DBRS Morningstar Confirms the Ratings of Arbor Realty Commercial Real Estate Notes 2019-FL2, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on all classes of secured floating rate notes issued by Arbor Realty Commercial Real Estate Notes 2019-FL2, Ltd. as follows:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which has remained in line with DBRS Morningstar’s expectations. In conjunction with this press release, DBRS Morningstar has published a Surveillance Performance Update rating report with in-depth analysis and credit metrics for the transaction and business plan updates on select loans. For access to this report, please click on the link under Related Documents below or contact us at info@dbrsmorningstar.com.

The transaction is a managed collateralized loan obligation pool with a maximum funded balance of $635.0 million. At issuance, the pool initially consisted of 27 loans totaling $510.9 million, which subsequently ramped up to the maximum balance. The transaction has a 36-month reinvestment period that will expire with the November 2022 Payment Date. All loans contributed during the reinvestment period are subject to Eligibility Criteria that include a rating agency condition by DBRS Morningstar. The pool has exhibited a high rate of loan turnover during the reinvestment period, with 19 loans, totaling $214.0 million (33.7% of the maximum trust balance), being contributed to the trust since December 2020. As of the October 2021 remittance report, the trust comprised 38 loans totaling $580.6 million with $54.4 million of available cash to fund additional collateral acquisitions.

The trust benefits from the high concentration of loans secured by multifamily properties, which have generally been less affected by the coronavirus pandemic. As of October 2021, 33 loans, totaling 92.0% of the funded pool balance, are secured by multifamily properties. The pool also benefits from properties located in urban areas with 10 loans, representing 38.3% of the current pool balance, with DBRS Market Ranks of 5 or greater. The pool has a weighted average (WA) stabilized loan-to-value (LTV) ratio of 70.0%, indicating favorable credit metrics for take-out financing and value creation; however, the pool also has an elevated WA As-Is LTV ratio of 83.9%, indicating limited sponsor equity should the individual borrower business plans fail. In addition, the WA As-Is debt service coverage ratio (DSCR) based on the DBRS Morningstar net cash flow (NCF) totals 0.90 times (x). The WA as-stabilized DSCR based on the DBRS Morningstar NCF totals 1.35x, which adequately covers debt service payments. The achievement of the as-stabilized DSCR is ultimately based on the borrowers’ execution of their business plans.

DBRS Morningstar is monitoring two related loans, The Park at Carlyle (Prospectus ID#3; 5.4% of the trust balance) and The Park at Callington (Prospectus ID#6; 4.6% of the trust balance), as the respective business plans appear to be delayed. Both loans are secured by large, garden-style multifamily properties in Birmingham, Alabama, and share sponsorship. In addition, both loans exhibited debt service payment delays after March 2020; however, the borrowers have since brought both loans current. The Park at Carlyle loan is secured by a 629-unit multifamily property purchased in April 2019. The business plan is to complete an extensive $9.0 million renovation that includes new roofs, windows, painting and siding, deck staircases, and interior unit upgrades ($4,965 per unit). According to a Q2 2021 portfolio update, approximately $6.4 million (70%) of the renovation reserve has been disbursed since origination and the borrower has only completed 124 unit renovations (18% of all units). The loan has a final maturity date in April 2022 and it is unlikely the borrower will complete all planned renovations within the original timeframe. As a mitigant, the property was 87.0% occupied with an average rental rate of $954 per unit as of June 2021, above DBRS Morningstar’s average post-renovated projected rental rate of $829 per unit at issuance. It should be noted the Central Birmingham submarket’s average vacancy rate significantly increased during the coronavirus pandemic. According to Q2 2021 Reis data, the average vacancy rate was 9.3%, compared with the YE2019 (pre-pandemic) average vacancy rate of 5.6%. Reis projects the average vacancy rate to decrease to 8.2% by YE2022 and does not forecast the vacancy rate to return to pre-pandemic levels in the near term.

The Park at Callington loan is secured by a 604-unit multifamily property also purchased in April 2019. The business plan is to complete an extensive $8.6 million renovation identical to The Park at Carlyle with $4,888 per unit of interior upgrades. According to a Q2 2021 portfolio update, approximately $6.5 million (76%) of the renovation reserve has been disbursed since origination and the borrower has completed 107 unit renovations (17% of all units). The loan has a final maturity date in April 2022 and, as such, the borrower is also unlikely to complete all planned renovations within the original timeframe. The property was 87.0% occupied with an average rental rate of $890 per unit as of June 2021, above DBRS Morningstar’s average post-renovated projected rental rate of $767 per unit at issuance. The property is also located in the Central Birmingham submarket. DBRS Morningstar increased the probability of default for both loans as the capital expenditure plans are unlikely to be completed by loan maturity in addition to the weakened demand in the submarket, which may present refinance risk.

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.

The DBRS 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.

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

The principal methodology is the 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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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