DBRS Morningstar Upgrades Ratings on Six Classes of MF1 2020-FL3, Ltd.

DBRS Limited (DBRS Morningstar) upgraded the ratings on the following six classes of floating-rate notes issued by MF1 2020-FL3, Ltd.

-- Class B to AAA (sf) from AA (low) (sf)
-- Class C to AA (sf) from A (low) (sf)
-- Class D to A (high) (sf) from BBB (sf)
-- Class E to A (sf) from BBB (low) (sf)
-- Class F to BBB (sf) from BB (low) (sf)
-- Class G to BB (sf) from B (low) (sf)

DBRS Morningstar also confirmed the following ratings on two classes:

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)

All trends are Stable.

The rating upgrades reflect the increased credit support to the bonds as a result of successful loan repayment as there has been collateral reduction of 43.8% since issuance. In addition, the borrowers on the remaining loans are generally progressing in the respective business plans, ultimately leading to property stabilization and value growth, which in turn is expected to have a material positive impact on the bonds. In conjunction with this press release, DBRS Morningstar has published a Surveillance Performance Update report with in-depth analysis and credit metrics for the transaction and with 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.

At issuance, the collateral consisted of 26 floating-rate mortgages secured by 51 mostly transitional multifamily properties totaling approximately $803.0 billion, excluding approximately $115.5 million to fund capital expenditures and operating shortfalls to aid in the individual properties’ stabilization plans. The transaction is structured with a 24-month Permitted Funded Companion Participation Acquisition Period ending with the June 2022 Payment Date whereby the Issuer can contribute funded participations of loans into the Trust. As of the March 2022 remittance, there are no available funds in the Permitted Funded Companion Participation Acquisition Account.

As of the March 2022 remittance, a total of 13 loans secured by 36 properties remain in the trust with an aggregate principal balance of $460.8 million. Most borrowers are progressing toward completing the stated business plans. According to an update from the collateral manager, $58.7 million of loan future funding across 10 of the remaining loans has been advanced to individual borrowers since loan closing to aid in property stabilization. The majority of this funding, $39.7 million, has been advanced to the borrower on The Darlington loan, which has used the funds to complete a $34.0 million capital improvement project and to fund operating shortfalls. An additional $9.0 million of loan future funding allocated to six individual borrowers remains outstanding to fund capital improvements expenditures, operating shortfalls, and performance earnouts. The majority of these funds, $5.2 million, are allocated to the borrower on the LA Multifamily Portfolio I loan as $1.5 million in potential capital improvements funding and $3.7 million in potential performance earnout funding.

The collateral pool is concentrated by property type because all loans are secured by multifamily properties. By geographical concentration, the collateral is most heavily concentrated in California, Texas, and Colorado, with loans representing 29.7%, 18.2%, and 13.6% of the current pool balance, respectively. Four loans, representing 47.4% of the current pool balance, are in urban markets with DBRS Morningstar Market Ranks of 6, 7, and 8. These markets have historically shown greater liquidity and demand. There are six loans, representing 42.3% of the current pool balance, secured by properties in markets with a DBRS Morningstar Market Rank of 3 or 4, which are suburban in nature and have historically had higher probability of default levels when compared with properties located in urban markets.

As of March 2022 reporting, all loans remain current, and there are nine loans on the servicer’s watchlist, representing 63.0% of the pool balance. Six loans, representing 52.6% of the pool balance, were flagged for debt service coverage ratios (DSCR) below a 1.0 times (x) coverage, with the largest of these two loans, SF Multifamily Portfolio I (Prospectus ID#3, 16.2% of the pool balance) and LA Multifamily Portfolio I (Prospectus ID#5, 13.5% of the pool balance), having reported DSCR figures of 0.99x and 0.93x, respectively, based on annualized trailing three months (T-3) ended September 30, 2021, financials provided by the collateral manager. Both loans recently received loan modifications, extending the initial maturity dates by an additional year to January 2024 and extending the final maturity dates to January 2027. The loans share a sponsor, which continues to execute its business plan of renovating rent-controlled multifamily units upon becoming vacant and increasing rents to market. The remaining three loans, representing 12.0% of the current pool balance, were added to the servicer’s watchlist because of upcoming loan maturity or deferred maintenance.

A total of four loans, representing 38.5% of the pool balance, have been modified. In addition to the SF Multifamily Portfolio I and LA Multifamily Portfolio I loans, the Overture Sugar Land loan was modified in January 2022, which allowed the borrower to exercise a one-year extension option despite the property not meeting the debt yield performance test. In exchange, the borrower paid the principal balance of the loan down by $3.5 million and deposited $1.3 million into a debt service reserve account.

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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#3 – SF Multifamily Portfolio I (16.2% of the pool)
-- Prospectus ID#4 – Portola Apartments (13.6% of the pool)
-- Prospectus ID#5 – LA Multifamily Portfolio I (13.5% of the pool)
-- Prospectus ID#9 – The Darlington (13.0% of the pool)
-- Prospectus ID#10 – Overture Sugar Land (5.4% of the pool)

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 North American CMBS Surveillance Methodology (March 4, 2022), 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.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

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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