DBRS Morningstar Confirms Ratings on MF1 2021-FL6, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on all classes of notes issued by MF1 2021-FL6, 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 as evidenced by stable performance and leverage metrics. The trust continues to be primarily secured by the multifamily collateral. 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 37 floating-rate mortgages secured by 50 mostly transitional properties with a cut-off date balance totaling $993.2 million. Most loans were in a period of transition with plans to stabilize performance and improve values for the underlying assets. The trust reached its maximum funded balance of $1.30 billion in October 2021. The transaction was a managed vehicle with a 24-month reinvestment, which expired with the August 2023 Payment Date.

As of the August 2023 remittance, the pool comprises 44 loans secured by 100 properties with a cumulative trust balance that has amortized down to $1.29 billion, representing minimal collateral reduction of 0.5%. Currently, 21 of the original loans in the transaction at closing, representing 44.8% of the current trust balance, remain in the trust. Since issuance, 16 loans with a prior cumulative trust balance of $426.9 million have been successfully repaid from the pool, including seven loans totaling $195.4 million that have repaid since the previous DBRS Morningstar rating action in November 2022. An additional seven loans, totaling $229.7 million, have been added to the trust since the previous DBRS Morningstar rating action.

The transaction is concentrated by property type as 42 loans, representing 93.0% of the current trust balance, are secured by multifamily properties with the remaining two loans (7.0% of the current trust balance) secured by healthcare properties. In comparison, when the previous DBRS Morningstar Surveillance Performance Update for the transaction was published in April 2022, multifamily properties represented 91.5% of the collateral, student housing properties represented 6.9% of the collateral, and healthcare properties represented 1.6% of the collateral.

The pool is primarily secured by properties in suburban markets, as defined by DBRS Morningstar, with 27 loans, representing 60.0% of the pool, assigned a DBRS Morningstar Market Rank of 3, 4, or 5. An additional 13 loans, representing 31.4% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 6 and 8, denoting urban markets, while four loans, representing 8.6% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 2, denoting tertiary markets. In comparison, at April 2022, properties in suburban markets represented 57.0% of the collateral, properties in urban markets represented 34.2% the collateral, and properties in tertiary markets represented 8.8% of the collateral.

Leverage across the pool has remained consistent as of August 2023 reporting when compared with issuance and April 2022 metrics. The current weighted-average (WA) as-is appraised value loan-to-value ratio (LTV) is 70.5%, with a current WA stabilized LTV of 65.1%. In comparison, these figures were 70.6% and 65.5%, respectively, at issuance and 76.7% and 66.5%, respectively, as of April 2022. DBRS Morningstar recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2021 and 2022 and may not reflect the current rising interest rate or widening capitalization rate environments.

Through August 2023, the lender had advanced cumulative loan future funding of $158.3 million to 29 of the 44 outstanding individual borrowers to aid in property stabilization efforts. The largest advance, $14.9 million, has been made to the borrower of the SF Multifamily Portfolio III loan. The loan is secured by a portfolio of 10 multifamily properties, totaling 308 units, located in San Francisco. The advanced funds have been used to fund the borrower’s extensive $33.9 million planned capital expenditure (capex) plan across the portfolio. The Q1 2023 collateral manager report noted the borrower had completed 136 unit upgrades with another 27 units in progress. The sponsor, Veritas Investment Group (Veritas), backs four portfolio loans in the MF1 2021-FL6 transaction with a current cumulative trust balance of $72.6 million (5.6% of the pool). The loans are secured by multifamily properties in Los Angeles and San Francisco. All four loans mature in January 2024 with three one-year extension options, and according to the collateral manager, each loan is expected to be extended. The collateral manager expects that the performance of each collateral portfolio will meet any required performance extension hurdles. Currently, $23.9 million of future funding remains available to the borrower on the SF Multifamily Portfolio III loan, which includes a potential $5.0 million earnout.

An additional $115.4 million of loan future funding allocated to 11 of the outstanding individual borrowers remains available. The vast majority of available funding ($100.0 million) is allocated across the four portfolio loans sponsored by Veritas, ranging from $22.0 million for the SF Multifamily Portfolio I loan to $27.0 million for the LA Multifamily Portfolio III loan. The business plan for each loan is similar with available funds to renovate properties with a small portion of dollars allocated for potential performance-based earnouts.

As of the August 2023 remittance, there are no delinquent loans, no loans in special servicing, and there are 20 loans on the servicer’s watchlist, representing 46.8% of the current trust balance. The loans have primarily been flagged for below breakeven debt service coverage ratios and upcoming loan maturity. Performance declines noted in the pool are expected to be temporary as multifamily units are being taken offline by respective borrowers to complete interior renovations. In the next six months, 13 loans, representing 26.4% of the current trust balance are scheduled to mature. According to the collateral manager, 11 of the individual borrowers are expected to exercise loan extension options, while the two remaining borrowers are expected to successfully execute exit strategies.

Eighteen loans, representing 39.2% of the current trust balance, have been modified. The modifications have generally allowed borrowers to exercise loan extension options by amending loan terms in return for fresh equity deposits and the purchase of a new interest rate cap agreement. The most common amendments include the removal of performance-based tests and changes to the required strike price on the purchase of a new interest rate cap agreement. The four Veritas loans were modified to extend the maximum maturity date to January 2027 to allow the sponsor additional time to complete its business plan, which was significantly delayed by the Coronavirus Disease (COVID-19) pandemic and the resulting eviction moratorium in Los Angeles and San Francisco.

Three loans, representing 8.1% of the current trust balance, are sponsored by Tides Equities (Tides). In a June 2023 article published by The Real Deal, the principals of the firm noted it would likely need to conduct a capital call from its investors in order to fund debt service shortfalls across its portfolio given the rise in floating interest rate debt. All three loans are current; however, the Tides on Country Club and Copper Creek (now known as Tides on Oakland Hills) loans have been modified. Modification terms included changes to interest reserve minimums and interest rate terms as well as the removal of automatic monthly loan future funding disbursements by the lender. All future loan funding must be requested by the borrower and approved by the lender. Additionally, an affiliate of the Issuer made a preferred equity investment in the Tides on Oakland Hills loan to cover operating and debt service shortfalls. In its analysis, DBRS Morningstar made a negative adjustment to the sponsor strength across all three Tides sponsored loans, resulting in individual loan expected loss levels approximately 1.5 times greater than the overall pool-wide MF1 2021-FL6 expected loss.

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/416784 (July 4, 2023).

All credit ratings are subject to surveillance, which could result in credit 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 the 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 credit rating was initiated at the request of the rated entity.

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

This is a solicited credit rating.

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

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

The credit 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 Version 1.1.0.0,
https://www.dbrsmorningstar.com/research/410913

-- 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 (August 23, 2023),
https://www.dbrsmorningstar.com/research/419592

-- 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].