Morningstar DBRS Changes Trends on Nine Classes of MF1 2022-B1 LLC to Negative from Stable; Confirms All Credit Ratings
CMBSDBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of commercial mortgage-backed notes issued by MF1 2022-B1 LLC (the Issuer) as follows:
-- Class A Notes at AAA (sf)
-- Class B Notes at AAA (sf)
-- Class C Notes at A (high) (sf)
-- Class D Notes at A (low) (sf)
-- Class E Notes at BBB (high) (sf)
-- Class F Notes at BBB (low) (sf)
-- Class G Notes at BB (high) (sf)
-- Class G-E Notes at BB (high) (sf)
-- Class G-X Notes at BB (high) (sf)
-- Class H Notes at BB (low) (sf)
-- Class H-E Notes at BB (low) (sf)
-- Class H-X Notes at BB (low) (sf)
-- Class I Notes at B (low) (sf)
-- Class I-E Notes at B (low) (sf)
-- Class I-X Notes at B (low) (sf)
Morningstar DBRS also changed the trends on Class G, Class G-E, Class G-X, Class H, Class H-E, Class H-X, Class I, Class I-E, and Class I-X to Negative from Stable. The trends on all other classes remain Stable.
The trend changes reflect the increased credit risk to the transaction resulting from the higher loan-level loss expectations for several of the larger 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 increased 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 16 loans, representing 58.1% of the current trust balance, have received loan modifications and/or forbearances. The terms of the modifications vary from loan to loan, however, common terms include interest deferrals via hard and soft pay structures, the purchase of new interest rate cap agreements, and funding interest reserves. Additionally, the transaction faces a heighted maturity risk as 24 loans, representing 82.2% of the current trust balance, will mature in 2025. While all of the loans have built-in extension options, Morningstar DBRS notes that, based on current collateral performance, most loans will not qualify to exercise those options 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 $99.5 million as well as three below-investment-grade bonds¿Class G, Class H, and Class I¿totaling $115.3 million. Additionally, all loans but one are 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 some 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 info-DBRS@morningstar.com.
The initial collateral consisted of 33 floating-rate mortgage loans secured by 76 mostly transitional properties with a cut-off balance of $1.625 billion. Most loans were in a period of transition with plans to stabilize performance and improve values of the underlying assets. The transaction had a 24-month reinvestment period that was originally scheduled to expire in November 2024, however, in December 2024, the lender and lone investor in the transaction agreed to an extension of the Reinvestment Period through the December 2026 Payment Date. As of the January 2025 remittance, the pool comprised 30 loans secured by 66 properties with a cumulative trust balance of $1.625 billion. Since the previous Morningstar DBRS credit rating action in June 2024, one loan, representing 3.1% of the current pool balance, has been added to the trust. Over the same period, four loans with a former cumulative trust balance of $162.5 million were paid in full.
Leverage across the pool is generally stable compared with issuance metrics with the current weighted-average (WA) as-is appraised value loan-to-value ratio (LTV) of 68.4% (compared with the closing LTV of 68.3%) and WA stabilized LTV of 60.0% (compared with the closing WA stabilized LTV 61.2%). Morningstar DBRS recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2021 or 2022 and may not reflect the current rising interest rate or widening capitalization rate environments. In the analysis for this review, Morningstar DBRS applied upward LTV adjustments across 12 loans, representing 45.2% of the current trust balance, generally reflective of higher cap rate assumptions compared with the implied cap rates based on the original appraisals.
As of the January 2025 remittance, no loans are specially serviced and 29 loans, representing 93.4% of the pool, are being monitored on the servicer's watchlist. The loans have been flagged for low debt service coverage ratios (DSCRs) and upcoming loan maturity. Three loans, comprising 12.8% of the pool, were previously specially serviced due to maturity default after their borrowers were unable to exercise extension options. All three loans were transferred back to the master servicer in January 2025 with one-year maturity extensions granted.
The largest of these loans, 175 West 87th Street (Prospectus ID#3; 6.1% of the pool), is secured by a 266-unit multifamily property in the Upper West Side of Manhattan, New York. The loan matured in July 2024 and had been categorized as a performing matured balloon loan from October 2024 to January 2025. The property did not meet the performance-based extension tests and, according to the collateral manager's Q3 2024 update, the borrower and lender were in discussions to extend the loan. Through January 2025, 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 capital expenditure (capex) plan over the prior year. As of August 2024, the property's occupancy rate of 78.9% was similar to the May 2023 occupancy rate of 80.8% and the closing occupancy rate of 77.8%. According to YE2023 reporting, the property generated net cash flow (NCF) of $3.2 million, which results in a DSCR of 0.27 times (x) 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 of approximately 90.0% and 70.0%%, respectively, as well as an increased probability of default (POD) to the loan to reflect the increased business plan execution risk. The resulting loan expected loss remains below the WA expected loss for the overall pool.
The Tides at Country Club loan (Prospectus ID#7; 3.9% of the pool), is secured by a 582-unit multifamily community in Mesa, Arizona. The loan transferred to special servicing in August 2023 for payment default. According to the collateral manager's Q3 2024 update, in June 2024, the loan was assumed by Geringer Capital and subsequently modified. As a condition of the modification, the loan was paid down by $3.0 million, a contingency reserve was established, and the requirement to purchase a new interest rate cap agreement was waived. The loan's maturity date was extended to August 2025, and in January 2025, the loan was returned to the master servicer. The new sponsor's business plan is to implement a $5.2 million capital improvement plan and renovate 354 units in order to increase rental rates and stabilize the property. As of January 2025, $4.4 million of future funding has been released, with 60 units renovated. The property was 83.8% occupied as of August 2024, with an average rental rate of $1,233 per renovated unit and $1,119 per unit overall. The achieved renovated rental rate is $446 lower than the issuer's original estimated rate of $1,679 per unit and $211 lower than Morningstar DBRS stabilized rent estimate of $1,444 per unit. While Morningstar DBRS did not make any LTV or POD adjustments, the loan's expected loss remains above the pool average, primarily because of its suburban location in a weak MSA Group.
The Highland Park loan (Prospectus ID#13, 2.8% of the pool), secured by a 373-unit multifamily property in the Columbia Heights neighborhood of Washington, D.C, transferred to special servicing in October 2024 for maturity default. Given the low in-place cash flow, the property did not meet the performance-based extension tests and, according to the collateral manager's Q3 2024 update, the borrower and lender were in discussions regarding a loan modification to extend the loan. The loan transferred back to the master servicer in January 2025, with an amended maturity date of July 2025, however, the terms of the amendment are currently pending. The loan did not include any future funding, as the borrower's business plan focused on stabilizing the property's occupancy rate and increasing rental rates. As of July 2024, the property was 93.6% occupied with an average rental rate of $2,367 per unit, which represented a 12.2% increase over issuance rates and was in line with the Morningstar DBRS stabilized rent estimate but remained below the Issuer's stabilized estimate of $3,244 per unit. In its current analysis, Morningstar DBRS also applied upward as-is and as-stabilized LTV adjustments of approximately 85.0% and 75.0%, respectively, as well as an increased POD to the loan to reflect the increased business plan execution risk. The resulting loan expected loss is approximately 1.5x greater than the pool average.
Through January 2025, the collateral manager had advanced cumulative loan future funding of $119.8 million to 17 of the outstanding individual borrowers, including $12.5 million since the previous Morningstar DBRS credit rating action. The loans with the largest future funding advances to date are the Reserve at Brandon (Prospectus ID#8; 3.6% of the pool balance; $21.1 million of future funding advanced), which is secured by a 982-unit multifamily property in Brandon, Florida, and the previously mentioned 175 West 8th Street loan ($20.4 million of future funding advanced). The advanced funds have been used by the borrowers to complete planned capex across the properties. An additional $73.3 million of loan future funding allocated to 12 loans remains outstanding. These funds are also scheduled to primarily be used toward capex with select amounts allocated to individual borrowers for debt service shortfalls and/or property performance-based earn out reserves.
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 G-X, H-X, and I-X are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.
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 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.
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.
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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 (December 13, 2024), https://dbrs.morningstar.com/research/444616
-- North American CMBS Insight Model Version 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
-- 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
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781
-- Legal Criteria for U.S. Structured Finance (December 3, 2024), https://dbrs.morningstar.com/research/444064
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.
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