Morningstar DBRS Confirms Credit Ratings on MF1 2020-FL4, Ltd.

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on the following classes of notes issued by MF1 2020-FL4, Ltd.:

-- 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 credit rating confirmations reflect the increased credit support available to the bonds as a result of successful loan repayments, with collateral reduction of 40.3% since issuance. Additionally, the majority of loan collateral, 19 loans, representing 98.6% 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 paydown is a positive development, Morningstar DBRS notes that the transaction is somewhat exposed to adverse selection as a majority of the 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 13 loans, representing 61.9% 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 and waiving interest rate cap agreement requirements. Forbearance agreements have been executed to facilitate further modification discussions between the lender and borrowers. To account for those increased risks, Morningstar DBRS' analysis for this review considered stressed scenarios to increase the loan-level expected losses (ELs), generally reflective of stressed values for the collateral properties or upward probability of default (POD) adjustments based on the level and source of the increased stress. While this approach increased the pool EL by nearly a full percentage point from the prior credit rating action's analysis, there was no downward pressure for the credit ratings as the transaction benefits from an unrated first-loss bond of $67.7 million, as well as two below investment-grade bonds, i.e., Class F and Class G, totaling $73.6 million, which combine for significant cushion against realized losses should the increased risks for those loans ultimately result in dispositions.

In conjunction with this press release, Morningstar DBRS 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 [email protected].

The initial collateral consisted of 22 floating-rate mortgages secured by 29 transitional multifamily properties with a cut-off date balance totaling approximately $783.3 million. Most of the loans were in a period of transition with plans to stabilize performance and improve the asset value. The transaction included an 18-month reinvestment period that expired in May 2022, at which point the bonds began to amortize sequentially with loan repayment and scheduled loan amortization.

The pool currently comprises 20 loans secured by 40 properties with a cumulative trust balance of $568.2 million. Since the previous Morningstar DBRS rating action in December 2023, four loans with a prior cumulative trust balance of $122.1 million have successfully repaid from the pool. Four of the original 22 loans, representing 17.0% of the current pool balance, remain in the trust.

Leverage across the pool has remained generally consistent with the issuance metrics as of the November 2024 reporting, as the current weighted-average (WA) as-is appraised value loan-to-value ratio (LTV) is 73.4%, with a current WA stabilized LTV of 63.8%. In comparison, these figures were 62.0% and 55.0%, respectively, at issuance. Most of the individual property appraisals for the remaining collateral were completed in 2021 and as such, may not fully reflect the effects of increased interest rates and/or widening capitalization rates since that time. To account for this factor, Morningstar DBRS applied upward LTV adjustments to increase the loan-level ELs where applicable.

Palm Valley (Prospectus ID#33, 5.0% of the current trust balance) represents the pool's only specially serviced loan. The loan, which is secured by a 264-unit, garden-style apartment property in Goodyear, Arizona, transferred to special servicing in October 2024 after the loan failed to pay off upon its July 2024 maturity default. According to the collateral manager, the sponsor has experienced difficulty in covering the debt service payment in recent months and requested a loan modification. The property was 96.0% occupied as of August 2024. As of the year-end 2023 financials provided by the servicer, the property generated a net cash flow of $2.9 million equating to a debt service coverage ratio (DSCR) of 0.62x and debt yield of 4.7%. In its current analysis, Morningstar DBRS increased its POD to the loan to reflect the increased maturity and business plan execution risk. The resulting loan EL exceeded the WA EL for the overall pool.

There are 19 loans, representing 95.0% of the current trust balance, on the servicer's watchlist as of the November 2024 reporting. The loans have been flagged for DSCRs below breakeven and upcoming loan maturities. The largest loan in the pool, Two Blue Slip (Prospectus ID#40, 16.1% of the current trust balance), is being monitored on the servicer's watchlist for upcoming maturity risk. The loan matures in February 2025; however, the loan includes two additional 12-month extension options. The property was 90.5% occupied as of September 2024 rent roll. According to the YE2023 financials the property generated $14.9 million, equating to a DSCR of 0.59x and debt yield of 4.4%. In its current analysis, Morningstar DBRS applied upward as-is and as-stabilized LTV adjustments to reflect the increased business plan execution risk. The resulting loan EL is below the WA EL for the overall pool.

Through October 2024, the lender had advanced cumulative loan future funding of $121.9 million to 17 of the 20 outstanding individual borrowers to aid in property stabilization efforts. The largest advance, $27.5 million, had been made to the borrower of the Parkview at Collingswood loan, which is secured by a 1,030-unit, high-rise-style apartment community located in Collingswood, New Jersey. The advanced funds have been used to fund the borrower's extensive $27.5 million planned capital expenditures (capex) across the portfolio. The Q3 2024 collateral manager report noted the borrower had completed 677 unit upgrades with another 43 units in progress. Of the renovated units, 346 units have achieved rental premiums of $296 per unit compared with in-place rental rates at issuance.

An additional $83.3 million of loan future funding allocated to 10 of the outstanding individual borrowers remains available. The vast majority of available funding ($56.1 million) is allocated across the two portfolio loans sponsored by Veritas, ranging from $23.0 million for the SF Multifamily Portfolio II loan to $33.1 million for the LA Multifamily Portfolio II loan. The business plan for each loan is similar, with funds available to renovate properties with a small portion of dollars allocated for potential performance-based earnouts.

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); 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 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 (October 28, 2024), https://dbrs.morningstar.com/research/441840

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 https://dbrs.morningstar.com or contact us at [email protected].