 11 loans with a current cumulative trust loan balance of $326.1 million have been added to the trust. As of June 2023 reporting, the Principal Collection Account had a balance of $239.1 million available to the collateral manager to purchase additional loan interests into the transaction.

As of the June 2023 remittance report, the transaction consists of 60 loans with a cumulative loan balance of $1.86 billion. Since issuance, 25 loans with a former cumulative trust balance of $658.7 million have repaid, including 17 loans totaling $470.3 million since the previous DBRS Morningstar rating action in November 2022. The transaction is concentrated by property type as all loans are secured by multifamily properties. The loans are primarily secured by properties in suburban markets as 56 loans, representing 92.5% of the pool, are secured by properties in suburban markets, as defined by DBRS Morningstar, with a DBRS Morningstar Market Rank of 3, 4, or 5. An additional three loans, representing 4.5% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 2, denoting a tertiary market. In comparison with the pool at closing, 85.4% of the collateral was located in suburban markets, 10.3% of the collateral was located in urban markets, and 4.3% of the collateral was located in tertiary markets.

Leverage across the pool has increased from issuance levels as the current weighted-average (WA) as-is appraised value loan-to-value (LTV) ratio is 84.0%, with a current WA stabilized LTV ratio of 68.5%. In comparison, these figures were 77.3% and 57.3%, respectively, at issuance. DBRS Morningstar recognizes that select loans added to the trust since issuance property may have been subject to the current rising interest rate or widening capitalization rate environments, thus exhibiting higher leverage.

As part of this review, DBRS Morningstar received updates on the business plans for all loans in the pool. Many borrowers are in the early stages of their respective stabilization plans with business plan progression generally in line with expectations since loan contribution to the trust. Through May 2023, the lender had advanced $85.5 million to 33 of the remaining individual borrowers. All of the released funds have been for ongoing capital improvement projects across the individual properties. An additional $41.8 million of loan future funding allocated to 15 individual borrowers remains outstanding to fund ongoing capital improvement projects.

According to the collateral manager, 10 loans, representing 14.1% of the current cumulative trust loan balance have been modified. Loan modification terms have included maturity extensions, reallocation of existing reserves, and changes in property management, among others. There are no loans on the servicer’s watchlist or in special servicing as of the June 2023 remittance; however, one loan, M6 Portfolio (Prospectus ID#2; 4.5% of the pool), reported a late June 2023 debt service payment. The loan is secured by a portfolio of six, Class C multifamily properties, totaling 1,240 units, in Memphis, Tennessee. According to the collateral manager, the borrower had completed 370 unit renovations across the portfolio through Q1 2023, of which 65 units have been leased, achieving an average rental rate of $932 per unit, surpassing the borrower’s stabilized monthly rental premium ranging from $150 per unit to $250 per unit, and the appraiser’s projected stabilized rental rate of $787 per unit. According to the servicer-provided financials based on trailing one-month revenues and trailing 12-month expenses for the period ended February 28, 2023, the portfolio reported net cash flow of $4.3 million, equating to a debt yield of 5.1%.

The Crest at Riverside loan (Prospectus ID#3; 3.8% of the pool), which is secured by a 396-unit garden-style property in Roswell, Georgia, was also reported as over 30 days delinquent as of June 2023. As noted at closing, the collateral manager had concerns with the borrower’s ability to continue to make debt service payments. According to an update from the collateral manager, the borrower intends to sell the property and received a Letter of Intent from a prospective buyer with a sale price slightly above the existing debt of $70.5 million. DBRS Morningstar has requested additional information from the collateral manager regarding the potential sale price and timing of closing.

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 (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, (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model v 1.1.0.0 (https://www.dbrsmorningstar.com/research/410913)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)

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