Morningstar DBRS Confirms All Credit Ratings of Arbor Realty Commercial Real Estate Notes 2022-FL2, LLC

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of commercial mortgage-backed notes issued by Arbor Realty Commercial Real Estate Notes 2022-FL2, LLC as follows:

-- Class A Notes at AAA (sf)
-- Class A-S Notes at AAA (sf)
-- Class B Notes at AA (low) (sf)
-- Class C Notes at A (low) (sf)
-- Class D Notes at BBB (sf)
-- Class E Notes at BBB (low) (sf)
-- Class F Notes at BB (low) (sf)
-- Class G Notes at B (low) (sf)

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction, which benefits from being solely composed of loans backed by multifamily properties. The multifamily sector has historically fared better during times of distress in terms of retained property value and cash flow compared with other property types. In its analysis for the review, Morningstar DBRS determined that most of the individual borrowers are progressing with their respective business plans to increase property cash flow and value. For loans exhibiting increased execution and other risks, Morningstar DBRS applied stressed scenarios in the analysis for this review, including elevated loan-to-value ratios (LTVs) based on higher capitalization rates (cap rates) assumed compared with the implied cap rates based on the issuance appraisals and the issuance or in-place cash flows. This analysis resulted in higher expected losses (ELs) for those loans and the overall pool EL. However, the credit rating confirmations and Stable trends are supported as the transaction benefits from a large unrated first-loss class totaling $89.3 million as well as more than $177.0 million of below investment-grade debt (and will continue to benefit from principal paydown as loans are repaid following the completion of the transaction's Reinvestment Period).

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 32 floating-rate mortgages secured by 40 mostly transitional properties with a cut-off balance of $936.9 million. The transaction was a managed vehicle with a 24-month Reinvestment Period, which ended with the May 2024 Payment Date. The transaction now has a sequential-pay structure following the expiration of the Reinvestment Period. As of September 2024, the pool comprises 33 loans secured by 39 properties with an outstanding balance of $962.4 million, representing a collateral reduction of 8.3% since issuance. Since the previous Morningstar DBRS credit rating action in October 2023, five loans, with a former trust balance of $4.3 million, were repaid in full and four loans, with a cumulative trust balance of $86.0 million, were added to the trust.

The transaction is concentrated by property type as all loans are secured by multifamily properties. The loans are primarily secured by properties in suburban markets as 24 loans, representing 63.6% of the pool, are secured by properties with a Morningstar DBRS Market Rank of 3, 4, or 5. An additional four loans, representing 23.6% of the pool, are secured by properties with a Morningstar DBRS Market Rank of 6, denoting urban markets, while five loans, representing 12.9% of the pool, are secured by properties with a Morningstar DBRS Market Rank of 2, denoting rural and tertiary markets. In comparison, at transaction issuance, properties in suburban markets represented 58.2% of the collateral, properties in urban markets represented 23.1% of the collateral, and properties in tertiary and rural markets represented 15.0% of the collateral.

Based on the as-is appraised values, leverage across the pool has increased slightly from issuance, with a current weighted-average (WA) LTV of 72.2%, in comparison with the WA issuance LTV of 71.5%. However, the WA stabilized LTV decreased over that same period, dropping to 64.5% from 66.0% at issuance. For loans that have reported delays with their respective business plans or, where issuance appraised values do not reflect the cap rate expansion that occurred in the past two years, Morningstar DBRS assumed higher LTVs. In the analysis for this review, Morningstar DBRS raised the LTVs for seven loans, representing 34.0% of the current trust balance.

Through September 2024, the lender had advanced cumulative loan future funding of $57.3 million to 20 individual borrowers to aid in property stabilization efforts. The largest future funding advance has been released to the borrower of the Hunters Ridge loan (Prospectus ID#2, 7.2% of the pool), which is secured by 455 units of a 487-unit multifamily condominium complex in Farmington Hills, Michigan. The borrower's business plan consists of implementing a $19.9 million capital improvement plan to stabilize the property. Through Q2 2024, the property was 80.9% occupied and 105 units had been renovated. Out of the 105 renovated units, 78 have been leased at an average rental rate of $1,897 per unit, below the Morningstar DBRS stabilized rental rate estimate of $1,944 per unit. As a result of interest rate hikes and increases in operating expenses, the borrower requested a loan modification, which was executed in March 2024, extending the loan's maturity to December 2026 from June 2025.

An additional $25.5 million allocated to five individual borrowers remains available. Available funding for each respective borrower is for planned capital expenditure improvements, with the exception of the 55 Jordan loan (Prospectus ID#3, 5.8% of the pool), as those funds are available to finance leasing costs. The largest portion of available funds, $8.5 million, is allocated to the borrower of the aforementioned Hunters Ridge loan. The second-largest outstanding future funding balance, $7.9 million, is allocated to the Solace on Peachtree loan (Prospectus ID#39, 6.7% of the pool), which is secured by a 533-unit, high-rise multifamily property in Atlanta. The sponsor is still in the early stages of executing its business plan, which focuses on renovating all 533 units. The property was 89.1% occupied as of May 2024 with $2.7 million of future funding advanced as of September 2024.

As of the September 2024 remittance, there are no loans being monitored on the servicer's watchlist; however, one loan, Sora on Rose Apartments (Prospectus ID#26, 2.1% of the pool), is specially serviced. The loan is secured by a 92-unit multifamily property in Phoenix and was transferred to special servicing in August 2024 for payment default. The loan was modified at the end of August to extend the loan's maturity to March 2026. As a condition to the extension, the borrower purchased a 12-month interest rate cap with a 2.5% strike rate and paid back the missed loan payment. As of June 2024, the property was 88.0% occupied with the entire $1.7 million future funding advanced to the borrower to renovate all 92 units. Seventy units had been renovated, 65 of which have been leased at an average rental rate of $1,566 per unit, below the appraiser's stabilized estimate of $1,640 per unit. Following the loan modification, the collateral manager expects the loan to be returned to the master servicer.

Twenty loans, representing 66.3% of the pool, have been modified. The modifications include maturity extensions, deferrals of forced future funding dates, changes to interest rate structure, amendments to required interest rate caps, and reallocation of reserves. The lender granted maturity extensions in exchange for fresh equity deposits in the form of a principal paydown or reserve deposits and the purchase of a new interest rate cap agreement. In the next 12 months, 27 loans, representing 74.3% of the current pool balance, have scheduled maturity dates. All but three of these loans have remaining extension options. Loans that were modified to change interest rate structure generally had their rate spreads reduced for the next 12 months before ramping up in each consecutive year until their respective maturity dates. Additional borrower equity contributions to interest reserves were required as a condition for the modifications.

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 factor(s) 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 at (August 13, 2024) 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 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 info-DBRS@morningstar.com.

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
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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
-- 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

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.