DBRS Morningstar Finalizes Provisional Ratings on MF1 2021-FL6

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes issued by MF1 2021-FL6 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.

Coronavirus Overview
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, 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.

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 37 floating-rate mortgage loans secured by 51 transitional multifamily and one senior housing property totaling $993.2 million (57.9% of the total fully funded balance), excluding $101.0 million of remaining future funding commitments and $620.5 million of pari passu debt. Two loans (LA Multifamily Portfolio III and SF Multifamily Portfolio III), representing 1.3% of the trust balance, are associated with the same sponsorship group and 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. Of the 37 loans, there are five unclosed, delayed-close loans as of June 24, 2021: Park Portfolio (#3), Venn on Market (#4), and Crystal Tower Apartments (#10), representing a total initial pool balance of 14.7%. The Issuer has 45 days post-closing to acquire the delayed-close assets.

In addition, the transaction is structured with a 90-day ramp-up acquisition period whereby the Issuer plans to acquire up to $306.8 million of additional collateral, as well as a 24-month reinvestment period. After the 90-day ramp-up acquisition period and the 24-month reinvestment period, the Issuer projects a target pool balance of $1.3 billion. DBRS Morningstar 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. Reinvestment of principal proceeds during the reinvestment period is subject to Eligibility Criteria which, among other criteria, includes a no-downgrade rating agency confirmation (RAC) by DBRS Morningstar for all new mortgage assets and funded companion participations exceeding $1.0 million. If a delayed-close loan is not expected to close or fund prior to the purchase termination date, the expected purchase price will be credited to the unused proceeds amount to be used by the Issuer to acquire ramp-up mortgage assets during the ramp-up acquisition period. Any funds in excess of $5.0 million after the ramp-up completion date will be transferred to the payment account and applied as principal proceeds in accordance with the priority of payments. The Eligibility Criteria indicates that all loans acquired within the ramp-up period must be secured by either multifamily, student housing, or senior housing properties. Furthermore, certain events within the transaction require the Issuer to obtain RAC. DBRS Morningstar will confirm that a 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 rating. The Issuer is not required to obtain RAC for acquisitions of companion participations less than $1.0 million.

The loans are mostly secured by cash flowing assets, many of which are in a period of transition with plans to stabilize and improve the asset value. In total, 22 loans, representing 53.1% of the pool, have remaining future funding participations totaling $101.0 million, which the Issuer may acquire in the future.

For the floating-rate loans, DBRS Morningstar used the one-month Libor index, which is based on the lower of a DBRS Morningstar stressed rate that corresponded to the remaining fully extended term of the loans or the strike price of the 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 DBRS Morningstar As-Is Net Cash Flow (NCF), 28 loans, comprising 74.9% of the pool, had a DBRS Morningstar As-Is Debt Service Coverage Ratio (DSCR) below 1.00x, a threshold indicative of elevated default risk. However, the DBRS Morningstar Stabilized DSCRs for only three loans, representing 5.0% of the initial pool balance, are below 1.00x. 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 other structural features in place are insufficient to support such treatment. Furthermore, even with the structure provided, DBRS Morningstar generally does not assume the assets to stabilize above market levels.

Seven loans, representing 23.0% 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. DBRS Morningstar Market Ranks of 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, Seattle, New York, and San Francisco.

Fifteen loans, representing 47.3% of the pool balance, have collateral in Metropolitan Statistical Area (MSA) Group 3, which is the best-performing group in terms of historical commercial mortgage-backed securities (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 27.4, which is favorable for a commercial real estate collateralized loan obligation and notably higher than previous transactions rated by DBRS Morningstar including MF1 2021-FL5, with a Herfindahl score of 26.9; MF1 2020-FL4, with a Herfindahl score of 13.9; and MF1 2020-FL3, with a Herfindahl score of 23.1. Per the transaction’s Eligibility Criteria, the Herfindahl score is permitted to be as low as 14.0 at the conclusion of the ramp-up acquisition period.

Based on the initial pool balances, the overall WA DBRS Morningstar As-Is DSCR of 0.69x and WA DBRS Morningstar As-Is Loan-to-Value Ratio (LTV) of 77.1% generally reflect high-leverage financing. Most of the assets are generally well positioned to stabilize, and any realized cash flow growth would help to offset a rise in interest rates and improve the overall debt yield of the loans. DBRS Morningstar associates its loss severity given default based on the assets’ as-is LTV, which does not assume that the stabilization plan and cash flow growth will ever materialize. The DBRS Morningstar As-Is DSCR at issuance does not consider the sponsor’s business plan, as the DBRS Morningstar As-Is NCF was generally based on the most recent annualized period. The sponsor’s business plan could have an immediate impact on the underlying asset performance that the DBRS Morningstar As-Is NCF is not accounting for. When measured against the WA DBRS Morningstar Stabilized NCF, the WA DBRS Morningstar DSCR is estimated to improve to 1.23x, suggesting that the properties are likely to have improved NCFs once the sponsors business plans have been implemented.

All loans have floating interest rates and are interest only during the initial term, which ranges from 24 months to 36 months, creating interest rate risk. The borrowers of all 37 loans have purchased Libor rate caps, ranging between 0.25% 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, all loans have extension options and, in order to qualify for these options, the loans must meet minimum DSCR and LTV requirements. Sixteen loans, representing 44.5% of the initial trust balance, amortize on 30-year schedules during all or a portion of their extension options.

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.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 – Vespaio (7.9% of the pool)
-- Prospectus ID#2 – Gallerie Apartments (6.0% of the pool)
-- Prospectus ID#3 – Park Portfolio (5.9% of the pool)
-- Prospectus ID#4 – Venn on Market (5.5% of the pool
-- Prospectus ID#5 – Hardware Village (4.1% of the pool)
-- Prospectus ID#6 – Fairland Crossing (3.9% of the pool)
-- Prospectus ID#7 – The Residences at Rodney Square (3.6% of the pool)
-- Prospectus ID#8 –The Clinton Multifamily Portfolio (3.4% of the pool)
-- Prospectus ID#9 – 380 Flushing (3.4% of the pool)
-- Prospectus ID#10 – Crystal Tower Apartments (3.3% of the pool)
-- Prospectus ID#11 – E 9th at Pickwick Plaza (3.2% of the pool)
-- Prospectus ID#12 – Convivium (3.2% of the pool)
-- Prospectus ID#13 – The Reserve at Wescott Plantation (3.1% of the pool)
-- Prospectus ID#14 – Tamarac Village (3.0% of the pool)
-- Prospectus ID#17 – 148-37 88th Avenue (2.8% of the pool)
-- Prospectus ID#18 – CA Ventures (2.7% of the pool)
-- Prospectus ID#19 – Dunbar (2.4% of the pool)
-- Prospectus ID#22 – The Sutton (2.1% of the pool)
-- Prospectus ID#23 – Crestwood Apartments (2.0% of the pool)
-- Prospectus ID#24 – Glendale Portfolio (1.9% of the pool)
-- Prospectus ID#28 – Christilla Commons (1.5% of the pool)
-- Prospectus ID#34 – LA Multifamily Portfolio III (0.9% of the pool)
-- Prospectus ID#36 – The Windale (0.6% of the pool)
-- Prospectus ID#37 – SF Multifamily Portfolio III (0.4% 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 (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 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.

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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