DBRS Morningstar Finalizes Provisional Ratings on MF1 2020-FL4, Ltd.

DBRS, Inc. (DBRS Morningstar) finalized provisional ratings on the following classes of notes issued by MF1 2020-FL4, Ltd. (the Issuer):

-- Class A Notes at AAA (sf)
-- Class A-S Notes at AAA (sf)
-- Class B Notes at AA (low) (sf)
-- Class C Notes at A (low) (sf)
-- Class D Notes at BBB (sf)
-- Class E Notes at BBB (low) (sf)
-- Class F Notes at BB (low) (sf)
-- Class G Notes at B (low) (sf)

All trends are Stable. Classes F and G will be privately placed.

With regard to the Coronavirus Disease (COVID-19) pandemic, the magnitude and extent of performance stress posed to global structured finance transactions remain 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, feeling more immediate effects. Accordingly, DBRS Morningstar may apply additional short-term stresses to its rating analysis. For example, DBRS Morningstar may front-load default expectations and/or assess the liquidity position of a structured finance transaction with more stressful operational risk and/or cash flow timing considerations.

MF1 2020-FL4, Ltd. provided coronavirus and business plan updates for all loans in the pool, confirming that all debt service payments have been received in full for closed loans. Furthermore, no loans are in forbearance or other debt service relief and no loan modifications were requested, except for The Edison (#7; 4.3% of the initial pool balance) and 144 West Street (#21; 1.2% of the initial pool balance). However, these modifications were in response to the loans’ approaching maturity.

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

The initial collateral consists of 22 floating-rate mortgage loans secured by 29 transitional multifamily properties totaling $783.3 million (67.8% of the total fully funded balance), excluding $203.7 million of remaining future funding commitments and $168.0 million of pari passu debt. Of the 22 loans, there are three unclosed, delayed-close loans as of October 27, 2020, representing 10.7% of the initial pool balance: Grande at Metro Park (#6), Avilla Paseo (#15), and LA Multifamily Portfolio II (#22). Additionally, the SF Multifamily Portfolio II (#13) and LA Multifamily Portfolio II (#22) loans have delayed-close mortgage assets, which are identified in the data tape and included in the DBRS Morningstar analysis. The Issuer has 45 days after closing to acquire the delayed-close assets.

Additionally, the transaction is structured with a 90-day ramp-up acquisition period, whereby the Issuer plans to acquire up to $166.7 million of additional collateral, and an 18-month reinvestment period. After the 45-day delayed-close asset acquisition period and 90-day ramp-up acquisition period, the Issuer projects a target pool balance of $950.0 million. DBRS Morningstar assessed the ramp loans using a conservative pool construct and, as a result, the ramp loans have expected losses above the pool weighted-average loan expected losses. Reinvestment of principal proceeds during the reinvestment period is subject to Eligibility Criteria, which, among other criteria, includes a rating agency no-downgrade confirmation by DBRS Morningstar for all new mortgage assets and funded companion participations exceeding $1.0 million. On the first payment date after the ramp-up completion date, any amounts remaining in the unused proceeds account up to $5.0 million will be deposited into the reinvestment account. Any funds exceeding $5.0 million will be transferred to the payment account and applied as principal proceeds in accordance with the priority of payments.

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. Of these loans, 11 have remaining future funding participations totaling $41.8 million, which the Issuer may acquire during the reinvestment period. Please see the chart below for participations that the Issuer will be allowed to acquire.

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, 19 loans, representing 90.9% of the cut-off date pool balance, had a DBRS Morningstar As-Is Debt Service Coverage Ratio (DSCR) of 1.00x or below, a threshold indicative of default risk. Additionally, the DBRS Morningstar Stabilized DSCR for six loans, representing 33.0% of the initial pool balance, is 1.00x or below, which 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.

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 14.9% of the initial pool balance) will be purchased by a wholly owned subsidiary of MF1 REIT II LLC.

All loans in the pool are secured by multifamily properties located across 10 states including California, New York, New Jersey, and Arizona. Multifamily properties benefit from staggered lease rollover and generally low expense ratios compared with other property types. While revenue is quick to decline in a downturn because of the short-term nature of the leases, it is also quick to respond when the market improves. Additionally, most loans are secured by traditional multifamily properties, such as garden-style communities or mid-rise/high-rise buildings, with only one loan secured by an independent living/assisted-living/memory care facility (#3, Crestavilla).

The loan collateral was generally in very good physical condition as evidenced by the six loans, representing 45.0% of the initial pool balance, secured by properties that DBRS Morningstar deemed to be Above Average in quality. An additional four loans, representing 16.8% of the initial pool balance, are secured by properties with Average + quality. Furthermore, only one loan is backed by a property that DBRS Morningstar considered to be Average - quality, representing just 2.0% of the initial pool balance.

DBRS Morningstar analyzed 18 of the 22 loans in the transaction, representing 94.5% of the pool by allocated cut-off date loan balance. This sample size is substantially larger than other commercial real estate collateralized loan obligation (CRE CLO) deals recently rated by DBRS Morningstar.

The pool is moderately diverse by CRE CLO standards with a Herfindahl score of 13.89, but it cannot drop below 14.00 after the ramp-up acquisition period is complete, as detailed in the Eligibility Criteria.

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 compared with Libor, is the first alternative benchmark replacement rate but is currently being developed. There is no assurance 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 than 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 compensate for the rate change. Currently, Wells Fargo, National Association in its capacity as the Designated Transaction Representative will generally be responsible for handling any benchmark rate change, and it will only be held to a gross negligence standard with regard any liability for its actions.

The ongoing coronavirus pandemic continues to pose challenges and risks to the CRE sector and, while DBRS Morningstar expects multifamily to fare better than most other property types, the long-term effects on the general economy and consumer sentiment are still unclear.

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.

The loan agreements for SF Multifamily Portfolio II (#13) and LA Multifamily Portfolio II (#22) allow the related borrower to acquire additional properties as collateral for the mortgage loan.

Three loans, representing 17.1% of the initial cut-off date pool balance, have a sponsor with negative credit history and/or limited financial wherewithal, including The Core at Sycamore Highlands (#4), The Edison (#7), and Mark at Midlothian (#11).

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.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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.dbrsmorningstar.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 – Vitagraph (12.6% of the pool)
-- Prospectus ID#2 – AVE Portfolio (11.5% of the pool)
-- Prospectus ID#3 – Crestavilla (10.2% of the pool)
-- Prospectus ID#4 – The Core at Sycamore Highlands (8.9% of the pool)
-- Prospectus ID#5 – One Brown (7.9% of the pool)
-- Prospectus ID#6 – Grande at Metro Park (7.1% of the pool)
-- Prospectus ID#7 – The Edison (4.3% of the pool)
-- Prospectus ID#8 – Dunlap Falls (4.1% of the pool)
-- Prospectus ID#9 – The Millennia (4.1% of the pool)
-- Prospectus ID#10 – Highland Way (4.0% of the pool)
-- Prospectus ID#11 – Mark at Midlothian (3.8% of the pool)
-- Prospectus ID#12 – Avilla Heritage (3.5% of the pool)
-- Prospectus ID#13 – SF Multifamily Portfolio II (2.8% of the pool)
-- Prospectus ID#14 – 19 Apartments (2.7% of the pool)
-- Prospectus ID#15 – Avilla Paseo (2.4% of the pool)
-- Prospectus ID#16 – Argyle & Harvard Apartments (2.0% of the pool)
-- Prospectus ID#19 – SOBE Chicago (1.3% of the pool)
-- Prospectus ID#21 – 144 West Street (1.2% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.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 North American CMBS Multi-Borrower Rating Methodology (August 7, 2020), which can be found on 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 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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

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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