Morningstar DBRS Confirms Credit Ratings on MF1 2021-FL6, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on all classes of notes issued by MF1 2021-FL6, 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 rating confirmations reflect the increased credit support to the notes as there has been a collateral reduction of 13.6% since the transaction became static in August 2023 following the post-closing two-month reinvestment period. The transaction also benefits from being composed primarily of loans backed by multifamily collateral, which has historically proven to better retain property value and cash flow compared with other property types. In its analysis for the review, Morningstar DBRS determined the majority of individual borrowers are progressing with their business plans to increase property cash flow and property value; however, some borrowers' business plans and loan exit strategies have lagged for a variety of factors, including increased construction costs, slowed rent growth, and increased debt service costs, which has increased the execution risk. The unrated, first-loss note of $95.9 million provides significant cushion against realized losses should the increased risks for those loans ultimately result in defaults and dispositions. 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 37 floating-rate mortgages secured by 50 mostly transitional properties with a cut-off date balance totaling $993.2 million. Most loans were in a period of transition with plans to stabilize performance and improve values for the underlying assets. The trust reached its maximum funded balance of $1.30 billion in October 2021.

As of the August 2024 remittance, the pool comprises 38 loans secured by 100 properties with a cumulative trust balance that has amortized down to $1.12 billion. Currently, 15 of the original loans in the transaction at closing, representing 37.2% of the current trust balance, remain in the trust. Since issuance, 22 loans with a prior cumulative trust balance of $579.8 million have been successfully repaid from the pool, including six loans totaling $152.9 million that have repaid since the previous Morningstar DBRS rating action in September 2023.

The transaction is concentrated by property type as 36 loans, representing 92.1% of the current trust balance, are secured by multifamily properties with the remaining two loans (7.9% of the current trust balance) secured by healthcare properties. In comparison, when the previous Morningstar DBRS Surveillance Performance Update for the transaction was published in September 2023, multifamily properties represented 93.0% of the collateral and healthcare properties represented 7.0% of the collateral.

The pool is secured primarily by properties in suburban markets, as defined by DBRS Morningstar, with 23 loans, representing 60.1% of the pool, assigned a Morningstar DBRS Market Rank of 3, 4, or 5. An additional 11 loans, representing 30.1% of the pool, are secured by properties with a Morningstar DBRS Market Rank of 6, 7 and 8, denoting urban markets, while four loans, representing 9.8% of the pool, are secured by properties with a Morningstar DBRS Market Rank of 2, denoting tertiary markets. In comparison, at September 2023, properties in suburban markets represented 60.0% of the collateral, properties in urban markets represented 31.4% the collateral, and properties in tertiary markets represented 8.6% of the collateral.

As of the August 2024 reporting, leverage across the pool has remained consistent with the issuance and September 2023 metrics. The current weighted-average (WA) as-is appraised value loan-to-value ratio (LTV) is 71.2%, with a current WA stabilized LTV of 66.3%. In comparison, these figures were 70.6% and 65.5%, respectively, at issuance and 70.5% and 65.1%, respectively, as of September 2023. 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 rising interest rate or widening capitalization rate (cap rate) environments. In the analysis for this review, Morningstar DBRS applied LTV adjustments to 22 loans, representing 65.7% of the current trust balance, generally reflective of higher cap rate assumptions compared with the implied cap rates based on the appraisals.

Through August 2024, the lender had advanced cumulative loan future funding of $153.6 million to 25 of the 36 outstanding individual borrowers to aid in property stabilization efforts. The largest advance, $16.4 million, has been made to the borrower of the SF Multifamily Portfolio III loan. The loan is secured by a portfolio of 10 multifamily properties totaling 308 units in San Francisco. The advanced funds have been used to fund the borrower's extensive $33.9 million planned capital expenditure plan across the portfolio. The Q1 2024 collateral manager's report noted the borrower had completed 151 out of the total 308 planned unit upgrades. The sponsor, Veritas Investment Group (Veritas), backs four portfolio loans in the MF1 2021-FL6 transaction with a current cumulative trust balance of $72.6 million (6.5% of the pool). The loans are secured by multifamily properties in Los Angeles and San Francisco. All four loans mature in January 2024 with three one-year extension options and, according to the collateral manager, each loan has been extended to the January 2025 maturity. Currently, $22.4 million of future funding, which includes a potential $5.0 million earnout, remains available to the borrower of the SF Multifamily Portfolio III loan.

An additional $101.7 million of loan future funding allocated to 10 of the outstanding individual borrowers remains available. The vast majority of available funding ($83.9 million) is allocated to the four portfolio loans sponsored by Veritas, ranging from $26.0 million for the LA Multifamily Portfolio I loan to $16.7 million for the LA Multifamily Portfolio III loan. The business plan for each loan is similar, with funds available to renovate properties and a small amount allocated for potential performance-based earnouts.

As of the August 2024 remittance, two loans, representing 4.0% of the pool, are delinquent and one loan, Tides on Country Club (Prospectus ID#54; 3.8% of the pool) is in special servicing. The loan is secured by a 582-unit apartment community in Mesa, Arizona, that transferred to the special servicer in August 2023 for imminent monetary default. In June 2024, the loan was modified and assumed by a new sponsor, which contributed $2.0 million in fresh equity and will be rebranding the property. In addition, 28 loans, representing 74.5% of the current trust balance are, on the servicer's watchlist.. The loans have been flagged primarily for below breakeven debt service coverage ratios and upcoming loan maturity. Performance declines noted in the pool are expected to be temporary as multifamily units are being made unavailable by respective borrowers to complete interior renovations.

In the next six months, 18 loans, representing 43.3% of the current trust balance, are scheduled to mature. According to the collateral manager, 16 of the individual borrowers are expected to exercise loan extension options, while the two remaining borrowers are expected to successfully execute exit strategies. Morningstar DBRS expects borrowers and lenders to negotiate mutually beneficial loan modifications to extend loans if property performance does not qualify to exercise the related options. Modification terms would likely include fresh sponsor equity to fund principal curtailments, fund carry reserves, or purchase new interest rate cap agreements.

Twenty-one loans, representing 51.4% of the current trust balance, have been modified. The modifications have generally allowed borrowers to exercise loan extension options by amending loan terms in return for fresh equity deposits and the purchase of a new interest rate cap agreement. The most common amendments include the removal of performance-based tests and changes to the required strike price on the purchase of a new interest rate cap agreement. The four Veritas loans were previously modified to extend the maximum maturity date to January 2027 to allow the sponsor additional time to complete its business plan, which was significantly delayed by the pandemic and the resulting eviction moratoria in Los Angeles and San Francisco.

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 Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

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 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

Morningstar DBRS 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, 2024), https://dbrs.morningstar.com/research/438283

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

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