Morningstar DBRS Confirms Credit Ratings on All Classes of MF1 2022-B1 LLC

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of commercial mortgage-backed notes issued by MF1 2022-B1 LLC (the Issuer), as follows:

-- Class A Notes at AAA (sf)
-- Class B Notes at AAA (sf)
-- Class C Notes at A (high) (sf)
-- Class D Notes at A (low) (sf)
-- Class E Notes at BBB (high) (sf)
-- Class F Notes at BBB (low) (sf)
-- Class G Notes at BB (high) (sf)
-- Class G-E Notes at BB (high) (sf)
-- Class G-X Notes at BB (high) (sf)
-- Class H Notes at BB (low) (sf)
-- Class H-E Notes at BB (low) (sf)
-- Class H-X Notes at BB (low) (sf)
-- Class I Notes at B (low) (sf)
-- Class I-E Notes at B (low) (sf)
-- Class I-X Notes at B (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the outstanding collateral in the transaction, which has remained in line with Morningstar DBRS' expectations. While select loans have exhibited performance concerns, the majority of the loans are expected to successfully secure refinancing and/or pay off upon loan maturity, given the underlying collateral has demonstrated stable to improving operating performance over the last few reporting periods, as the respective borrowers have generally progressed toward completion of their stated business plans.

In conjunction with this press release, Morningstar DBRS 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 November 2022 with a cut-off pool balance totaling approximately $1.275 billion, excluding approximately $151.0 million of future funding commitments. The initial collateral consisted of 33 floating-rate mortgage loans secured by 76 multifamily, senior housing, student housing, mixed-use, and manufactured housing properties, most of which were in a period of transition with plans to stabilize and improve asset values. As of the May 2024 remittance, the pool comprises 33 loans secured by 69 properties with a cumulative trust balance of $1.625 million. Since issuance, two loans with a former cumulative trust balance of $78.6 million have successfully repaid from the pool, both of which were repaid since Morningstar DBRS' prior credit rating action in June 2023.

The transaction has a 24-month reinvestment period, whereby the Issuer can purchase new loan collateral or funded loan participations on existing loan collateral into the trust, subject to certain eligibility criteria. Future collateral interests can be secured only by multifamily, manufactured housing, student housing, and senior living property types during the stated reinvestment period. The Issuer is required to obtain a no-downgrade Rating Agency Confirmation (RAC) by Morningstar DBRS for all new collateral interests and funded companion participations. Since issuance, five loans totaling $274.7 million have been contributed to the trust.

The transaction is concentrated by property type as 31 loans, representing 96.5% of the current trust balance, are secured by multifamily properties, with one loan (2.6% of the current trust balance) secured by a senior housing and one loan (1.2% of the current trust balance) secured by a manufactured housing property. The transaction is also concentrated by loan size, as the largest 15 loans represent 65.9% of the pool, and by properties in suburban markets, with 17 loans, representing 49.7% of the pool, assigned a Morningstar DBRS Market Rank of 3, 4, or 5. An additional nine loans, representing 36.6% of the pool, are secured by properties with a Morningstar DBRS Market Rank of 6, 7, or 8 denoting an urban market, while seven loans, representing 13.6% of the pool, are secured by properties with a Morningstar DBRS Market Rank of 1 or 2, denoting a rural or tertiary market.

Leverage across the pool is generally stable compared with issuance with a current weighted-average (WA) as-is appraised value loan-to-value ratio (LTV) of 67.4% (compared with 68.3% at closing) and a WA stabilized LTV of 62.0% (compared with 61.2% at closing). Morningstar DBRS recognizes, however, that select property values may be inflated as the majority of the individual property appraisals were completed in 2021 or 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 eight loans, representing 21.1% of the current trust balance.

Through April 2024, the collateral manager had advanced $164.3 million in loan future funding to 27 of the 33 remaining individual loans, to aid in property stabilization efforts. The loan with the largest future funding advances to date is the Avilla Gateway loan (Prospectus ID#35; 1.0% of the pool balance), secured by a 228-unit multifamily property in Phoenix, Arizona. The loan is scheduled with an initial maturity in July 2024, with two one-year extension options available. The advanced funds have been used to fund the borrower's $22.9 million Phase II capital improvement plan that commenced in June 2022, with the $19.9 million of future funding allocated specifically to hard costs (including site work, amenities, and unit improvements) and soft costs (including taxes and/or legal fees incurred from construction).

According to the Q1 2024 quarterly report, the borrower has drawn a total of $21.4 million and has completed the hard cost portion of the project, with only one remaining soft cost to execute. As of February 2024, the property was achieving physical and leased occupancy rates of 76.3% and 82.9%, respectively, with an average leased rental rate of $1,897 per unit, representing a $132 rental premium over the average in-place rent of $1,765 per unit at closing. Additionally, concessions are being offered through two months of free rent. As the average leasing rate was 14 units per month over the past six months, the borrower expects to reach stabilization at the end of Q2 2024.

An additional $91.3 million of unadvanced loan future funding allocated to 19 loans remains outstanding, which are scheduled to primarily be used toward capital improvements, tenant costs and leasing commissions, and/or funding debt service or earn out reserves.

As of the May 2024 remittance, there was only one loan, The Tides at Country Club (Prospectus ID#7; 3.7% of the pool), in special servicing. The loan is secured by a 582-unit multifamily community in Mesa, Arizona. The loan transferred to special servicing in August 2023 for payment default. According to the Q1 2024 report provided by the collateral manager, a short-term forbearance agreement has been granted to provide additional time for the borrower to finalize a potential loan assumption. The sponsor's business plan is to implement a $6.9 million in capital improvement project to complete the renovations on the remaining 420 unrenovated and partially renovated units. As of April 2024, $3.8 million of future funding as been released, with approximately 60 units (14.0%) renovated as of Q1 2024. The property was 85.2% occupied (86.6% occupied for available units) as of January 2024, with an average rental rate of $1,161 per renovated unit (not inclusive prior renovated units), representing a $199 premium over the average in-place rent of $962 at closing, but below the sponsor's projected renovated rental rate of $1,466 per unit. Given the impending modification/loan assumption, Morningstar DBRS believes the expected loss of the loan is higher than pool average driven primarily by the suburban location of the asset in MSA Group 1, which is the weakest group in terms of historical defaults and losses and higher Morningstar DBRS As-Is LTV of 83.8%.

In addition to the specially serviced loan, there are two loans, The Reserve at Brandon (Prospectus ID#8; 3.5% of the pool) and Tides on 61st (Prospectus ID#17; 2.0% of the pool), that are deemed matured nonperforming loans after surpassing their initial loan maturity in early May 2024. According to the collateral manager's most recent update, however, both loans have executed pre-negotiation agreements alongside a temporary forbearance to provide a short-term loan maturity extension, which will facilitate potential modification discussions. According to the loan's initial documents, both loans have three one-year extension options available. As of January 2024, The Reserve at Brandon property (now known as the Skye Reserve) was able to achieve an occupancy rate of 76.7% and a rental premium of $504 relative to closing. For the same period, the Tides on 61st was 89.1% occupied (90.3% occupied for available units) and was achieving a $491 rental premium relative to closing. However, given the recent financial difficulties faced by Tides Equities, Morningstar DBRS analyzed the loan with an adjustment to the sponsor quality, resulting in an individual loan expected loss (EL) figure of more than two times the pool's EL.

The Axel (Prospectus ID#2; 10.2% of the pool) is a matured performing loan, secured by the borrower's leasehold interest in two ground leases underlying the Axel, a 284 residential unit luxury multifamily property, with 59,454 sf of commercial space in Brooklyn, New York. Following the loan's initial maturity in May 2024, the borrower has been granted a short-term extension to July 2024 via a forbearance agreement, and per the servicer's most recent commentary, the borrower is currently engaging in discussions to extend the loan. According to the loan's initial documents, the loan has three one-year extensions available. Through April 2024, the borrower has advanced only approximately 38.3% of the future funding that was set to cover the borrower's capital improvement project, leasing costs, future reserves, and earn-out future funding. Per the collateral manager, the borrower will be using the remaining future funding toward tenant improvements and leasing costs. As of Q1 2024, the property was 81.7% occupied, with the borrower expecting occupancy to stabilize in Q3 2024, given the upcoming strong leasing season. The average rental rate for all occupied units was $3,839 per unit, as of January 2024, with the market-rate units achieving an average rental rate of $4,535 per unit, above the Morningstar DBRS stabilized rental rate of $3,958 per unit.

The are 30 loans, representing 91.1% of the pool, on the servicer's watchlist, the vast majority of which are being monitored for low debt service coverage ratios, low occupancy, and/or upcoming maturities, including The Axel loan, as well as two loans, representing 6.9% of the pool, that are in a payment grace period. Despite the significant number of loans on the watchlist, the majority of the borrowers behind these loans have made solid process in their respective business plans, with the properties exhibiting signs of improved performance based on the growing rental premiums relative to the average in-place rents at issuance. Furthermore, per issuance documents, the majority of these loans also have multiple extension options available, in the form of two or three one-year extension options or one six-month plus three one-year extension options.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS   
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

Classes G-X, H-X, I-X, G-E, H-E, and I-E are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

All credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798.

Other methodologies referenced in this transaction are listed at the end of this press release.

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.

Morningstar DBRS 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://dbrs.morningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model version 1.2.0.0, https://dbrs.morningstar.com/research/428797

Rating North American CMBS Interest-Only Certificates (December 13, 2023), https://dbrs.morningstar.com/research/425261

Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024; https://dbrs.morningstar.com/research/428623)

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

North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592

Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279 (July 17, 2023).

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