DBRS Morningstar Confirms Ratings on All Classes of MF1 2022-FL8 Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed its credit ratings on all classes of notes issued by MF1 2022-FL8 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 (high) (sf)
-- Class G at BB (low) (sf)
-- Class H at B (low) (sf)

All trends are Stable.

The credit 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. Additionally, 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 32 floating-rate mortgage loans secured by 69 transitional multifamily properties and one manufactured housing community property, totaling $1.8 billion (77.0% of the fully funded balance of $2.0 billion), excluding $152.6 million of future funding commitments and $392.1 million of pari passu debt. Most loans were in a period of transition with plans to stabilize performance and improve the asset value. The transaction is a managed vehicle with the reinvestment period scheduled to expire with the January 2024 Payment Date. As of the September 2023 remittance, the pool comprises 37 loans secured by 89 properties with a cumulative trust balance of $2.0 billion. Since issuance three loans, totaling $48.5 million, have been added to the trust while three loans totaling $86.1 million have repaid since the last credit rating action in November 2022.

The transaction is concentrated by property type as 35 loans, representing 96.8% of the current trust balance, are secured by multifamily properties with the remaining two loans (3.2% of the current trust balance) secured by manufactured housing properties. The pool is primarily secured by properties in suburban markets, with 21 loans, representing 51.6% of the pool, assigned a DBRS Morningstar Market Rank of 3, 4, or 5. An additional 12 loans, representing 41.1% of the pool, are secured by properties in urban markets, with a DBRS Morningstar Market Rank of 6, 7, or 8. The remaining loans are backed by properties with a DBRS Morningstar Market Rank of 1 or 2, denoting tertiary markets. These property-type and market-type concentrations remain generally in line with the pool composition at the November 2022 credit rating action.

Leverage across the pool has remained consistent as of September 2023 reporting when compared with issuance metrics as the current weighted-average (WA) as-is appraised loan-to-value ratio (LTV) is 72.4%, with a current WA stabilized LTV of 64.7%. In comparison, these figures were 72.1% and 64.5%, respectively, at issuance. DBRS Morningstar recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2022 and may not fully reflect the effects of increased interest rates and/or widening capitalization rates in the current environment.

Through August 2023, the lender had advanced cumulative loan future funding of $163.2 million to 26 of the 27 outstanding individual borrowers. The largest advance, $38.8 million, has been made to the borrower of the Park Portfolio loan, which is secured by a portfolio of eight, garden-style multifamily properties totaling 317 units in Brooklyn, New York. The advanced funds have been used to fund the borrower’s $17.0 million planned capital expenditure plan and fund various performance-based earnouts as part of the borrower’s business plan to convert units into affordable housing in order to qualify for an Article XI tax abatement. The Q2 2023 collateral manager report noted the property was only 32.5% occupied as of May 2023 as the remainder of the units are offline because of ongoing renovations.

An additional $93.1 million of loan future funding allocated to 23 of the outstanding individual borrowers remains available. The largest portion of available funding ($16.2 million) is allocated to the SF Multifamily Portfolio IV loan, which is secured by a portfolio of five multifamily properties totaling 124 units in San Francisco. The borrower’s business plan is to complete both interior and exterior renovations throughout the properties. As of March 2023, the portfolio was 84.0% occupied with an average rental rate of $2,443/unit, representing a rental premium of $194/unit over in-place rents at issuance.

In September 2023, three of the four loans in the pool sponsored by Tides Equities (Tides) transferred to special servicing, namely Superstition Vista, The Meadows, and Aya Las Vegas. The loan that did not transfer, Wynn Palms ($47.8 million, 2.4% of the pool), also has a pari passu piece of the A note securitized in the MF1 2022-FL9 LLC transaction, which is also rated by DBRS Morningstar. The loan in that transaction was transferred to special servicing with September 2023 reporting. According to The Real Deal, the principals of the firm noted in June 2023 a capital call would likely be needed from investors in order to fund debt service shortfalls across the portfolio, given the rise in floating interest rate debt. The loans transferred to special servicing in September 2023 and were reported current. The collateral manager’s commentary indicates the AYA Las Vegas loan was modified, which included receiving preferred equity capital injections to cover the projected debt service shortfalls over the next three years. In the analysis for this review, DBRS Morningstar made a negative adjustment to the sponsor strength across all Tides-sponsored loans, resulting in increased expected losses for those loans that exceeded the pool average.

There are 20 loans on the servicer’s watchlist, representing 44.2% of the current trust balance. The loans have primarily been flagged for below breakeven debt service coverage ratios and upcoming loan maturities. All loans remain current with performance declines expected to be temporary as multifamily units are being taken offline by respective borrowers to complete interior renovations. In the next six months, 20 loans, representing 50.5% of the current trust balance, are scheduled to mature. According to the collateral manager, 19 of the individual borrowers are expected to exercise loan extension options, while the one remaining borrower is expected to successfully execute its exit strategy.

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].