DBRS Morningstar Confirms All Credit Ratings on Arbor Realty Commercial Real Estate Notes 2022-FL2, LLC

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on all classes of commercial mortgage-backed notes issued by Arbor Realty Commercial Real Estate Notes 2022-FL2, LLC 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 credit rating confirmations reflect the overall stable performance of the transaction, which has remained in line with DBRS Morningstar’s expectations since issuance as the trust continues to be solely 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 transaction closed in May 2022 with the initial collateral consisting of 32 floating-rate mortgages and senior participations secured by 40 mostly transitional properties with a cut-off balance of $936.9 billion. Most loans were in a period of transition with plans to stabilize performance and improve the asset value. The transaction has a maximum funded balance of $1.1 billion and is a managed vehicle with the Reinvestment Period scheduled to expire with the May 2024 Payment Date. As of October 2023 reporting, the Reinvestment Account has a balance of $4.5 million.

As of the October 2023 remittance, the pool comprises 34 loans secured by 37 properties with a cumulative trust balance of $1.05 billion. As part of DBRS Morningstar’s analysis, the Clear Fork & Trinity Oaks loans were treated as a single loan, as were the Hunters Ridge A1 and A3 loan notes. As of October 2023, 25 of the original loans, representing 71.8% of the current trust balance, remain in the trust. Since issuance, seven loans with a former cumulative trust balance of $204.8 million, have been successfully repaid from the pool, all of which were repaid since the previous DBRS Morningstar credit rating action in November 2022. An additional two loans, totaling $200.3 million, have been added to the trust since the previous DBRS Morningstar credit rating action.

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 25 loans, representing 63.2% 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 four loans, representing 25.0% of the pool, are secured by properties with DBRS Morningstar Market Ranks of 6 or 7, denoting urban markets, while five loans, representing 11.8% of the pool, are secured by properties with DBRS Morningstar Market Ranks of 1 and 2, denoting rural and tertiary markets. In comparison, at transaction issuance, properties in suburban markets represented 58.2% of the collateral, urban markets represented 23.1% of the collateral, and properties in tertiary and rural markets represented 15.0% of the collateral.

Leverage across the pool has increased slightly as of the October 2023 reporting when the current weighted-average (WA) as-is appraised loan-to-value ratio (LTV) was 78.1%, with a current WA stabilized LTV of 66.0%. In comparison, these figures were 71.5% and 66.0%, respectively, at issuance. 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. In the analysis for this review, DBRS Morningstar applied upward LTV adjustments across two loans, representing 10.0% of the current trust balance.

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. Through October 2023, the lender had advanced cumulative loan future funding of approximately $42.2 million to 24 of the 34 outstanding individual borrowers to aid in property stabilization efforts. The loan with both the largest amount of future funding remaining ($14.7 million) and advanced through June 2023 ($5.2 million) is the Hunters Ridge loan. The loan is secured by 455 units of a 487-unit multifamily condominium complex in Farmington Hills, Michigan. The borrower’s business plan consists of implementing a $19.9 million capital improvement plan to stabilize the property. Through June 2023, $5.2 million of advanced funds had been used to fund the unit renovations, common hallway refurbishment, clubhouse redevelopment, amenity, and landscaping improvements. While occupancy decreased to 81.0% as of June 2023 from 95.0% at issuance, the average in-place rental rate across the entire property increased to $1,681 per unit, with the renovated units averaging rents of $2,055 per unit. In comparison at loan closing, the average in place rental rate was $1,486 per unit.

An additional $42.3 million of loan future funding allocated to eight of the outstanding individual borrowers remains available. Available funding for each respective borrower is for planned capital expenditure improvements, with the exception of the 55 Jordan loan (Prospectus ID#3; 5.4% of the pool) as available funds are available to finance leasing costs.

As of the October 2023 reporting, no loans are specially serviced or on the servicer’s watchlist; however, the borrowers of four loans, totaling $79.4 million (7.6% of the pool), are categorized as being less than 30 days delinquent on the respective debt service payments. Overall, the borrowers of these loans have been progressing with the respective business plans, with the largest loan, The Slate (Prospectus ID#19; 2.7% of the pool), secured by a garden-style multifamily property in Atlanta. According to the collateral manager, the borrower has used all loan future funding toward the completion of capital improvements across the property. As of May 2023, the collateral was 87.1% occupied, with an average in-place rent of $1,516 per unit, a $302 monthly premium over the issuance rental rate of $1,214 per unit. The achieved premium is in line with the borrower’s expected premium, which ranged from $65 per unit to $350 per unit.

While there were no future funding dollars allocated for the Silversmith Creek (Prospectus ID#37; 1.6% of the pool) and The Park on 23rd (Prospectus ID#33; 1.2% of the pool) loans, the borrower of the Silversmith Creek loan has completed a significant portion of its planned capital improvement plan. According to the collateral manager, approximately 46.0% of unit-interior renovations and 44.0% of common area and exterior renovations have been completed. The borrower for The Park on 23rd loan has completed 21.0% of the planned capital improvements via disbursements from a renovation reserve. The last loan that reported a late payment is The Townhomes at Peacock Hills (Prospectus ID#44; 2.0% of the pool), which was added to the trust in September 2023. Through July 2023, the lender had only advanced 5.8% of future funding for planned capital improvements as the borrower remains in the initial stages of its business plan.

According to the latest update provided by the collateral manager, only one loan, Sora on Rose (Prospectus ID#26; 1.9% of the pool), has been modified, which allowed a rolling advance of approximately $173,000 from the renovation reserve for the borrower to access funds to finance its capital improvement plan more efficiently. Maturity risk is concentrated in 2025 as 22 loans (57.8% of the pool) are scheduled to mature, while 11 loans (40.2% of the pool) are scheduled to mature in 2024. The majority of these loans have extension options ranging between 12 and 24 months. According to the collateral manager, one loan, representing 3.3% of the pool, is expected to be repaid prior to its March 2025 maturity.

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 (July 4, 2023) at https://www.dbrsmorningstar.com/research/416784.

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

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 v 1.1.0.0 (https://www.dbrsmorningstar.com/research/410913)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023; https://www.dbrsmorningstar.com/research/420982)

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)

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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