Morningstar DBRS Confirms Credit Ratings on All Classes of MF1 2022-FL8 Ltd.; Changes Trend to Negative from Stable on Two Classes

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on all the classes of notes issued by MF1 2022-FL8 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)

Morningstar DBRS also changed the trends on Class G and Class H to Negative from Stable. The trends on the remaining classes remain Stable.

The trend changes reflect the increased credit risk to the transaction because of Morningstar DBRS' higher loan-level loss expectations for the majority of the loans in the transaction, including two loans in special servicing, representing 4.0% of the current trust balance. Morningstar DBRS notes many borrowers are facing execution risk with their respective business plans because of a combination of factors including decreased property values, increased construction costs, slower rent growth, and increases in debt service costs stemming from the high interest rate environment. As a result of lagging business plans and loan exit strategies, seven loans, representing 18.0% of the current trust balance, have been modified. Terms for the modifications vary from loan to loan; however, common terms include interest deferrals via a hard and soft pay structure, waiving interest rate cap agreement requirements; and forbearance agreements, which have been executed to facilitate further modification discussions between both the lender and the borrowers. Additionally, the transaction faces a heighted maturity risk as 29 loans, representing 70.8% of the current trust balance, are expected to mature within the next six months. While all of the loans have built in extension options, Morningstar DBRS notes that a number of the loans will not qualify to exercise the related options based on current loan performance and therefore will likely need to be modified.

The credit rating confirmations reflect the overall stability of the transaction as the majority of loan collateral, or 36 loans, representing 96.8% of the current trust balance, is secured by multifamily properties. Multifamily properties have historically proven to be better able to retain property value and cash flow compared with other property types. While the individual borrowers are proceeding with their business plans to increase property cash flow and property value, the headwinds and challenges noted above continue to present challenges. In conjunction with this press release, Morningstar DBRS has published a Surveillance Performance Update report with an in-depth analysis and credit metrics for the transaction and with business plan updates on select loans. To access this report, please click on the link under Related Documents below or contact us at [email protected].

The initial collateral consisted of 32 floating-rate mortgage loans secured by 69 transitional multifamily properties and one manufactured housing community property, totaling $1.8 billion (77.0% of the fully funded balance of $2.0 billion), excluding $152.6 million of future funding commitments and $392.1 million of pari passu debt. Most loans were in a period of transition with plans to stabilize performance and improve the asset value. The transaction was structured with a Reinvestment Period that expired with the January 2024 Payment Date.

As of the August 2024 remittance, the pool comprises 38 loans secured by 90 properties with a cumulative trust balance of $1.99 billion, reflecting a collateral reduction of 1.7% since issuance. Of the original 32 loans, 27 loans, representing 87.5% of the current trust balance, remain in the pool. Since the previous Morningstar DBRS credit rating action in September 2023, three loans, totaling $11.3 million, have been added to the trust while two loans, totaling $64.8 million, have repaid in full.

The remaining collateral in the transaction beyond the multifamily concentration noted above includes two manufactured housing community properties (3.2% of the current trust balance). The pool is primarily secured by properties in suburban markets, with 21 loans, representing 50.1% of the pool, assigned a Morningstar DBRS Market Rank of 3, 4, or 5. An additional 13 loans, representing 42.7% of the pool, are secured by properties in urban markets, with a Morningstar DBRS Market Rank of 6, 7, or 8. The remaining loans are backed by properties with a Morningstar DBRS Market Rank of 1 or 2, denoting tertiary markets. These property-type and market-type concentrations remain generally in line with both the pool composition and the September 2023 credit rating action.

Leverage across the pool has remained consistent as of August 2024 reporting when compared with issuance metrics, as the current weighted-average (WA) as-is appraised loan-to-value (LTV) ratio is 72.7%, with a current WA stabilized LTV of 64.9%. In comparison, these figures were 72.1% and 64.5%, respectively, at issuance. Morningstar DBRS recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2022 and may not fully reflect the effects of increased interest rates and/or widening capitalization rates in the current environment. In the analysis for this review, Morningstar DBRS applied upward LTV adjustments across 19 loans, representing 69.6% of the current trust balance.

Through August 2024, the lender had advanced cumulative loan future funding of $226.0 million to each of the 28 outstanding individual borrowers. The largest advance, $39.5 million, was made to the borrower of the Park Portfolio loan, which is secured by a portfolio of eight, garden-style multifamily properties totaling 317 units in Brooklyn, New York. The advanced funds have been used to fund the borrower's $17.0 million planned capital expenditure and fund various performance-based earnouts as part of the borrower's business plan to convert the majority of the units into affordable housing in order to qualify for an Article XI tax abatement. The Q2 2024 collateral manager report noted the property was only 41.6% occupied as of May 2024 as the borrower is in the midst of the tenant application and screening process on completed units in addition to the remainder of the units being offline because of ongoing renovations.

An additional $73.0 million of loan future funding allocated to 20 of the outstanding individual borrowers remains available. The largest portion of available funding ($15.1 million) is allocated to the SF Multifamily Portfolio IV loan, which is secured by a portfolio of five multifamily properties totaling 124 units in San Francisco. The borrower's business plan is to complete both interior and exterior renovations throughout the properties. As of March 2024, the portfolio was 93.0% occupied with an average rental rate of $2,722/unit, representing a rental premium of $472/unit over in-place rents at issuance.

As of the August 2024 reporting, two loans, representing 4.0% of the current trust balance, are delinquent and in special servicing. The larger of the two loans, Brentmoor Apartments (Prospectus ID# 20; 2.3% of current trust balance), transferred to special servicing in April 2024 for payment default. The loan, which is secured by a 228-unit Class B, garden-style apartment property in Raleigh, North Carolina, was 93.0% occupied of May 2024; however, the loan reported a below-breakeven debt service coverage ratio (DSCR) of 0.57x as of YE2023. According to the Q2 2024 collateral manager report, the loan was placed into receivership in April 2024. At closing, the property had an As-Is appraised value of $53.0 million, which Morningstar DBRS deems aggressive as the implied cap rate is 4.3% based on the YE2023 NCF figure. As such, Morningstar DBRS believes the current market value of the property is lower. In its analysis, Morningstar DBRS applied an upward LTV adjustment resulting in a loan expected loss in excess of the weighted-average expected loss for the pool.

The second loan in special servicing, Mainstream Apartments (Prospectus ID#25; 1.7% of the current trust balance), is secured by a 324-unit Class B, garden-style multifamily property in Houston. The loan transferred to special servicing in May 2024 for payment default after the loan matured in January 2024. According to the Q2 2024 collateral manager update, the property was 85.0% occupied as of May 2024. The loan was also placed into receivership in April 2024. In its current analysis, Morningstar DBRS assumed a distressed property value given the status of the loan and liquidated it from the trust. The resulting loan loss severity was nearly 30.0%.

There are 31 loans on the servicer's watchlist, representing 71.8% of the current trust balance. The loans have primarily been flagged for below-breakeven DSCRs and upcoming loan maturities. The largest loan on the servicer's watchlist, Park Portfolio (Prospectus ID #5; 4.9% of current trust balance), is secured by a portfolio of eight properties totaling 317 units in Brooklyn, New York. The sponsor benefits from partial or complete real estate tax abatements under New York City's Article XI program (the Article XI units) as 229 of the units are subject to affordable housing regulations. The loan is currently on the servicer's watchlist for low NCF as the YE2023 figure was $0.4 million, equating to a 0.05x DSCR. According to the Q2 2024 collateral manager report, the portfolio had an overall occupancy rate of 41.6% with a 55.0% occupancy rate across the Article XI units and a 6.8% occupancy rate across the market rate units. In its analysis, Morningstar DBRS applied upward As-Is and As-Stabilized LTV adjustments resulting in a loan expected loss just below the pool average. Morningstar DBRS expects NCF to improve as the completed affordable housing units become occupied and as the market rate unit renovations are completed. The loan matures in November 2024 and will likely need to be modified in order for the borrower to qualify for an extension.

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 private rating letters 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 DBRS Morningstar 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 the 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

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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

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

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].