Morningstar DBRS Assigns Provisional Credit Ratings to Arbor Realty Commercial Real Estate Notes 2025-BTR1, LLC

DBRS, Inc. (Morningstar DBRS) assigned provisional credit ratings to the following classes of notes (the Notes) to be issued by Arbor Realty Commercial Real Estate Notes 2025-BTR1, LLC (the Issuer).

-- Class A at (P) AAA (sf)
-- Class A-1R at (P) AAA (sf)
-- Class A-1T at (P) AAA (sf)
-- Class A-S at (P) AAA (sf)
-- Class B at (P) AA (low) (sf)
-- Class C at (P) A (low) (sf)
-- Class D at (P) BBB (sf)
-- Class E at (P) BBB (low) (sf)
-- Class F at (P) BB (low) (sf)
-- Class G at (P) B (low) (sf)

All trends are Stable.

The initial collateral consists of 21 floating-rate mortgage loans totaling $551.9 million. The collateral interest is secured by mortgages on build-to-rent (BTR) multifamily communities. The underlying properties are in various stages of completion with total funding commitments ranging from 39.8% to 100.0%. As of the cut-off date, the pool has a 78.5% funded amount, with remaining future funding obligations of $204.3 million. The properties are generally in the later stages of development, with horizontal construction complete and vertical construction initiated or fully complete. During the reinvestment period, the loans added will be required to have, at a minimum, a 25.0% loan funded amount. In addition, the weighted-average (WA) funding percentage for the pool must be at least 50.0% at all times. The 25.0% loan funded amount and 50.0% WA funding percentage thresholds provide guardrails on future loans added to the pool, ensuring the horizontal risk is eliminated and properties have or can begin vertical construction.

The transaction is a managed vehicle, which includes a 24-month reinvestment period. As part of the reinvestment period, the transaction includes a 180-day ramp-up acquisition period during which the Issuer is expected to increase the trust balance by $50.0 million to a total target collateral principal balance of $801.8 million. Morningstar DBRS assessed the ramp loans using a conservative pool construct and, as a result, the ramp loans have expected losses above the pool WA loan expected losses. The A-1R note was assumed to be sized with similar credit characteristics as the existing collateral interests, with no consideration for further construction completion or performance improvement. Reinvestment of principal proceeds during the reinvestment period is subject to Eligibility Criteria, which, among other criteria, include a no-downgrade rating agency confirmation (RAC) by Morningstar DBRS for all new mortgage assets and funded companion participations exceeding $500,000. The eligibility criteria indicates that only BTR can be brought into the pool during the stated ramp-up acquisition period and reinvestment period. BTR for purposes of the Eligibility Criteria means real property that consists of (A) detached single family residences, two- or four-family dwellings, five or more residential units and mixed-use properties (at least 50% square feet residential) and (B) designed and constructed with the intention of being operated as rental residences. Additionally, the eligibility criteria establish maximum loan-to-value ratio (LTV) and minimum debt yield requirements.

The loans are secured by properties which are in a period of transition with plans to stabilize and improve the asset value. In total, 17 loans, representing 85.5% of the pool, have remaining future funding participations totaling $204.3 million, which the Issuer may acquire in the future, of which $172.6 million will be acquired by the Issuer with the remaining $31.6 million to be held by Arbor Realty SR, Inc. outside the transaction. Please see the related presale report for the participations that the Issuer will be able to acquire.

After closing, the transaction will be monitored for performance concerns and No Downgrade Confirmation requests, as part of the addition of new collateral during the reinvestment period. Morningstar DBRS reviews the request to confirm if the proposed action or failure to act or other specified event will not, in and of itself, result in the downgrade or withdrawal of the current credit rating. The Issuer is required to obtain RAC for all acquisitions of companion participations exceeding $500,000.

All of the loans in the pool have floating interest rates, and Morningstar DBRS incorporates an interest rate stress that is based on the lower of a Morningstar DBRS stressed rate that corresponds to the remaining fully extended term of the loans or the strike price of an interest rate cap with the respective contractual loan spread added to determine a stressed interest rate over the loan term. When the debt service payments were measured against the Morningstar DBRS As-Is Net Cash Flow (NCF), the Morningstar DBRS Stabilized NCF for 18 of 21 loans, representing 91.0% of the pool, was below 1.00 times, which is indicative of elevated refinance risk. The properties are often transitioning with potential upside in cash flow; however, Morningstar DBRS does not give full credit to the stabilization if there are no holdbacks or if other structural features in place are insufficient to support such treatment. Furthermore, even with the structure provided, Morningstar DBRS generally does not assume the assets will stabilize above market levels.

The sponsor for the transaction, Arbor Realty SR, Inc., is a majority-owned subsidiary of Arbor Realty Trust, Inc. (Arbor; New York Stock Exchange: ABR) and an experienced CRE collateralized loan obligation (CLO) issuer and collateral manager. The ARCREN 2025-BTR1 transaction will be Arbor's 20th CRE CLO securitization after the global financial crisis. In total, Arbor has been an issuer and manager of 19 CRE CLO securitizations after the global financial crisis totaling more than $10 billion. Additionally, Arbor will purchase and retain 100.0% of the most subordinate classes, including the Class F Notes, the Class G Notes, and the Income Notes, which total approximately $119.3 million.

Arbor is a market leader in the BTR space and has been active in the BTR space since 2019. Arbor's BTR team comprises 39 dedicated professionals across five offices. All aspects of BTR are run by this team including sourcing, underwriting, credit, loan administration, and servicing. Since the program's inception, Arbor has originated 122 BTR loans amounting to $4.60 billion, which highlights its expertise in the space. In 2024, Arbor closed 40 BTR loans amounting to approximately $1.6 billion.

Morningstar DBRS' credit ratings on the Notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related Principal Distribution Amounts and Interest Distribution Amounts for the rated classes.

Morningstar DBRS' credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations., for example, Defaulted Interest Amounts.

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 credit 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, or Governance factors that had a relevant or significant 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): 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 Multi-Borrower Rating Methodology (April 9, 2025): https://dbrs.morningstar.com/research/451739.

Other methodologies referenced in this transaction are listed at the end of this press release.

Morningstar DBRS materially deviated from its North American CMBS Multi-Borrower Rating Methodology when determining the credit ratings assigned to the Notes by considering an amount of vertical construction risk associated with the development of BTR multifamily collateral. The material deviation is warranted, given the risk associated with vertical development and its impact on project completion and potential delays to timely payment of interest and ultimate payment of principal. Morningstar DBRS accounted for this risk by stressing business plan scores, increasing loss given defaults for properties that were in the earlier stages of development, and curtailing property quality credit. Mitigants to the vertical construction risk include a diversified pool of properties, that are in various stages of loan funding between 39.8% and 100.0%, with an average of 75.8%; implying no loan is exposed to the earliest stages of development when project delays are most common. Also, eligibility criteria ensure that no future loans can be brought into the trust unless they have a minimum loan funding of 25.0%. In addition, the WA funding percentage for the pool will need to be at least 50.0% at all times. Development of BTR multifamily properties is also unique in that construction is completed in phases, which allows units to be leased up over time and cash flows can be generated before all units are completed. Furthermore, the loans are structured with provisions and features including defined use of proceeds, loan-to-cost and LTV thresholds, debt yield requirements, loan-in-balance provisions, cost contingencies, minimum equity, and guaranties, among others.

With regard to due diligence services, Morningstar DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of Morningstar DBRS' methodology, Morningstar DBRS used the data file outlined in the independent accountant's report in its analysis to determine the credit ratings referenced herein.

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.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

A provisional credit rating is not a final credit rating with respect to the above-mentioned securities and may change or be different than the final credit rating assigned or may be discontinued. The assignment of final credit ratings on the above-mentioned securities is subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalize the credit ratings.

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 Commercial Mortgage Servicer Rankings (August 23, 2024)
https://dbrs.morningstar.com/research/438283

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 (March 27, 2025)
https://dbrs.morningstar.com/research/450750

North American CMBS Insight Model v 1.3.0.0
https://dbrs.morningstar.com/research/451739

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.