DBRS Morningstar Confirms Ratings on MF1 2021-FL7, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the following classes of notes issued by MF1 2021-FL7, Ltd. (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 (high) (sf)
-- Class G at BB (low) (sf)
-- Class H 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 since issuance. 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 49 floating-rate mortgages secured by 67 transitional multifamily properties and six senior housing properties totaling $1.9 billion (70.6% of the fully funded balance), excluding $159.5 million of remaining future funding commitments and $626.4 million of pari passu debt. Most loans were in a period of transition with plans to stabilize and improve asset value. The transaction is structured with a Reinvestment Period through the September 2023 Payment Date, whereby the Issuer may acquire Funded Companion Participations into the trust.

As of the July 2023 remittance, the pool comprises 54 loans secured by 110 properties with a cumulative trust balance of $2.16 billion. Since issuance, eight loans with a former cumulative trust balance of $275.0 million have been successfully repaid from the pool. Of the original 49 loans, 37 loans, representing 75.5% of the current trust balance, remain in the transaction as of July 2023 reporting. Since the previous DBRS Morningstar rating action in November 2022, six loans with a current trust balance of 9.3% have been added to the trust.

The transaction is concentrated by property type as 55 loans are secured by multifamily properties, totaling 95.4% of the current trust balance, and two loans are secured by senior housing properties, totaling 4.6% of the current trust balance.

The loans are primarily secured by properties in suburban markets. Forty-three loans, representing 74.4% of the pool, are secured by properties in suburban markets, as defined by DBRS Morningstar, with a DBRS Morningstar Market Rank of 3, 4, or 5. An additional nine loans, representing 24.5% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 6 or 7, denoting an urban market, while one loan, representing 1.1% of the pool, is secured by property with a DBRS Morningstar Market Rank of 2, denoting a tertiary market. In comparison, in June 2022, properties in suburban markets represented 79.3% of the collateral and properties in urban markets represented 18.1% of the collateral.

Leverage across the pool has also remained consistent from the pool as of July 2023 reporting as the current weighted-average (WA) as-is appraised loan-to-value (LTV) ratio is 53.2%, with a current WA stabilized LTV ratio of 65.1%. In comparison, these figures were 64.3% and 55.2%, respectively, as of June 2022. DBRS Morningstar recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2021 and 2022 and may not reflect the current rising interest rate or widening capitalization rate environments.

Through July 2023, the lender had advanced cumulative loan future funding of $178.1 million to 41 of the 43 remaining individual borrowers to aid in property stabilization efforts. The largest advance, $14.4 million, has been made to the borrower of the SF Multifamily Portfolio III loan, which is secured by a portfolio of 10 multifamily properties totaling 308 units in the San Francisco Bay area. Funds were advanced to the borrower to acquire additional collateral and to complete unit interior and property exterior upgrades across the portfolio.

An additional $137.5 million of loan future funding allocated to 26 individual borrowers remains available. The largest portion of available funds, $27.1 million, is allocated to the borrower of the LA Multifamily Portfolio 1 loan, which is secured by a portfolio of 13 properties totaling 185 units in the West LA area of Los Angeles. The loan future funding is available to the borrower to fund interior and exterior upgrades as well as to potentially fund a performance-based earnout. To date the borrower has completed renovations across 55 units while an additional 27 are under renovation. As of the March 2023 rent roll, the portfolio was 87.6% occupied.

As of the July 2023 remittance, there are no loans in special servicing; however, there are 27 loans on the servicer’s watchlist, representing 61.7% of the current trust balance. The loans have been flagged for a variety of reasons including upcoming maturity dates and low occupancy rates or cash flow, which may or may not have resulted in cash flow sweeps being initiated. The largest loan on the servicer’s watchlist, Riverpoint (10.6% of the current trust balance), is secured by a Class A, 480-unit, high-rise apartment property in Washington, D.C. The loan is being monitored on the servicer’s watchlist for occupancy and cash flow concerns. In addition the loan was reported 30 days delinquent as of July 2023 servicer reporting, however, according to the collateral manager, a forbearance agreement was executed in April 2023 allowing the borrower to defer up to 50% of contractual debt service payments for the months between April 2023 and June 2023. All deferred amounts must be repaid in equal monthly installments over a term commencing with the payment date in August 2023 and ending in September 2024. The forbearance agreement was subsequently amended in June 2023 requiring the borrower to deposit $500,000 to cover the outstanding portions of the deferred amounts. The amendment also removes the cap on the monthly forbearance amounts. As of the April 2023 rent roll, the residential component was 77.3% occupied while the retail component was 87.0% leased to four tenants. Based on the YE2022 financials, property NCF was $4.7 million, equating to a 0.27x DSCR and 2.1% debt yield. The loan has an initial maturity date of September 2023 and includes three 12-month extension options. DBRS Morningstar increased the probability of default of the loan in its current analysis to reflect the increased credit risk. The resulting loan expected loss remains below the pool’s WA expected loss.

Seven loans, representing 20.7% of the current trust balance, have been modified. Terms of individual loan modifications vary and have included the waiver of performance-based tests to exercise maturity extensions, the waiver of borrower requirements to purchase new interest rate cap agreements if property operations cover debt service, and the relocation of existing reserves or future funding dollars among other minor terms. In most instances, individual borrowers were required to contribute fresh equity or cash flow sweeps were initiated to execute the loan modifications.

The transaction also includes six loans, representing 8.1% of the pool balance, that are sponsored by Tides Equities. In a June 2023 The Real Deal article, the principals of the firm noted it would likely need to conduct a capital call from its investors in order to fund debt service shortfalls across its portfolio given the rise in floating interest rate debt. Some of the individual properties owned by the sponsor currently generate sufficient cash flow to cover debt service payments while others do not. As all loans backed by the sponsor remain current, DBRS Morningstar did not make any further analytical adjustments to any of the six loans.

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/416784 (July 4, 2023).

All credit ratings are subject to surveillance, which could result in credit 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 North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model Version 1.1.0.0, https://www.dbrsmorningstar.com/research/410913

-- DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022), https://www.dbrsmorningstar.com/research/402646

-- North American Commercial Mortgage Servicer Rankings (September 8, 2022),
https://www.dbrsmorningstar.com/research/402499

-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023),
https://www.dbrsmorningstar.com/research/415687

-- Legal Criteria for U.S. Structured Finance (December 7, 2022),
https://www.dbrsmorningstar.com/research/407008/legal-criteria-for-us-structured-finance

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.