DBRS Morningstar Finalizes Provisional Ratings on Arbor Realty Commercial Real Estate Notes 2021-FL4, Ltd.

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes to be issued by Arbor Realty Commercial Real Estate Notes 2021-FL4, Ltd. (ARCREN 2021-FL4 or 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 initial collateral consists of 50 floating-rate mortgage loans and senior participations secured by 87 mostly transitional properties, with an initial cut-off date balance totaling approximately $1.71 billion. Each collateral interest is secured by a mortgage on a multifamily property or a portfolio of multifamily properties. The transaction is a managed vehicle, which includes an 180-day ramp-up acquisition period and a 30-month reinvestment period. The ramp-up acquisition period will be used to increase the trust balance by $314.98 million to a total target collateral principal balance of $2.1 billion. DBRS Morningstar assessed the $314.98 million ramp component using a conservative pool construct, and, as a result, the ramp loans have expected losses above the pool weighted-average (WA) loan expected loss. During the reinvestment period, so long as the note protection tests are satisfied and no event of default has occurred and is continuing, the collateral manager may direct the reinvestment of principal proceeds to acquire reinvestment collateral interest, including funded companion participations, meeting the eligibility criteria. The eligibility criteria, among other things, has minimum debt service coverage ratio (DSCR), loan-to-value ratio (LTV), and loan size limitations. In addition, mortgages exclusively secured by multifamily properties are allowed as ramp-up collateral interests. Lastly, the eligibility criteria stipulates a rating agency confirmation on ramp loans, reinvestment loans, and pari passu participation acquisitions above $500,000 if a portion of the underlying loan is already included in the pool, thereby allowing DBRS Morningstar the ability to review the new collateral interest and any potential impacts to the overall ratings.

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 cut-off balances were measured against the DBRS Morningstar As-Is Net Cash Flow, 16 loans, representing 67.6% of the initial pool balance, had a DBRS Morningstar As-Is DSCR of 1.00 times (x) or below, a threshold indicative of default 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 other loan structural features in place are insufficient to support such treatment. Furthermore, even with the structure provided, DBRS Morningstar generally does not assume the assets will stabilize to above-market levels. The transaction will have a sequential-pay structure.

The sponsor for the transaction, Arbor Realty SR, Inc., is a majority-owned subsidiary of Arbor Realty Trust, Inc. (Arbor; NYSE: ABR) and an experienced commercial real estate (CRE) collateralized loan obligation (CLO) issuer and collateral manager. The ARCREN 2021-FL4 transaction will be Arbor’s 17th post-crisis CRE CLO securitization, and the firm has seven outstanding transactions representing approximately $5 billion in investment-grade proceeds. In total, Arbor has been an issuer and manager of 16 CRE CLO securitizations totaling roughly $8.5 billion. Additionally, Arbor will purchase and retain 100.0% of the Class F Notes, the Class G Notes, and the Preferred Shares, which total $385,875,000, or 18.4% of the transaction total.

The transaction's initial collateral composition consists entirely of multifamily properties, which 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. The subject pool includes garden-style communities and midrise/high-rise buildings. After closing, as part of the ramp-up and reinvestment period, the collateral manager may only acquire loans secured by multifamily properties, excluding student housing properties. The prior ARCREN 2021-FL3 transaction allowed the collateral manager to also acquire student housing properties. Compared with the ARCREN 2021-FL3 transaction, the subject pool has more favorable property-type requirements during the reinvestment period.

Forty-seven loans, representing 90.9% of the pool balance, represent acquisition financing. Acquisition financing generally requires the respective sponsor(s) to contribute material cash equity as a source of funding in conjunction with the mortgage loan, which results in a higher sponsor cost basis in the underlying collateral and aligns the financial interests between the sponsor and lender.

The WA DBRS Morningstar Stabilized LTV is lower than recently rated Arbor transactions. Twenty-six loans, representing 45.4% of the total trust balance, have a DBRS Morningstar Stabilized LTV less than 70.0%, which decreases refinance risk at maturity. Three of these loans are in the top 10 largest loans in the pool, including The Avenue at East Falls (Prospectus ID#2; 4.95% of the cutoff date pool balance), Startford Chase and Blendon Square (Prospectus ID#8; 3.4% of the pool balance), and Commons at White Marsh (Prospectus ID#10; 2.9% of the pool balance). Additionally, only one loan in the pool, Manhattanville Portfolio (#6; 3.7% of the pool balance), has a DBRS Morningstar Stabilized LTV greater than 80.0%.

The initial collateral pool is diversified across 16 states and has a loan Herfindahl score of approximately 34.2. The loan Herfindahl score is higher to recent Arbor CRE CLO transactions. Eleven of the loans, representing 26.3% of the initial pool balance, are portfolio loans that benefit from multiple property pooling. Mortgages backed by cross-collateralized cash flow streams from multiple properties typically exhibit lower cash flow volatility.

While the eligibility criteria for this transaction is similar to those for ARCREN 2021-FL3, they are lower than the first two ARCREN 2021 transactions. This transaction, like ARCREN 2021-FL3, allows for higher LTV and lower DSCRs when compared with the first prior ARCREN 2021 transactions. The collateral manager has the option to acquire multifamily loans with an As-Stabilized LTV of 80.0% and a minimum DSCR of 1.15x. This compares with an LTV of 75.0% and a DSCR of 1.25x in ARCREN 2021-FL1 and ACREN 2021-FL2. DBRS Morningstar modeled the hypothetical ramp-up loans with the maximum LTV of 80.0% and DSCR minimum of 1.15x, which results in higher probability of default (POD) and loss given default (LGD) adjustments compared with the prior 2021 ARCREN transactions. Before the collateral manager can acquire new loans, the loans will be subject to a No Downgrade Confirmation by DBRS Morningstar.

DBRS Morningstar's business plan score considers the anticipated lift at the property from current performance, planned property improvements, sponsor experience, projected time horizon, and overall complexity of the business plan. Compared with similar transactions, and previous transactions by the Issuer, the subject has a high average business plan score, indicative of higher risk. The DBRS Morningstar business plan score has a range of 1 to 5. The business plan score's in the subject pool ranged between 1.68 and 3.12, with an average sampled score of 2.40. Higher DBRS Morningstar business plan scores indicate more risk in the sponsor’s business plan. The business plan score is an input into the DBRS Morningstar model and drives the blended POD used for the loan's expected loss. A riskier business plan drives a higher POD.

The transaction is managed and includes both a ramp-up and reinvestment period, which could result in negative credit migration and/or an increased concentration profile over the life of the transaction. The deal's initial collateral composition is 100.0% multifamily. During the ramp-up period, only loan secured by multifamily properties can be added. Unlike prior ARCREN transactions, this transaction does not permit the addition of student housing loans to the pool. Future loans cannot be secured by office, hospitality, industrial, retail, or healthcare-type facilities, such as assisted living and memory care. The risk of negative credit migration is also partially offset by eligibility criteria that outline DSCR, LTV, property type, and loan size limitations for ramp and reinvestment assets. Before ramp loans, reinvestment loans and companion participations above $500,000 can be acquired by the Collateral manager, a No Downgrade Confirmation is required from DBRS Morningstar. DBRS Morningstar accounted for the uncertainty introduced by the 180-day ramp-up period by running a ramp scenario that simulates the potential negative credit migration in the transaction based on the eligibility criteria.

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 Disease (COVID-19) 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 loan structure to be sufficient to execute such plans. In addition, DBRS Morningstar analyzes LGD based on its As-Is LTV, assuming the loan is fully funded.

All loans in the pool have floating interest rates and are IO during the initial loan term, as well as during all extension terms, creating interest rate risk and lack of principal amortization. DBRS Morningstar stresses interest rates based on the loan terms and applicable floors or caps. The DBRS Morningstar adjusted DSCR is a model input and drives loan level PODs and LGDs. All loans have extension options, and to qualify for these options, the loans must meet minimum DSCR and LTV requirements. All loans are short term and, even with extension options, have a fully extended loan term of five years maximum.

ESG CONSIDERATIONS

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.

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, 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.

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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