Morningstar DBRS Confirms Credit Ratings on All Classes of Arbor Realty Commercial Real Estate Notes 2021-FL1, Ltd.
CMBSDBRS Limited (Morningstar DBRS) confirmed the credit ratings on all classes of commercial mortgage-backed notes issued by Arbor Realty Commercial Real Estate Notes 2021-FL1, 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 (low) (sf)
-- Class G at B (low) (sf)
All trends are Stable.
The credit rating confirmations and Stable trends reflect the increased credit enhancement to the notes as a result of continued loan repayments. There has been a collateral reduction of 41.9% since issuance, including an additional 15.4% since Morningstar DBRS' prior credit rating action in May 2024. This collateral reduction and the $60.8 million unrated first-loss piece serve as mitigants to the specially serviced loan concentration, which includes three loans, representing 13.2% of the current trust balance. Additionally, Morningstar DBRS notes that a select number of borrowers have been unable to meaningfully increase property cash flow and asset values as their respective business plans have stalled.
Throughout 2025, 18 loans, representing 79.8% of the current trust balance, have scheduled maturity dates. Based on the Q3 2024 reporting provided by the collateral manager, these loans reported debt yields ranging from 1.0% to 8.0%. While financing markets and sales volumes have improved year over year, Morningstar DBRS expects select borrowers will be unable to execute exit strategies and will need maturity extension and/or other forms of relief, potentially increasing the credit risk for those loans. Beyond the unrated $60.8 million first loss piece noted above, there are two non-investment grade rated bonds totaling an additional $68.7 million, that carry current ratings that are reflective of the additional credit risk in the transaction. 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 and with 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@dbrsmorningstar.com.
The transaction closed in March 2021 with the initial collateral pool consisting of 37 floating-rate mortgages and senior participations secured by 64 mostly transitional properties, totaling $635.2 million, which increased to $785.0 million following the completion of the ramp-up acquisition period in August 2021. The Reinvestment Period expired in September 2023 and, as of the January 2025 remittance, the pool comprises 23 loans with a cumulative loan balance of $455.8 million. Since Morningstar DBRS' previous credit rating action, six loans with a former cumulative trust loan balance of $120.8 million have repaid from the trust.
The transaction is concentrated by property type as all loans are secured by multifamily properties. The transaction is also concentrated by loan size, as the largest 10 loans represent 62.5% of the pool. The loans are primarily secured by properties in suburban markets as 18 loans, representing 74.6% of the pool, are secured by properties in suburban markets, as defined by Morningstar DBRS, with a Morningstar DBRS Market Rank of 3, 4, or 5. An additional three loans, representing 9.6% of the pool, are secured by properties with a Morningstar DBRS Market Rank of 1 and 2, denoting a rural or tertiary market, while two loans, representing 15.8% of the pool, are secured by a property with a DBRS Morningstar Market Rank of 7, denoting an urban market.
The largest loan in special servicing, Ridge at Crestwood (Prospectus ID#69; 6.9% of the current pool balance), is secured by 344-unit garden-style property in Birmingham, Alabama. The loan transferred to special servicing in September 2024 for payment default. Shortly afterward, a loan modification was executed, the terms of which included a maturity extension to March 2026, a $0.3 million deposited into the renovation reserve, and an additional $1.4 million deposited into a general reserve. The loan remains current as of the January 2025 remittance. The borrower originally planned to renovate the property at a total budgeted cost of $4.0 million with $1.4 million allocated for interior renovations. As of the Q3 2024 collateral manager's report, $4.1 million of the renovation reserve had been funded; however, performance has not improved to stabilized projections with the November 2024 occupancy rate of 54.7% and average rental rate of $889 per unit. In comparison, Morningstar DBRS projected stabilized figures of 94.0% and $974 per unit, respectively, while the issuer projected stabilized figures of 93.0% and $1,011 per unit, respectively. Given the current status of the property, net cash flow (NCF) is depressed, reported as a negative figure for the trailing 12-month period ended November 30, 2024, significantly below the Morningstar DBRS and issuer stabilized projections of $1.8 million and $2.1 million, respectively. With this review, Morningstar DBRS applied a probability of default (POD) adjustment in its analysis, with a resulting loan expected loss (EL) approximately 40.0% higher than the EL for the pool.
The second-largest loan in special servicing, Tivoli at Vintage Park (Prospectus ID#59; 4.0% of the current pool balance), is secured by a 158-unit, garden-style property in Houston, built in 1999. The loan transferred to the special servicer in February 2024 for payment default. After an attempt to sell the property fell through in July 2023, the borrower exercised a 12-month extension option, extending the maturity date to November 2024 to aid in efforts to sell the asset. According to the Q3 2024 collateral manager's report, the loan was ultimately assumed by a new borrower in March 2024 and a loan modification is in the process of being finalized, which will extend the maturity to November 2025. The business plan at origination included the renovation of 118 units budgeted at $0.5 million; however, after renovating 58 units at a cost of $0.3 million, the remaining funds were used to pay an outstanding property tax bill. According to the collateral manager, property occupancy, cash flow, and the debt service coverage ratio (DSCR) remain below issuance levels and were short of projected stabilized levels. According to the October 2024 rent roll, the property was 88.6% occupied with an average rental rate of $1,242 per unit. The property is surpassing the Morningstar DBRS stabilized rental rate projection of $1,186 per unit but trails the issuer's stabilized projection of $1,331 per unit. For the seven months ended October 31, 2024, the property reported net operating income of $0.1 million. As the new borrower has taken control of the property, performance is expected to improve; however, the in-place NCF is below the Morningstar DBRS stabilized NCF of $1.0 million and the issuer's stabilized NCF of $1.3 million. Given the inability of the previous borrower to complete the business plan, Morningstar DBRS analyzed the loan with an increased POD adjustment with this review, resulting in an EL approximately 10.0% above the overall pool EL.
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 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 (December 13, 2024), https://dbrs.morningstar.com/research/444617.
Other methodologies referenced in this transaction are listed at the end of this press release.
The credit ratings assigned to Classes B, C, and F materially deviate from the credit ratings implied by the predictive model. Morningstar DBRS typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider a three-notch or more deviation from the credit rating stress(es) implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviations is uncertain loan level event risk given the concentration of loans in special servicing as well as the concentration of borrowers that are behind the respective business plans to increase property cash flow and asset value.
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.
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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/North American CMBS Insight Model v 1.2.0.0 (December 13, 2024), https://dbrs.morningstar.com/research/444616
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- Legal Criteria for U.S. Structured Finance (December 3, 2024) https://dbrs.morningstar.com/research/444064
-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283
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 (July 17, 2023).
For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.
Ratings
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