DBRS Morningstar Finalizes Provisional Ratings on Arbor Multifamily Mortgage Securities Trust 2022-MF4

DBRS, Inc. (DBRS Morningstar) finalized provisional ratings on the following classes of Mortgage Pass-Through Certificates, Series 2022-MF4 issued by Arbor Multifamily Mortgage Securities Trust 2022-MF4 (AMMST 2022-MF4):

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AAA (sf)
-- Class X-A at AAA (sf)
-- Class C at AA (low) (sf)
-- Class D at A (low) (sf)
-- Class X-D at A (low) (sf)
-- Class E at BBB (high) (sf)

All trends are Stable.

DBRS Morningstar discontinued and withdrew its ratings on the Class A-4 and Class X-B certificates initially contemplated in the offering documents, as they were removed from the transaction.

The collateral consists of 30 fixed-rate loans secured by 40 multifamily properties, one of which was identified by DBRS Morningstar as student housing for having an elevated student tenant concentration. Twenty-four loans within the transaction have 10-year loan terms, two loans are structured with seven-year terms, and four loans are structured with five-year terms. The transaction is a sequential-pay pass-through structure. DBRS Morningstar analyzed the conduit pool to determine the provisional ratings, reflecting the long-term probability of default within the term and its liquidity at maturity. When DBRS Morningstar measured the cut-off loan balances against its net cash flow assumptions and their respective actual constants, eight loans, representing 49.2% of the trust balance, had a DBRS Morningstar Term Debt Service Coverage Ratio (DSCR) at or above 1.75 times (x), a threshold indicating a lower likelihood of midterm default. Twenty-two loans, representing 62.2% of the pool, were connected with the borrower’s refinancing of an existing mortgage loan. Seven loans, representing 36.3% of the pool balance, were connected with the borrower’s acquisition of the related mortgage property. Lastly, the Yonkers Portfolio loan (Prospectus ID#22; 1.5% of the pool) was used by the sponsor for both a refinance and an acquisition related to a two-property portfolio.

Classes A-1, A-2, A-3, A-5, A-SB, A-S, X-A, B, C, D, X-D, and E of the AMMST 2022-MF4 transaction have been conveyed into a trust by Arbor to issue corresponding classes of Mortgage Pass-Through Certificates. All DBRS Morningstar-rated classes will be subject to ongoing surveillance, confirmation, upgrade, or downgrade by DBRS Morningstar after the date of issuance. Arbor Private Label, LLC's origination and underwriting practices are similar to its affiliate, Arbor Commercial Funding I, LLC, which is a member of Fannie Mae's Delegated Underwriting and Servicing program. Furthermore, the transaction’s most subordinate certificates will be held by an affiliate of the Issuer and will be in the first-loss position. Although the loans in the pool are similar to agency loans, DBRS Morningstar did not give any additional credit that it typically incorporates in a pure agency transaction.

The pool’s weighted-average (WA) expected loss is 2.28%, which is in line with Freddie Mac pools recently rated by DBRS Morningstar. The deal has favorable credit metrics as evidenced by the WA DBRS Morningstar Issuance Loan-to-Value Ratio (LTV) and DBRS Morningstar Balloon LTV of 68.9% and 65.2%, respectively. The pool exhibits a relatively strong DBRS Morningstar WA DSCR of 1.62x, with 49.2% of the pool balance having DBRS Morningstar DSCRs in excess of 1.75x; however, DBRS Morningstar notes that the high DSCR is in part due to many loans being structured with interest-only (IO) terms. The pool has strong occupancy metrics with an in-place WA occupancy of 96.1% based on the most recent rent rolls provided to DBRS Morningstar. Furthermore, only one loan has an occupancy below 90.0%. About 34.0% of the loans are in DBRS Morningstar Metropolitan Statistical Area (MSA) Group 3, which is credit positive and results in a lower probability of default (POD) than other MSA groups. The MSAs in Group 3 cover cities including New York and Washington, D.C., and their greater metro areas.

The pool has significant concentration in Brooklyn, New York, with 16.9% of the pool balance. As a result, the pool’s Herfindahl score is 18.3, which is lower than recent Freddie Mac pools analyzed by DBRS Morningstar. Furthermore, Kings Portfolio 3, 4, and 5 (Prospectus ID#s 1, 5, and 10, respectively) comprise 20.7% of the pool balance and have the same sponsorship group. While issued as three separate loans to the same sponsor, the collateral for the Kings Portfolio loans is all within the same MSA. As a result, DBRS Morningstar elected to roll up the three loans into one portfolio to stress the concentration of the pool in determining the credit ratings. This placed substantial downward pressure on the Herfindahl score to 12.3 from 18.3 in the DBRS Morningstar analysis. The Herfindahl score of 12.3 is notably lower than that of past Freddie Mac transactions rated by DBRS Morningstar.

Three of the top five loans, including Chisholm at Tavolo Park (Prospectus ID#2), Industry Columbus (Prospectus ID#3), and Royalton at Kingwood (Prospectus ID#4), were issued to newly formed DST borrowers and a sponsor affiliate will retain only 10.0% of equity post-closing with the remaining 90.0% of equity being syndicated to passive investors. There is risk associated with this ownership structure if the property faces difficulties and requires additional capital as the passive investors are unknown and may not be sufficiently well capitalized to inject needed funds. These three loans represent a combined 26.2% of the pool balance. The sponsor behind the three loans is experienced with DST structures and was required to establish working capital reserves to cover shortfalls. In addition, the sponsorship group will act as the nonrecourse carveout guarantor. To mitigate the complex sponsor/borrower structure, DBRS Morningstar applied a sponsor strength of Weak, resulting in an increased POD for all three loans.

The pool is concentrated by property type as multifamily properties represent 100.0% of the pool balance, which include garden-style, mid-rise, and high-rise assets. Some properties are mixed-use and derive income from retail or commercial use. Additionally, one property, representing 3.3% of the pool balance, disclosed a student concentration of approximately 30%. Compared with other property types, multifamily assets generally benefit from staggered lease rollover and lower expense ratios. While revenue is quick to decline in a downturn because of the short-term nature of the leases, they are also quick to respond when the market improves. Twenty-two loans, representing 66.7% of the pool, exhibited a recent occupancy rate at or above 95.0%, and another seven loans, representing 30.5% of the pool, exhibited an occupancy rate between 90.0% and 94.9%. Only one loan, representing approximately 2.8% of the pool, exhibited an occupancy less than 90.0%.

Twelve loans, representing 39.0% of the pool balance, are secured by properties in DBRS Morningstar Market Ranks of 3 or 4, which, although generally suburban in nature, have historically had higher default and loss rates. Furthermore, four loans, representing 5.7% of the pool, are secured by properties in a DBRS Morningstar Market Rank of 2, which are more rural or tertiary. Properties in tertiary and rural markets typically have higher loss severities than those in urban markets. No properties are within a DBRS Morningstar Market Rank of 8 and the pool’s DBRS Morningstar WA Market Rank of 4.7 indicates a higher concentration of properties in less densely populated areas. DBRS Morningstar analyzed properties in less densely populated markets with higher PODs and loss severity given defaults than those in more urban markets. While the number of properties in rural or suburban DBRS Morningstar Market Ranks is elevated, 40.0% of the pool is secured by properties with a Market Rank of 6 or 7. These markets are generally more urban and can benefit from greater liquidity, even during times of economic stress.

Eleven loans, representing 59.3% of the pool and including nine of the top 15 loans, have full-term IO payments. An additional 18 loans, comprising 39.2% of the pool, have remaining partial IO periods ranging from 12 months to 60 months. Only one loan, comprising 1.5% of the pool balance, is scheduled to pay principal for the entire loan term. Loans that are full-term IO or partial IO do not benefits from amortization. Based on observed historical performance, partial IO loans received an increased POD adjustment in the model, with the most severe adjustment applied to loans with 12 to 84 months of IO. Fully amortizing and full-term IO loans receive a decreased POD adjustment.

Twenty-two loans, representing 62.2% of the pool, were for the purpose of refinancing existing debt. Acquisition loans are considered more favorable because the sponsor is usually required to contribute a significant amount of cash equity as part of the transaction. Acquisition financing is also generally based on actual transaction values rather than an appraiser’s estimate of market value. The pool has a WA Issuance LTV of 62.6% and a WA Balloon LTV of 59.2%, showing substantial equity in the trust’s assets.

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.

Classes X-A and X-D are IO certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

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 (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.

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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