DBRS Morningstar Upgrades Ratings on Five Classes of Arbor Realty Commercial Real Estate Notes 2020-FL1, Ltd.

DBRS, Inc. (DBRS Morningstar) upgraded its ratings on five classes of floating-rate notes issued by Arbor Realty Commercial Real Estate Notes 2020-FL1, Ltd. as follows:

-- Class B Secured Floating Rate Notes to AAA (sf) from AA (low) (sf)
-- Class C Secured Floating Rate Notes to A (high) (sf) from A (low) (sf)
-- Class D Secured Floating Rate Notes to A (low) (sf) from BBB (high) (sf)
-- Class E Secured Floating Rate Notes to BBB (sf) from BBB (low) (sf)
-- Class F Floating Rate Notes to BB (sf) from BB (low) (sf)

DBRS Morningstar also confirmed the following ratings on three classes:

-- Class A Senior Secured Floating Rate Notes at AAA (sf)
-- Class A-S Senior Secured Floating Rate Notes at AAA (sf)
-- Class G Floating Rate Notes at B (low) (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 a collateral reduction of 32.3% since issuance. In addition, the borrowers on the remaining loans are generally progressing with their respective business plans, which DBRS Morningstar expects will ultimately lead to property stabilization and value growth. 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.

The initial collateral consisted of 31 floating-rate loans with a cutoff balance totaling $640.5 million, which was subsequently ramped up to the maximum deal balance of $800.0 million. The transaction had a 36-month reinvestment period that originally was scheduled to expire with the March 2023 Payment Date; however, the collateral manager chose to end the reinvestment period in December 2022 as existing available reinvestment proceeds and principal from subsequent loan repayments have been used to amortize the rated notes since that date forward.

As of the January 2023 remittance, the pool comprised 37 loans secured by 49 properties with a cumulative trust balance of $541.4 million. Since issuance, 56 loans have been repaid from the pool, including six loans with a former trust balance of $99.9 million that have been repaid since the previous DBRS Morningstar rating action in November 2022. Only one of the original 31 loans, representing 3.5% of the current trust balance, remains in the transaction.

The transaction is concentrated by multifamily properties as 33 loans, representing 85.4% of the current pool balance, are secured by multifamily properties while the remaining four loans are each secured by one student-housing, office, healthcare, or retail property. Through September 2023, the collateral manager advanced $20.9 million in loan future funding to 28 individual borrowers to aid in property stabilization efforts. The largest portion of this funding ($2.3 million) has been advanced to the borrower of the Aston Villa Apartments loan, which is secured by a multifamily property in Columbus, Ohio. The borrower’s business plan is to complete a significant $2.2 million capital improvement plan to the property’s unit interiors, amenities, and common areas with additional reserves for radon testing and debt service advances.

An additional $29.4 million of unadvanced loan future funding allocated to 35 individual borrowers remains outstanding. The largest portion of unadvanced future funding dollars ($2.8 million) is allocated to the borrower of the Parkview Village Apartments loan, which is secured by a 388-unit garden-style property in Fort Wayne, Indiana. The borrower’s business plan is to institute a $3.7 million capital improvement program across the property to increase rental rates by bringing down units back online as well as renovating unit interiors and building exteriors. Through Q3 2022, the collateral manager had advanced $1.4 million of the renovation reserve.

Beyond the property type concentration, the transaction is also concentrated by properties in suburban markets, which DBRS Morningstar defines as markets with a DBRS Morningstar Market Rank of 3, 4, or 5. As of January 2023, 22 loans, representing 57.5% of the cumulative loan balance, are secured by properties in suburban markets. An additional 13 loans, representing 35.3% of the cumulative loan balance, are secured by properties in tertiary and rural markets, which historically have less liquidity and demand. In comparison with the pool composition as of the January 2022 reporting, there were 28 loans, representing 57.6% of the cumulative loan balance, in suburban markets and 16 loans, representing 35.3% of the cumulative loan balance, in tertiary and rural markets.

The collateral pool exhibits similar leverage from issuance with a current weighted-average (WA) appraised loan-to-value ratio (LTV) of 77.8% and WA stabilized LTV of 66.2%. In comparison, these figures were 76.2% and 70.3%, respectively, at closing. As the majority of these appraisals were conducted prior to 2022, there is the possibility that select property values may have decreased given the current interest rate and capitalization rate environment.

As of January 2023, two loans, representing 4.4% of the pool balance, are in special servicing. The River Ridge Apartments loan (Prospectus ID#39; 1.7% of the pool) is secured by a multifamily property in Columbia, South Carolina. The loan transferred to special servicing in September 2022 for pending maturity default. The collateral manager confirmed the loan was extended with a new maturity date in September 2023 to allow the borrower additional time to complete planned property upgrades and stabilize property operations. As of November 2022, the property was 82.9% occupied with an average rental rate of $857/unit; however, 32 units, or 21.9% of the total unit count were occupied, on a month-to-month basis. The collateral manager also confirmed that 54.0% of the $2.7 million renovation reserve had been advanced through December 2022. While the current performance of the asset is below expectations, an updated November 2022 appraisal value indicated there is sufficient market equity remaining in the transaction as the fully funded loan balance is $9.3 million.

The other specially serviced loan, Forest Manor (Prospectus ID#79; 2.7% of the pool), is secured by a healthcare property in Northport, Alabama. The loan transferred to special servicing in January 2023 because it matured in the same month and the borrower had not communicated a repayment strategy. According to an update from the collateral manager; however, the borrower received a financing commitment from the U.S. Department of Housing and Urban Development with take-out financing scheduled to close by month-end February 2023. As a result, the borrower has requested a short-term loan extension, which DBRS Morningstar expects the lender will grant. According to the most recent financials provided, property operations generated a debt service coverage ratio of 2.0 times. There are no loans on the servicer’s watchlist.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929 (May 17, 2022).

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

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

The principal methodology is the North American CMBS Surveillance Methodology (October 3, 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 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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