DBRS Morningstar Finalizes Provisional Ratings on MF1 2021-FL5, Ltd.

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes issued by MF1 2021-FL5, Ltd. (the Issuer):

-- 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 classes are Stable.

The initial collateral consists of 35 floating-rate mortgage loans secured by 49 transitional multifamily and five senior housing properties totaling $1.177 billion (56.7% of the total fully funded balance), excluding $298.0 million of remaining future funding commitments and $599.1 million of pari passu debt. Three loans (LA Multifamily Portfolio II, SF Multifamily Portfolio II, and LA Multifamily Portfolio III), representing 7.2% of the trust balance, are associated with the same sponsorship group. These loans allow the borrower to acquire and bring properties into the trust post-closing through future funding up to a maximum whole-loan balance of $100.0 million for each individual loan, which is accounted for in figures and metrics throughout the report. Two loans in the pool, 56 West 125th Street and Vitagraph, representing 4.9% of the initial pool balance, are contributing both senior and mezzanine loan components that will both be held in the trust. Of the 35 loans, there is one unclosed, delayed-close loan as of March 9, 2021: Pinnacle (Prospectus ID#9), representing 3.8% of the initial pool balance. Additionally, one loan, LA Multifamily Portfolio III (Prospectus ID#35), has delayed-close mortgage assets, which are identified in the data tape and included in the DBRS Morningstar analysis. If a delayed-close loan or asset is not expected to close or fund prior to the purchase termination date, then any amounts remaining in the unused proceeds account up to $5.0 million will be deposited into the replenishment account. Any funds in excess of $5.0 million will be transferred to the payment account and applied as principal proceeds in accordance with the priority of payments. Additionally, during a 90-day period following the closing date, the Issuer can bring an estimated $13.4 million of future funding participations into the pool, resulting in a target deal balance of $1.190 billion.

The loans are mostly secured by currently cash flowing assets, many of which are in a period of transition with plans to stabilize and improve the asset value. In total, 21 loans, representing 56.6% of the pool, have remaining future funding participations totaling $298.0 million, which the Issuer may acquire in the future.

Given the floating-rate nature of the loans, the index DBRS Morningstar used (one-month Libor) was the lower of (1) DBRS Morningstar’s stressed rate that corresponded with the remaining fully extended term of the loans and (2) the strike price of the interest rate cap with the respective contractual loan spread added to determine a stressed interest rate of the loan term. When measuring the cut-off date balances against the DBRS Morningstar As-Is Net Cash Flow, 32 loans, representing 91.7% of the cut-off date pool balance, had a DBRS Morningstar As-Is Debt Service Coverage Ratio (DSCR) of 1.00 times (x) or below, a threshold indicative of default risk. Additionally, the DBRS Morningstar Stabilized DSCR for 19 loans, representing 43.0% of the initial pool balance, of 1.00x or below indicates elevated refinance risk. The properties are often transitioning with potential upside in cash flow; however, DBRS Morningstar does not give full credit to the stabilization if there are no holdbacks or if the other loan structural features are insufficient to support such treatment. Furthermore, even if the structure is acceptable, DBRS Morningstar generally does not assume the assets will stabilize above market levels. The transaction will have a sequential-pay structure.

With regard to the Coronavirus Disease (COVID-19) pandemic, the magnitude and extent of performance stress posed to global structured finance transactions remains highly uncertain. This considers the fiscal and monetary policy measures and statutory law changes that have already been implemented or will be implemented to soften the impact of the crisis on global economies. Some regions, jurisdictions, and asset classes are, however, affected more immediately. Accordingly, DBRS Morningstar may apply additional short-term stresses to its rating analysis, for example by front-loading default expectations and/or assessing the liquidity position of a structured finance transaction with more stressful operational risk and/or cash flow timing considerations.

For more information regarding rating methodologies and the coronavirus pandemic, please see the following DBRS Morningstar press releases: https://www.dbrsmorningstar.com/research/357883 and https://www.dbrsmorningstar.com/research/358308.

The loans were all sourced by an affiliate of the Issuer, which has strong origination practices and substantial experience in the multifamily industry. Classes F and G and the Preferred Shares (collectively, the Retained Securities; representing 14.8% of the initial pool balance) will be purchased by a wholly owned subsidiary of MF1 REIT II LLC.

Seven loans, representing 18.9% of the pool, are in areas identified as DBRS Morningstar Market Ranks of 7 or 8, which are generally characterized as highly dense urbanized areas that benefit from increased liquidity driven by consistently strong investor demand, even during times of economic stress. Markets ranked 7 and 8 benefit from lower default frequencies than less dense suburban, tertiary, and rural markets. Urban markets represented in the deal include Los Angeles, New York, San Francisco, and Denver. Fifteen loans, representing 44.4% of the pool balance, have collateral in MSA Group 3, which is the best-performing group in terms of historical CMBS default rates among the top 25 MSAs. MSA Group 3 has a historical default rate of 17.2%, which is nearly 10.8 percentage points lower than the overall CMBS historical default rate of 28.0%.

The pool exhibits a Herfindahl score of 26.9, which is favorable for a commercial real estate (CRE) collateralized loan obligation and notably higher than previous transactions rated by DBRS Morningstar, including MF1 2020-FL4 with a Herfindahl score of 13.9, and MF1 2021-FL3 with a Herfindahl score of 23.1.

The loan collateral was generally in very good physical condition as evidenced by five loans, representing 19.2% of the initial pool balance, secured by properties that DBRS Morningstar deemed to be Above Average in quality. An additional three loans, representing 10.7% of the initial pool balance, are secured by properties with Average + quality. Furthermore, only two loans, representing 8.0% of the initial pool balance, are backed by a property that DBRS Morningstar considered to be Average – quality.

Twenty-three loans, comprising 60.3% of the initial trust balance, represent acquisition financing wherein sponsors contributed significant cash equity as a source of funding in conjunction with the mortgage loan, resulting in a moderately high sponsor cost basis in the underlying collateral.

DBRS Morningstar has analyzed the loans to a stabilized cash flow that is, in some instances, above the in-place cash flow. It is possible that the sponsors will not successfully execute their business plans and that the higher stabilized cash flow will not materialize during the loan term, particularly with the ongoing coronavirus pandemic and its impact on the overall economy. A sponsor’s failure to execute the business plan could result in a term default or the inability to refinance the fully funded loan balance. DBRS Morningstar made relatively conservative stabilization assumptions and, in each instance, considered the business plan to be rational and the future funding amounts to be sufficient to execute such plans. In addition, DBRS Morningstar analyzes loss severity given default (LGD) based on the as-is loan-to-value ratio (LTV), assuming the loan is fully funded.

The ongoing coronavirus pandemic continues to pose challenges and risks to the CRE sector and, while DBRS Morningstar expects multifamily properties to fare better than most other property types, the long-term effects on the general economy and consumer sentiment are still unclear. Furthermore, the pandemic has nearly halted leasing activity for assisted-living properties in the short term, which will continue to hamper this sector. Thirty-four loans, representing 96.8% of the initial pool balance (including the delayed-close loans), were originated after the beginning of the pandemic in March 2020. Loans originated after the pandemic include timely property performance reports and recently completed third-party reports, including appraisals. Seventeen loans, representing 46.5% of the initial pool balance, are secured by newly built or recently renovated properties with relatively simple business plans, which primarily involve the completion of an initial lease-up phase. The sponsors behind these assets are using the loans as traditional bridge financing, enabling them to secure more permanent financing once the properties reach stabilized operations. Given the uncertainty and elevated execution risk stemming from the coronavirus pandemic, 22 loans, representing 67.8% of the initial pool balance, are structured with upfront interest reserves, some of which are expected to cover one year or more of interest shortfalls. The three assisted-living properties, representing 8.5% of the initial pool balance, were modeled with increased probability of default (PD) and LGD.

The loan agreements for LA Multifamily Portfolio II (Prospectus ID#5), SF Multifamily Portfolio II (Prospectus ID#20), and LA Multifamily Portfolio III (Prospectus ID#35) allow the related borrower to acquire additional properties as collateral for the mortgage loan subject to maximum whole loan proceeds of $100.0 million each. This exposes the pool to an increase in borrower concentration, and there is no nonconsolidation opinion required for the loans. However, the sponsor is a well-capitalized real estate investment company with significant experience managing multifamily properties and operating in West Coast markets, particularly San Francisco. Furthermore, the sponsor has successfully executed a similar business plan on other portfolios. Additionally, the portfolio properties are in very desirable markets in San Francisco and Los Angeles, with many in areas with a DBRS Morningstar Market Rank of 7 or 8, which is indicative of a liquid and urban market. DBRS Morningstar modeled the maximum whole-loan amounts of $100.0 million by adding additional properties to the portfolios based on the eligibility criteria provided by the Issuer. For modeling purposes, DBRS Morningstar increased the maximum Stabilized LTVs by 250 basis points to allow some conservatism on the future appraisals, which DBRS Morningstar will not be able to review.

Four loans, representing 12.8% of the initial cut-off date pool balance, have a sponsor with negative credit history and/or limited financial wherewithal, including Dunbar (Prospectus ID#2), Glendale Portfolio (Prospectus ID#11), 56 West 125th Street (Prospectus ID#19), and Memory Center of Atlanta (Prospectus ID#30). DBRS Morningstar deemed these loans to have Weak sponsor strength, effectively increasing the PD for each loan.

All loans have floating interest rates and are interest-only during the initial loan term, which ranges from 24 months to 36 months, creating interest rate risk. The borrowers of all 35 loans have purchased Libor rate caps, ranging between 0.75% and 3.00%, to protect against rising interest rates over the term of the loan. All loans are short term and, even with extension options, have a fully extended loan term of five years maximum. Additionally, 34 loans, representing 98.9% of the initial pool balance, have extension options and, in order to qualify for these options, the loans must meet minimum DSCR and LTV requirements. Nineteen loans, representing 51.6% of the initial pool balance, amortize on 30-year schedules during all or a portion of their extension options.

The transaction will likely be subject to a benchmark rate replacement, which will depend on the availability of various alternative benchmarks. The current selected benchmark is the Secured Overnight Financing Rate (SOFR). Term SOFR, which is expected to be a similar forward-looking term rate comparable with Libor, is the first alternative benchmark replacement rate but is currently being developed. There is no assurance that Term SOFR development will be completed or that it will be widely endorsed and adopted. This could lead to volatility in the interest rate on the mortgage assets and floating-rate notes. The transaction could be exposed to a timing mismatch between the notes and the underlying mortgage assets as a result of the mortgage benchmark rates adjusting on different dates from the benchmark on the notes, or a mismatch between the benchmark and/or the benchmark replacement adjustment on the notes and the benchmark and/or the benchmark replacement adjustment (if any) applicable to the mortgage loans. In order to compensate for differences between the successor benchmark rate and the then-current benchmark rate, a benchmark replacement adjustment has been contemplated in the indenture as a way to compensate for the rate change. Currently Wells Fargo, National Association in its capacity as Designated Transaction Representative will generally be responsible for handling any benchmark rate change, and will be held to a gross negligence standard only with regard to any liability for its actions.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrs.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#1 - 1724 Highland (7.5% of the pool)
-- Prospectus ID#2 - Dunbar (5.3% of the pool)
-- Prospectus ID#3 - The Sutton (5.2% of the pool)
-- Prospectus ID#4 - Hardware Village (5.1% of the pool)
-- Prospectus ID#5 - LA Multifamily Portfolio II (4.2% of the pool)
-- Prospectus ID#6 - Harbor Pointe (4.2% of the pool)
-- Prospectus ID#7 - CA Ventures (4.1% of the pool)
-- Prospectus ID#8 - Quin at Sleepy Hollow (4% of the pool)
-- Prospectus ID#9 - Pinnacle (3.8% of the pool)
-- Prospectus ID#10 - Boulder Crossroads (3.8% of the pool)
-- Prospectus ID#11 - Glendale Portfolio (3.7% of the pool)
-- Prospectus ID#12 - Lofts at Wildlight (3.6% of the pool)
-- Prospectus ID#13 - Crosswinds (3.5% of the pool)
-- Prospectus ID#16 - Sage Mountain (3.3% of the pool)
-- Prospectus ID#17 - AVE Portfolio (3.2% of the pool)
-- Prospectus ID#21 - Vitagraph (2.2% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrs.com. The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

Notes:
All figures are in U.S. dollars unless otherwise noted.

With regard to due diligence services, DBRS Morningstar 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 DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is the North American CMBS Multi-Borrower Rating Methodology (August 7, 2020), which can be found on www.dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on www.dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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