Morningstar DBRS Confirms Credit Ratings on MF1 2021-FL7, Ltd.

DBRS, Inc. (Morningstar DBRS) confirmed all credit ratings on the classes of notes issued by MF1 2021-FL7, 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 (high) (sf)
-- Class G at BB (low) (sf)
-- Class H at B (low) (sf)

All trends are Stable.

The credit rating confirmations reflect the favorable collateral composition of the transaction as the trust continues to be primarily secured by the multifamily collateral. Historically, loans secured by multifamily properties have exhibited lower default rates and the ability to retain and increase asset value. Additionally, the majority of individual borrowers are progressing the stated business plans to increase property cash flow 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 initial collateral consisted of 49 floating-rate mortgages secured by 67 transitional multifamily properties and six senior housing properties totaling $1.9 billion (70.6% of the fully funded balance), excluding $159.5 million of remaining future funding commitments and $626.4 million of pari passu debt. Most loans were in a period of transition with plans to stabilize and improve asset value. The transaction was structured with a Reinvestment Period that expired with the September 2023 Payment Date.

As of the June 2024 remittance, the pool comprises 54 loans secured by 110 properties with a cumulative trust balance of $2.0 billion. There has been collateral reduction of 9.7% since issuance as of the June 2024 remittance. Since the previous Morningstar DBRS credit rating action in August 2023, nine loans with a former cumulative trust balance of $266.1 million have been repaid in full. An additional eight loans with a current cumulative trust balance of $111.4 million have been added to the trust since August 2023.

The transaction is concentrated by multifamily properties as 53 loans, representing 95.4% of the current pool balance, are secured by multifamily properties, while the remaining loan is secured by senior-housing property. The loans are concentrated by properties in suburban locations, which Morningstar DBRS defines as markets with a Morningstar DBRS Market Rank of 3, 4, or 5. As of June 2024, 45 loans, representing 75.4% of the current trust balance, were secured by properties in suburban markets. Seven loans, representing 23.4% of the current trust balance, were secured by properties in urban markets, defined as markets with a Morningstar DBRS Market Rank of 6, 7, or 8. An additional two loans, representing 1.2% of the current trust balance, were secured by properties in tertiary markets, defined as markets with a Morningstar DBRS Market Rank of 2.

Leverage across the pool has remained relatively static from closing, with a current weighted-average (WA) as-is appraised loan-to-value ratio (LTV) of 69.2.3% (compared with 70.6% at closing) and a WA stabilized LTV of 65.4% (unchanged since closing). Morningstar DBRS 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 interest rate and widening capitalization rate (cap rate) environment. In the analysis for this review, Morningstar DBRS applied upward LTV adjustments across 25 loans, representing 74.0% of the current trust balance.

Through May 2024, the collateral manager had advanced cumulative loan future funding of $223.6 million allocated to 45 of the 47 remaining individual borrowers to aid in property stabilization efforts. The largest advance, $16.3 million, has been made to the borrower of the SF Multifamily Portfolio III loan, which is secured by a portfolio of 10 multifamily properties totaling 308 units in the San Francisco Bay area. Funds were advanced to the borrower to acquire additional collateral and to complete unit interior and property exterior upgrades across the portfolio. According to the collateral manager, the renovation project is 47.7% complete as the borrower has completed unit renovations across 147 units of the planned 308 units. As of the December 2023 rent roll, the portfolio was 85.0% occupied.

An additional $109.2 million of loan future funding allocated to 20 individual borrowers remains available. The largest portion of available funds, $26.2 million, is allocated to the borrower of the LA Multifamily Portfolio 1 loan, which is secured by a portfolio of 13 properties totaling 185 units in the West LA area of Los Angeles. The loan future funding is available to the borrower to fund interior and exterior upgrades as well as to potentially fund a performance-based earnout. To date the borrower has completed renovations across 76 units while an additional eight units are under renovation. As of the March 2024 rent roll, the portfolio was 88.2% occupied.

The Tides on Country Club (Prospectus ID# 61, 0.5% of the current trust balance) represents the transaction's only specially serviced loan. The loan, which is secured by a 582-unit apartment community in Mesa, Arizona, transferred to special servicing in August 2023 after the sponsor requested a modification. The loan is expected to return back to the master servicer after the loan was modified and assumed by Geringer Capital. The modification will also result in the reallocation of future funding reserves as well as require a small principal payment. As of the January 2024 rent roll, the property was 85.2% occupied, while the original borrower's renovation project was only 14% complete. The property was re-appraised for $114.9 million in conjunction with the loan assumption, down from $141.4 million at issuance. The updated value implies an LTV of 97.0% based on the current outstanding loan balance.

As of the June 2024 remittance, there are 49 loans on the servicer's watchlist, representing 92.9% of the current trust balance. The loans have generally been flagged for upcoming maturity dates and low occupancy rates or cash flow. The largest loan on the servicer's watchlist, Riverpoint (Prospectus ID# 1, 11.7% of the current trust balance), is secured by a Class A, 480-unit, high-rise apartment property in Washington, D.C. The loan continues to be monitored on the servicer's watchlist after the loan was modified in November 2023, which included transferring title of the property to the junior mezzanine lender. The recent modification includes extending the loan to its final maturity date of September 2026 as well as providing the junior mezzanine lender the option to defer a portion of its interest payments via a hard/soft pay structure. The modified pay structure requires the junior mezzanine lender to pay a series of minimum fixed interest payments with the balance of which, known as the soft portion, to accrue and capitalize monthly through maturity. The hard pay rate from July 2023 through June 2024 is set at 3% and will increase semi-annually by 50 basis points through loan maturity. According to the collateral manager, the residential component was 81.2% occupied as of the March 2024 rent roll. In its analysis, Morningstar DBRS applied upward As-Is and As-Stabilized LTV adjustments as well as an increased probability of default to reflect the increased credit risk from loan closing. The resulting loan expected loss is similar with the expected loss for the pool.

Eight loans, representing 31.4% of the current trust balance, have been modified. Terms of individual loan modifications vary and have included the waiver of performance-based tests to allow borrowers to exercise maturity extensions, the waiver of borrower requirements to purchase new interest-rate cap agreements if property operations cover debt service, and the relocation of existing reserves or future funding dollars among other minor terms. In most instances, individual borrowers were required to contribute fresh equity, or cash flow sweeps were initiated to execute the loan modifications. Select loan modifications have also allowed borrowers to defer and capitalize a portion of interest payments. For such modifications, Morningstar DBRS has applied a probability of default penalty to the loan to account for the increased credit risk.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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); 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 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, 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://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
-- DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (June 28, 2024),
https://dbrs.morningstar.com/research/435293
-- North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592
-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623
-- 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/410863.

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