DBRS Morningstar Confirms Credit Ratings on MF1 2022-FL10 LLC; Changes Trend on Nine Classes to Negative from Stable

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on all classes of notes issued by MF1 2022-FL10 LLC (the Issuer) 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 (high) (sf)
-- Class F-E Notes at BB (high) (sf)
-- Class F-X Notes at BB (high) (sf)
-- Class G Notes at BB (low) (sf)
-- Class G-E Notes at BB (low) (sf)
-- Class G-X Notes at BB (low) (sf)
-- Class H Notes at B (low) (sf)
-- Class H-E Notes at B (low) (sf)
-- Class H-X Notes at B (low) (sf)

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

The trend changes reflect the increased credit risk to the transaction resulting from higher loan-level loss expectations for the majority of the loans in the transaction. Morningstar DBRS notes that 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 current elevated interest rate environment as all loans have floating interest rates. As a result of lagging business plans and loan exit strategies, the borrowers of eight loans, representing 26.9% of the current trust balance, have received loan modifications and/or forbearances. 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. Forbearance agreements have been executed to facilitate further modification discussions between the lender and borrowers. Additionally, the transaction faces a heighted maturity risk as seven loans, representing 33.1% of the current trust balance, have past due maturity dates or will mature through Q1 2025. This includes the two largest loans in the trust: 175 West 87th Street (Prospectus ID#1; 7.7% of the current trust balance) and Highland Park (Prospectus ID#2; 7.5% of the current trust balance), which are both currently categorized as matured performing balloons and are discussed below. While all of the loans have built-in extension options, Morningstar DBRS notes most loans will not qualify to exercise the related options based on current collateral performance and therefore will likely need to be modified.

The credit rating confirmations reflect the overall credit support to the transaction with an unrated, first-loss piece of $75.6 million as well as three below-investment-grade bonds, Class F, Class G, and Class H, totaling $78.2 million. Additionally, the majority of loan collateral, 24 loans, representing 95.7% 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 majority of individual borrowers are proceeding with their business plans to increase property cash flow and property value, the headwinds and challenges noted above continue to pressure select borrowers. 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. To access this report, please click on the link under Related Documents below or contact us at [email protected].

The initial collateral consisted of 24 floating-rate mortgage loans secured by 34 mostly transitional properties with a cut-off balance of $979.2 million. Most loans were in a period of transition with plans to stabilize performance and improve values of the underlying assets. The transaction had a maximum funded balance of $1.03 billion and a two-year Reinvestment Period that expired with the August 2024 Payment Date. As of the October 2024 remittance, the pool comprised 25 loans secured by 34 properties with a cumulative trust balance of $979.5 million, representing a collateral reduction of 4.4% since closing. Twenty of the original 24 loans, representing 88.8% of the current pool balance, remain in the trust.

Since the previous Morningstar DBRS credit rating action in October 2023, two loans, representing 2.7% of the current pool balance, have been added to the trust. Over the same period, two loans with a former cumulative trust balance of $40.9 million were paid in full while one additional loan with a former cumulative trust balance of $39.9 million was purchased from the trust by the Issuer as a credit-risk asset. Beyond the multifamily concentration noted above, one loan (representing 4.3% of the current trust balance) is secured by a portfolio of manufactured housing communities.

Leverage across the pool has remained similar since issuance as the current weighted-average (WA) as-is appraised LTV is 70.7% with a current WA stabilized appraised LTV of 61.5%. In comparison, these figures were 68.0% and 62.4%, respectively, at issuance. Morningstar DBRS recognizes these appraised values may be inflated as the majority of the individual property appraisals were completed in 2022 and do not reflect the current higher interest-rate or widening capitalization-rate environments. In the analysis for this review, Morningstar DBRS applied LTV adjustments to 18 loans, representing 83.6% of the current pool balance, generally reflective of higher cap rate assumptions compared with the implied cap rates based on the appraisals.

There are no specially serviced loans; however, one loan, Hairston Woods (Prospectus ID#17; 3.1% of the current trust balance) is delinquent as the borrower last paid debt service in June 2024. The loan is secured by a 240-unit multifamily property in Stone Mountain, Georgia, and the borrower's business plan was to complete a $4.8 million capex plan across the property including upgrades to all unit interiors. Through Q2 2024, the lender had advanced $2.9 million to the borrower with 205 unit upgrades completed. While the borrower has progressed in its capex plan, the achieved renovated monthly rental rate was approximately $200 below expectation and the property continued to experience increased collection loss, which was below 75.0% for June 2024. In response, property management has installed staff to assist in the eviction process. Property cash flow continues to be depressed, reported by the collateral manager as $0.5 million on an annualized basis for the trailing six-month period ended May 31, 2024. The servicer is currently discussing loan modification terms with the borrower but is also dual tracking foreclosure with potential resolution timing not known at this time. In its analysis, Morningstar DBRS recognized the progress regarding the capex plan, but notes the increased credit risk to the transaction given the low in-place cash flow and loan status. In its current analysis, Morningstar DBRS liquidated the loan, applying a haircut to the in-place property value at closing of $38.8 million. The resulting loan loss severity was approximately 30.0%.

There are 23 loans, representing 96.5% of the current trust balance, on the servicer's watchlist as of the October 2024 reporting. The loans have been flagged for debt service coverage ratios (DSCRs) below breakeven and upcoming loan maturities. The largest loan on the servicer's watchlist, 175 West 87th Street, which is secured by a 266-unit multifamily property in the Upper West Side of Manhattan, New York. The loan matured in July 2024 and is currently categorized as a performing matured balloon loan. The property did not meet the performance-based extension tests, and according to the collateral manager's Q2 2024 update, the borrower indicated it would need relief in order to extend the loan. According to the October 2024 reporting, discussions between the lender and borrower remain ongoing with potential resolution terms not provided. Through Q3 2024, the lender had advanced $20.4 million of loan future funding to the borrower, including $6.3 million since Q3 2023 as the borrower continued to implement its capex plan over the prior year. As of May 2024, the property was 83.5% occupied, which is similar to the May 2023 occupancy rate of 80.8% and the 77.8% occupancy rate at closing. According to the YE2023 reporting, the property generated NCF of $3.2 million, which results in a DSCR of 0.27x and a debt yield of 1.8% based on the currently funded whole loan balance. In its current analysis, Morningstar DBRS applied upward As-Is and As-Stabilized LTV adjustments as well as an increased POD to the loan to reflect the increased business plan execution risk. The resulting loan expected loss is below the WA expected loss for the overall pool.

The Highland Park loan was originally added to the servicer's watchlist for a low YE2023 DSCR of 0.62x; however, the loan is now also flagged as a performing matured balloon loan as noted above. The loan matured in July 2024 and is secured by a 373-unit multifamily property in the Columbia Heights neighborhood of Washington, D.C. Given low in-place cash flow, the property did not meet the performance-based extension tests and the borrower and lender are currently in discussion regarding a potential loan modification, according to the collateral manager's Q2 2024 update. The loan did not include any future funding with the borrower's business plan focused on stabilizing the property's occupancy rate and increasing rental rates. As of May 2024, the property was 94.1% occupied with an average rental rate of $2,264 per unit, which represented a 7.4% increase over issuance levels, but remained below the Issuer's stabilized estimate. In its current analysis, Morningstar DBRS also applied upward As-Is and As-Stabilized LTV adjustments as well as an increased POD to the loan to reflect the increased business plan execution risk. The resulting loan expected loss is below the WA expected loss for the overall pool.

Through September 2024, the collateral manager had advanced cumulative loan future funding of $201.4 million to 19 of the outstanding individual borrowers, including $57.5 million since the previous Morningstar DBRS credit rating action, as borrowers continued to make progress in their respective business plans. The largest advance, $62.5 million, was made to the borrower of The 600 loan (Prospectus ID#19; 3.5% of the current trust balance), which is secured by a 30-story, 404-unit multifamily tower in Birmingham, Alabama. The advanced funds have been used by the borrower to fund the complete conversion and renovation of the property into a multifamily use from its former office use. According to the Q2 2024 update from the collateral manager, the capex project was 92.5% complete and was projected to be finished in Q3 2024. As of May 2024, 371 units were rentable, and 109 units were occupied. There is no more future funding available to the borrower. The loan matured in July 2024 and was modified to allow the borrower to exercise the first 12-month extension option. Terms of the modification included reduction in the floating interest rate spread to 4.50% from 5.90%. The borrower was required to purchase an interest rate cap agreement with a 5.25% strike rate and deposit $5.4 million into a shortfall reserve with the obligation to replenish the reserve to $3.0 million if it falls below $1.0 million.

An additional $114.7 million of future loan funding allocated to 16 of the outstanding individual borrowers remains available. The largest portion of available funds ($33.5 million) is allocated to the borrower of the Park at Sheffield loan, which is secured by a Class B multifamily property in Miami. The borrower's business plan is to used future funding to complete a significant $36.2 million renovation and expansion of the property, which includes adding a second story to all existing multifamily buildings to develop townhome-style units. According to the Q2 2024 collateral manager update, there have delays in the design and permitting processes, which has also led to an increased budget. The update also noted that the collateral manager will require the borrower to replenish the debt service reserve through loan maturity in January 2025. The borrower had reportedly notified the lender of its intention to secure takeout financing prior to loan maturity, suggesting the originally planned capex plan will commence with new financing.

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); https://dbrs.morningstar.com/research/437781.

Classes F-X, G-X, and H-X are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches

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.

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.

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.

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.

DBRS, Inc.
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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 (September 19, 2024), https://dbrs.morningstar.com/research/439702

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].