DBRS Morningstar Confirms Ratings on All Classes of MF1 2022-FL10 LLC

DBRS, Inc. (DBRS Morningstar) confirmed its credit ratings on all classes of notes issued by MF1 2022-FL10 LLC (the Issuer) as follows:

-- Class A Notes at AAA (sf)
-- Class A-S Notes at AAA (sf)
-- Class B Notes at AA (low) (sf)
-- Class C Notes at A (low) (sf)
-- Class D Notes at BBB (sf)
-- Class E Notes at BBB (low) (sf)
-- Class F Notes at BB (high) (sf)
-- Class F-E Notes at BB (high) (sf)
-- Class F-X Notes at BB (high) (sf)
-- Class G Notes at BB (low) (sf)
-- Class G-E Notes at BB (low) (sf)
-- Class G-X Notes at BB (low) (sf)
-- Class H Notes at B (low) (sf)
-- Class H-E Notes at B (low) (sf)
-- Class H-X Notes 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 initial collateral consisted of 24 floating-rate mortgage loans secured by 34 transitional multifamily properties totaling $979.18 million. Most loans were in a period of transition with plans to stabilize performance and improve values of the underlying assets. The trust reached the maximum transaction balance of $1.03 billion in December 2022. As of the October 2023 remittance, the pool comprised 25 loans secured by 34 properties with a cumulative trust balance of $1.02 billion. Since issuance, one loan, with a former trust balance of $2.1 million, has been successfully repaid in full. In addition, since the previous DBRS Morningstar rating actions in November 2022, one loan, totaling $17.8 million, has been added into the pool.

The transaction is managed with a two-year Reinvestment Period, whereby the Issuer can purchase new loans and funded loan participations into the trust. The Reinvestment Period is scheduled to end with the August 2024 Payment Date. As of October 2023, the Reinvestment Account had an available balance of $2.1 million.

The transaction is concentrated by property type, as all loans are secured by multifamily properties. The pool is primarily secured by properties in suburban markets, with 14 loans, representing 47.3% of the pool, assigned a DBRS Morningstar Market Rank of 3, 4, or 5. An additional eight loans, representing 38.4% of the pool, are secured by properties in urban markets, with a DBRS Morningstar Market Rank of 6, 7, or 8. The remaining three loans, representing 14.3% of the pool, 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 October 2023 reporting when compared with issuance metrics as the current weighted-average (WA) as-is appraised value loan-to-value ratio (LTV) is 67.3%, with a current WA stabilized LTV of 61.5%. In comparison, these figures were 68.0% and 62.4%, 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. In the analysis for this review, DBRS Morningstar applied upward LTV adjustments across nine loans, representing 48.1% of the current trust balance.

Through September 2023, the lender had advanced cumulative loan future funding of $156.9 million to 19 of the 25 outstanding individual borrowers. The largest advance, $32.5 million, was made to the borrower of The 600 loan, which is secured by a Class A, 30-story high-rise-style apartment building totaling 404 units in Birmingham, Alabama. The advanced funds are part of the borrower’s extensive capital expenditure plan to convert the property into a Class A multifamily property from a 30-story office tower. As of Q2 2023, the project was 32.0% funded. The sponsor has successfully leased 12 units, with several units nearing completion on floor 27. The expected completion date is June 2024, just prior to the loan’s initial July 2024 maturity date. The loan also includes five 12-month extension options through July 2029.

An additional $153.2 million of loan future funding allocated to 20 individual borrowers remains available. The largest individual loan allocation ($35.0 million) is to the borrower of the Park at Sheffield loan, which is secured by a 316-unit, garden-style apartment complex located in Miami. The sponsor’s business plan is to complete an extensive capital expenditure plan by expanding the size of the property by 26 additional units. According to the collateral manager, construction is expected to commence in Q3 2023 as all of the units have been vacated. The renovation is expected to be completed within a two-year time frame.

As of the October 2023 remittance, there are no delinquent loans; however, there are three loans, representing 9.1% of the pool balance, in special servicing. The loans, which are sponsored by Tides Equities (Tides), include Park at Stone Creek ($54.7 million, 5.3% of the pool), Spanish Oaks ($26.3 million, 2.6% of the pool), and The Meadows ($12.2 million, 1.2% of the pool). The loans transferred to special servicing in August 2023 for sponsor-related concerns. The servicer did not provide any details regarding the transfers. However, according to published reports, principals of the firm noted in June 2023 a capital call would likely be needed from investors in order to fund debt service shortfalls for select loans across Tides’ portfolio given the rise in floating-interest rate debt. In the analysis for this review, DBRS Morningstar made a negative adjustment to the sponsor strength across all three Tides-sponsored loans, resulting in increased expected losses for those loans that exceeded the pool average.

There are 14 loans on the servicer’s watchlist, representing 57.9% of the current trust balance. The loans have primarily been flagged for below breakeven debt service coverage ratios and low occupancy rates. 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, three loans, representing 9.9% of the current trust balance, are scheduled to mature, but all three loans have extension options.

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 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

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