DBRS Morningstar Confirms All Classes of MF1 2020-FL3, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the following classes of notes issued by MF1 2020-FL3, 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 trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations. The transaction consists of 25 loans secured by 50 multifamily properties as one loan has been repaid since issuance. All loans in the pool are secured by transitional assets in the process of stabilization. At issuance, 18 of the remaining 25 loans had outstanding future funding obligations, with an aggregate commitment of $115.5 million to fund capital expenditures (capex) and operating shortfalls to aid in the individual properties’ stabilization plans. As of the Q1 2021 collateral manager report, $57.9 million of that future funding has been released to individual borrowers, including $22.3 million allocated to The Darlington loan (Prospectus ID#9; 5.7% of the pool balance). Of the $57.9 million released to borrowers, $41.0 million has been purchased by the trust with the remaining $16.9 million held outside of the trust.

The transaction is structured with a 24-month Permitted Funded Companion Participation Acquisition Period whereby the Issuer can contribute funded participations of loans into the Trust. The period ends with the June 2022 payment date. As of the May 2021 remittance, there were no available funds in the Permitted Funded Companion Participation Acquisition Account as the cumulative loan balance equaled the cumulative bond balance of $820.0 million.

The Darlington loan is secured by a 623-unit multifamily property located along Peachtree Road between the Midtown and Buckhead submarkets of Atlanta. The high-rise building was originally built in 1948 and the sponsor’s business plan is extensive, with total upgrades planned at $36.5 million including new utilities, mechanicals, exterior facade, property amenities, and unit interiors. At issuance, the loan had outstanding future funding of $38.9 million including $7.5 million for operating and debt service shortfalls. Initial construction was stalled as the borrower could not obtain the necessary permits as a result of the Coronavirus Disease (COVID-19) pandemic, which extended the projected completion date to September 2021 from April 2021. As a result of the delay, the guarantor deposited an additional $750,000 into the operating reserve account.

As of March 2021, construction was approximately 72% complete with all utility upgrades finished and the temporary certificate of occupancy pending for the first floor (the site of the leasing office, property amenities, and some residential units) upon building and elevator inspections. The collateral manager reported that 85 units had been preleased; however, the average rental rate was not provided. At issuance, DBRS Morningstar assumed a projected average stabilized rental rate of $1,050/unit, slightly below the current Class B/C average rental rate of $1,104/unit in the Buckhead submarket as of Q1 2021, according to Reis. There may be additional cash flow upside as the average rental rate for properties built prior to 1960 was reported at $1,377/unit and the total renovation budget for the property is in excess of $50,000/unit, suggesting the borrower may be able to achieve Class A rents. Of the $22.3 million of loan future funding released to the borrower through Q1 2021, $17.4 million has been purchased by the trust with the remaining $4.9 million held outside the trust. As of Q1 2021, $16.6 million of future funding remained outstanding. The loan has a maximum funded balance of $68.5 million, which, if fully contributed to the trust, would represent 8.4% of the pool balance and would be the third-largest loan in the transaction.

There are no loans in special servicing and all loans are current. There are 10 loans on the servicer’s watchlist, representing 34.4% of the pool balance, which have been added for various reasons including upcoming maturity, deferred maintenance, low occupancy rates, and/or debt service coverage ratios. As initial performance declines were expected for many loans given the individual borrower’s business plans to implement capital expenditure programs and the existence of upfront operating shortfall reserves, a loan’s placement on the servicer’s watchlist is not necessarily indicative of increased risks from issuance. The Wave Lakeview loan (Prospectus ID#17; 2.6% of the pool balance) was added for its upcoming June 2021 maturity date; however, the borrower has three one-year extension options remaining. As the borrower has yet to achieve its business plan, DBRS Morningstar expects it to exercise the first extension option.

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.

DBRS Morningstar materially deviated from its quantitative model when determining the rating assigned to Class G by assigning a rating lower than the implied rating suggested by the quantitative model. The material deviation is warranted given the sustainability of loan performance trends is not demonstrated.

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

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

The principal methodology is North American CMBS Surveillance Methodology (March 26, 2021), 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 DBRS Morningstar Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

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.

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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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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