DBRS Morningstar Confirms Credit Ratings on MF1 2020-FL4, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed its credit ratings on the following classes of notes issued by MF1 2020-FL4, Ltd.:

-- 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 largely remained in line with DBRS Morningstar’s expectations as the trust continues to be primarily secured by multifamily collateral. While select loans have exhibited performance concerns, including delinquency issues and transfers to special servicing, increased collateral reduction provides additional credit support to the rated bonds. 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 22 floating-rate mortgages secured by 29 transitional multifamily properties with a cut-off date balance totaling approximately $783.3 million. Most of the loans were in a period of transition with plans to stabilize performance and improve the asset value. The transaction included an 18-month reinvestment period that expired in May 2022, at which point the bonds began to amortize sequentially with loan repayment and scheduled loan amortization. Since the expiration of the reinvestment period, the transaction has paid down by 26.6% through December 2023 reporting.

The pool currently comprises 24 loans secured by 46 properties with a cumulative trust balance of $697.4 million. Since the previous DBRS Morningstar rating action in March 2023, two loans with a prior cumulative trust balance of $69.3 million have successfully repaid from the pool.

The transaction is concentrated by multifamily properties as 22 loans, representing 92.5% of the current pool balance, are secured by multifamily properties while the remaining two loans are secured by senior-housing properties. The pool is primarily secured by properties in suburban markets, with 18 loans, representing 64.7% of the pool, assigned a DBRS Morningstar Market Rank of 3, 4, or 5. An additional five loans, representing 31.5% of the pool, are secured by properties in urban markets, with a DBRS Morningstar Market Rank of 6 or 7. The remaining loan, representing 3.8% of the pool, is backed by a property with a DBRS Morningstar Market Rank of 2, denoting a tertiary market.

Through November 2023, the lender had advanced cumulative loan future funding of $158.3 million to 22 of the 24 outstanding individual borrowers to aid in property stabilization efforts. The largest advance, $19.0 million, had been made to the borrower of the Parkview at Collingswood loan, which is secured by a 1,030-unit, high-rise style apartment community located in Collingswood, New Jersey. The advanced funds have been used to fund the borrower’s extensive $27.5 million planned capital expenditure (capex) plan across the portfolio. The Q3 2023 collateral manager report noted the borrower had completed 563 unit upgrades with another 49 units in progress. Of the renovated units, 346 units have achieved rental premiums of $291 per unit compared with in-place rental rates at issuance.

An additional $90.8 million of loan future funding allocated to 15 of the outstanding individual borrowers remains available. The vast majority of available funding ($58.0 million) is allocated across the two portfolio loans sponsored by Veritas, ranging from $24.6 million for the SF Multifamily Portfolio II loan to $9.1 million for the LA Multifamily Portfolio II loan. The business plan for each loan is similar, with funds available to renovate properties with a small portion of dollars allocated for potential performance-based earnouts.

As of the December 2023 remittance, four loans, representing 17.6% of the pool are in special servicing. The largest loan in special servicing, The Edison (Prospectus ID#7; 4.9% of the pool), is secured by a 223-unit mid-rise apartment building in Chicago’s Edgewater neighborhood. The loan transferred to special servicing in August 2022 for payment default, which was compounded as the borrower was unable to secure take-out financing upon the loan’s final maturity date in November 2022. The lender is expected to take title to the property in January 2024 via a deed-in-lieu foreclosure resolution strategy. The property was 79.0% occupied as of August 2023, down from 87.0% as of December 2022; however, according to the collateral manager, the receiver has successfully addressed tenant delinquency issues as the rental collection rate was reported to be above 90.0%. To reflect the current status of the loan and the unknowns surrounding the ultimate resolution timing, in its current analysis, DBRS Morningstar analyzed the loan with an elevated probability of default, resulting in a loan expected loss in excess of three times the overall expected loss for the pool.

The three remaining loans in special servicing are sponsored by Tides Equities (Tides), including Maravilla Apartments, ($45.5 million, 6.5% of the pool), Palm Valley ($28.4 million, 4.1% of the pool), and Superstition Vista ($14.7 million, 2.1% of the pool). The loans transferred to special servicing in August 2023 due to imminent monetary default as the sponsor experienced performance issues across its commercial real estate portfolio. The loans were modified in October 2023, requiring the borrower to make deposits into various reserves including accounts payable reserves, interest reserves and interest rate cap reserves. The interest reserves also have a replenishment requirement, which is a sponsor guaranty under each loan. In return for these deposits, the lender will allow the borrower to defer a portion of each loan’s monthly interest rate payment of up to 50.0% of the loan’s contractual interest rate margin during the first 12 months and up to 25.0% of the margin rate for the following 12 months. Any deferred amounts will be capitalized and added to the respective outstanding loan balance. Additionally, the debt yield property performance tests to qualify for loan extension options were removed, and the related loan extension fees were waived. In its analysis, DBRS Morningstar increased the probability of default across all three loans, which resulted in individual loan expected loss figures of approximately two times the expected loss for the overall pool.

As of the December 2023 remittance, there are 15 loans on the servicer’s watchlist, representing 58.7% of the current trust balance. The loans have primarily been flagged for below breakeven debt service coverage ratios, occupancy concerns, 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 and increase cash flow; however, DBRS Morningstar also notes the challenges borrowers continue to face with increased debt service payments on floating-rate debt, which may increase the likelihood of loan delinquency. In the next six months, 12 loans, representing 49.8% of the current trust balance, are scheduled to mature; however, all of the loans with the exception of the 144 West Street loan, have available extension options remaining to the individual borrowers.

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 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 (November 3, 2023)/North American CMBS Insight Model Version 1.2.0.0, https://www.dbrsmorningstar.com/research/422859

-- 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, 2023), https://www.dbrsmorningstar.com/research/425081

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