Morningstar DBRS Confirms All Credit Ratings on MF1 2023-FL12 LLC

DBRS, Inc. (Morningstar DBRS) confirmed all credit ratings on the classes of notes issued by MF1 2023-FL12 LLC as follows:

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

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction, which has remained in line with Morningstar DBRS' expectations since issuance as evidenced by stable performance and leverage metrics. Additionally, the trust continues to be primarily solely secured by multifamily collateral, which have historically exhibited lower default rates and retained values in times of market downturns as compared with other property types. 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 as well as business plan updates on select loans. For access to this report, please click on the link under Related Documents below or contact us at info-DBRS@morningstar.com.

The initial collateral consisted of 21 floating-rate mortgages secured by 21 mostly transitional properties with a cut-off date balance totaling $895.2 million, excluding $129.2 million of future funding commitments. Most loans were in a period of transition with plans to stabilize performance and improve the underlying assets' values. The managed transaction includes an 18-month reinvestment period expiring in April 2025. As of the September 2024 remittance, the pool is unchanged since issuance.

The pool is primarily secured by properties in suburban markets, with nine loans, representing 42.1% of the pool, assigned a Morningstar DBRS Market Rank of 3, 4, or 5. An additional seven loans, representing 40.6% of the pool, are secured by properties in urban markets with a Morningstar DBRS Market Rank of 6, 7, or 8. The remaining five loans, representing 17.3% of the pool, are backed by properties with a Morningstar DBRS Market Rank of 1 or 2, denoting tertiary markets. These market-type concentrations remain generally in line with the pool composition at closing.

Leverage across the pool has remained unchanged since issuance. The current weighted-average (WA) as-is loan-to-value ratio (LTV) is 65.0% and the current WA stabilized LTV is 63.5%, based on the as-is and stabilized appraised values for the collateral properties as provided at issuance or contribution and the current outstanding loan balances. In the analysis for this review, Morningstar DBRS applied LTV adjustments to 10 loans, representing 58.2% of the current trust balance, generally reflective of higher capitalization rate (cap rate) assumptions compared with the implied cap rates based on the appraisals. This was merited either based on an appraiser's cap rate that was low as compared with assumptions for similarly located and/or positioned assets placed in recent vintage deals or low compared with market cap rates, which have generally increased since 2022 when interest rate increases began.

As of the September 2024 remittance, there were no loans in special servicing, but one loan, Poth Brewery, representing 3.9% of the current trust balance, was reported 30 days delinquent. The loan is secured by a mid-rise, mixed-use building totaling 131 multifamily units and 27,646 square feet (sf) of commercial space in Philadelphia. As of the July 2024 rent roll, the multifamily portion was 87.9% occupied (93.9% leased) while the commercial portion was 50% occupied (75% leased). In the analysis for this loan, Morningstar DBRS applied upward LTV adjustments for both the as-is and stabilized figures and increased the loan's probability of default to reflect the increased risk due to the outstanding delinquency and lag in property stabilization, which resulted in a loan-level expected loss (EL) that exceeded the pool's average EL.

There were 16 loans, representing 79.1% of the current trust balance, on the servicer's watchlist as of the September 2024 reporting. The majority of these loans have been flagged for occupancy and cash flow concerns; however, Morningstar DBRS notes that the majority of the underlying properties are newly built and are in the early stages of their respective business plans. In addition to the unrated equity piece at the bottom of the capital stack with a balance of just under $50 million, there is also approximately $61.5 million in classes with below investment-grade credit ratings, with total credit enhancement of 12.4% for the BBB (low) (sf)-rated Class E Note.

Through August 2024, the lender had advanced cumulative loan future funding of $79.9 million to 14 outstanding individual borrowers to aid in property stabilization efforts. The largest advance, $12.6 million, was to the borrower of the Oaklyn loan, which is secured by a newly built, Class A, high-rise multifamily property consisting of 275 luxury rental apartments and 19,328 sf of ground-floor retail space in the Fort Lauderdale suburb of Oakland Park, Florida. The advanced funds have been used to fund the remaining construction costs and leasing costs associated with the retail space. According to the collateral manager, the remaining construction items have been completed and the certificate of occupancy was received in May 2024. The remaining future funding is allocated to fund interest shortfalls as well as a $2.0 million earn-out reserve, which is subject to certain performance benchmarks. As of the provided July 2024 rent roll, the multifamily component was 86.1% occupied while the retail portion was 59% occupied.

An additional $68.2 million of loan future funding allocated to 10 of the outstanding individual borrowers remains available. The largest portion of available funding ($30.2 million) is allocated to the Creekside loan, which is secured by a newly built, 155-unit, built-to-rent community in Guyton, Georgia, approximately 30 miles north of Savannah. The property was constructed in two phases, with Phase 1 consisting of 79 units and Phase 2, which is currently under development, consisting of 76 units. The funds are available to fund construction costs and two separate performance-based earn-outs totaling $12.5 million and $6.5 million. As of the July 2024 rent roll provided by the Issuer, Phase 1 was 91.1% occupied while Phase 2 is currently in the early stages of construction and no units have been delivered by the sponsor.

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.

Classes F-E, F-X, G-E, G-X, H-E, and H-X are Exchangeable Notes, Class F, Class G, and Class E. Classes F-X, G-X, and H-X reference a single rated tranche and the credit ratings mirror the reference obligation tranche, in accordance with the priority of payment.

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
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- 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 info-DBRS@morningstar.com.