Morningstar DBRS Confirms Credit Ratings on All Classes of Arbor Realty Commercial Real Estate Notes 2021-FL4, Ltd.

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of commercial mortgage-backed notes issued by Arbor Realty Commercial Real Estate Notes 2021-FL4, 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 (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the collateral in the transaction as borrowers are generally progressing toward the completion of the stated business plans and have generally demonstrated rental rate growth relative to issuance levels based on the Q1 2024 collateral report provided by the collateral manager. The transaction consists solely of multifamily collateral across 63 loans. Historically, loans secured by multifamily properties have exhibited lower default rates and the ability to retain and increase asset value. 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 December 2021 with the initial collateral consisting of 51 floating-rate mortgages and senior participations secured by 87 transitional multifamily properties with a cut-off date balance totalling approximately $1.79 billion. Most of the loans are in a period of transition with plans to stabilize performance and improve the asset value. The transaction included a 180-day ramp-up acquisition period, which was used to increase the trust balance to a total target collateral principal balance of $2.1 billion. Additionally, the transaction had a Reinvestment Period that expired with the June 2024 payment date.

As of the June 2024 reporting, the pool comprises 63 loans secured by 85 properties with a cumulative trust balance of $1.8 billion. Forty-five loans with a former cumulative trust balance of $1.3 billion have successfully repaid from the pool since issuance, including 19 loans with a former cumulative trust balance of $610.7 million since Morningstar DBRS' prior credit rating action in June 2023. An additional 24 loans with a current cumulative trust balance of $626.5 million have been added to the trust since June 2023.

The loans are primarily secured by properties in suburban markets, which Morningstar DBRS defines as markets with a Morningstar DBRS Market Rank of 3, 4, or 5. As of June 2024, 53 loans, representing 85.2% of the current trust balance, were secured by properties in suburban markets. An additional nine loans, representing 11.2% of the current trust balance, were secured by properties in tertiary markets, defined as markets with a Morningstar DBRS Market Rank of 1 or 2. Only one loan, representing 3.6% of the current trust balance, is secured by a property in an urban market, with a Morningstar DBRS Market Rank of 6. There are no loans in the pool that are secured by properties with a Morningstar DBRS Market Rank of 7 or 8.

Based on the as-is appraised values, leverage across the pool has decreased from closing, with a current Morningstar DBRS weighted-average (WA) as-is loan-to-value ratio (LTV) of 74.3% (compared with 77.3% at closing). However, the Morningstar DBRS WA stabilized LTV increased over that same period, increasing to 67.1% (compared with 57.3% at closing). Morningstar DBRS recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2021 through 2023 and may not reflect the current interest rate and widening capitalization rate (cap rate) environment. For a select number of loans that are exhibiting increased credit risk from issuance, including the pool's only specially serviced loan, East Orange (Prospectus ID#26; 1.9% of the pool balance), which transferred to the special servicer in December 2023 for monetary default, Morningstar DBRS applied upward LTV adjustments across six loans, representing 17.4% of the current trust balance in the analysis for this review.

Through May 2024, the collateral manager had advanced cumulative whole loan future funding of $246.9 million allocated to 39 of the 63 remaining individual borrowers to aid in property stabilization efforts. The largest advance, $58.1 million, was made to the borrower of the 153-10 88th Avenue loan (Prospectus ID#101, 3.5% of the pool), which is secured by a 223-unit multifamily property in Jamaica, New York, consisting of 156 market-rate units and 67 affordable-rate units. Funds were advanced to the borrower to complete its first ground-up construction project of the property. Per the Q1 2024 report provided by the collateral manager, the borrower has disbursed approximately 94.0% of the construction reserve for hard and soft costs. Both the affordable units and market-rate units are currently in the process of being leased, with the leasing of the market-rate units underway since July 2023. As of Q1 2024, 92 leases (41.0%) have been executed at an average rental rate of $3,004 per unit, which is approximately 11.0% higher than the appraiser's market rent projection of $2,713 per unit and 32.5% higher than Morningstar DBRS' rent projection of $2,268 per unit. The borrower has also been offering market rate concessions of two months of free rent for 14-month leases in an effort to lease up the vacant units. Approximately $4.6 million of future funding remains outstanding for this loan.

An additional $77.7 million of loan future funding allocated to 12 of the remaining individual borrowers remains available. The largest portion of available funds ($54.0 million) is allocated to the borrower of Equinox on Prince loan (Prospectus ID#80, 0.8% of the pool). The loan was contributed to the trust in March 2023 and is secured by a multifamily property in Tucson, Arizona. The available funds are allocated for the borrower's capital improvement and lease-up plan.

As of the June 2024 remittance, 31 loans (53.1% of the current trust balance) have maturities scheduled through the next six months. However, the majority of these loans have extension options available that are expected to be exercised. In addition, according to an update from the collateral manager, seven loans (9.6% of the pool) are expected to pay off in the next few months. The pool's only specially serviced loan, East Orange, is secured by a portfolio of eight multifamily properties, totaling 282 units, in East Orange, New Jersey. The loan transferred to special servicing in December 2023 for payment default and, as of the June 2024 reporting, has been paid through September 2023. The loan had an initial maturity in March 2023, but due to rent collection difficulties and the high concessions offered, the borrower was unable to make its debt service payments. The loan was modified to extend its maturity to September 2023 and allow for two three-month extension options. The borrower exercised the first extension option, bringing the loan's maturity to December 2023. The second option was not exercised, and the loan is now flagged as a matured nonperforming loan. Per the Q1 2024 reporting, a receiver has been assigned, and the collateral manager has been engaging in further discussions about a take-over strategy. Per the June 2024 reporting, the property was reappraised in January 2024 at a value of $31.5 million, a 14.1% decline in comparison to the issuance as-is value of $36.7 million.

The borrower's business plan was to complete interior and exterior renovations, with the goal of achieving an average rental rate that is at or above the appraiser's stabilized rate of $1,651 per unit as units turn over. As a result of the COVID-19 eviction moratorium, which was lifted in January 2022, the borrower has faced challenges in collecting rents, and has since been working on evicting 55 residents with the goal of renovating and re-leasing the units at the market rate. According to the Q1 2024 update from the collateral manager, the portfolio occupancy was 76.0%, with an average rental rate of $1,333 per unit, which represents a 25.0% premium over the average in-place rate at closing. The borrower has also been offering concessions to new tenants but expects to reduce the amount of concessions offered over time. The average rental rate excluding the concessions would be approximately $1,610 per unit. According to the financial reporting provided by the collateral manager, the annualized net cash flow for the trailing three-month period ended November 30, 2024, was $0.7 million. Although the borrower has demonstrated commitment to the collateral through several loan modifications and additional equity injections of $2.3 million to fund shortfalls since closing, Morningstar DBRS maintains a cautious outlook for the loan. In the analysis for this review, Morningstar DBRS increased the loan's as-is and stabilized LTVs by adjusting the property value assumptions made by the appraiser at closing in addition to increasing the loan's probability of default, resulting in an expected loss approximately 150.5% greater than the pool's WA expected loss.

According to the collateral manager, 26 loans, representing 55.0% of the current cumulative trust loan balance have been modified. Loan modification terms have included maturity extensions, rolling renovation reserves, and changes in property management, among others. Outside of the East Orange loan, four loans (8.9% of the current pool balance), are late on their payments per the June 2024 remittance, and one loan, Peninsula Court Apartments (Prospectus ID#58; 0.8% of the current pool balance), secured by a 68-unit multifamily property in Bayonne, New Jersey, is between 30 and 60 days delinquent. In spite of the delinquent payment, the property was 98.5% occupied as of February 2024, with an average rental rate of $1,956 per unit, representing a 14.6% increase over issuance levels. The borrower was able to complete 29 of the 50 planned unit renovations through Q1 2024, with the renovated units achieving an average rental rate of $2,004 per unit. Morningstar DBRS believes the property's cash flow may continue to increase as more unit renovations are completed. However, given the loan's delinquency, upward adjustments to both the as-is and stabilized LTV were applied, in addition to increasing the loan's probability of default.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS  
There were no Environmental, Social, or 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 at (January 23, 2024; https://dbrs.morningstar.com/research/427030)

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 v 1.2.0.0 (https://dbrs.morningstar.com/research/428797)
-- 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.

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