DBRS Morningstar Confirms Ratings on Arbor Realty Commercial Real Estate Notes 2021-FL2, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on all classes of notes issued by Arbor Realty Commercial Real Estate Notes 2021-FL2, Ltd. as follows:

-- 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 rating confirmations reflect the overall stable performance of the transaction, which has remained in line with DBRS Morningstar’s expectations since issuance as the trust continues to be solely secured by multifamily collateral. 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 25 floating-rate mortgages secured by 50 transitional multifamily properties with a cut-off date balance totaling $653.0 million. Most loans were in a period of transition with plans to stabilize performance and improve the asset value. The trust reached its maximum funded balance of $815.0 million in December 2021. The transaction is a managed vehicle with a 30-month reinvestment period scheduled to expire with the December 2023 Payment Date.

As of the July 2023 remittance, the pool comprises 28 loans secured by 29 properties with a cumulative trust balance of $648.2 million. The cash balance of the Reinvestment Account is $166.8 million. Only four of the original loans in the transaction at closing, totaling $121.9 million, currently remain in the trust. Since issuance, 30 loans with a former cumulative trust balance of $719.0 million have been successfully repaid from the pool, including 17 loans totaling $425.0 million since the previous DBRS Morningstar rating action in November 2022. An additional nine loans, totaling $240.1 million, have been added to the trust since the previous DBRS Morningstar rating action.

The transaction is concentrated by property type, as all loans are secured by multifamily properties. The loans are primarily secured by properties in suburban markets as 16 loans, representing 62.7% 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 11 loans, representing 29.8% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 2, denoting a tertiary market, while one loan, representing 7.5% of the pool, is secured by property with a DBRS Morningstar Market Rank of 6, denoting an urban market. In comparison, in April 2022, properties in suburban markets represented 72.9% of the collateral, properties in tertiary and rural markets represented 12.8% of the collateral, and properties in urban markets represented 14.3% of the collateral.

Leverage across the pool has declined marginally as of July 2023 reporting as the current weighted-average (WA) as-is appraised value loan-to-value (LTV) ratio is 79.8%, with a current WA stabilized LTV ratio of 68.0%. In comparison, these figures were 82.2% and 72.3%, respectively, as of April 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 March 2023, the lender had advanced cumulative loan future funding of $63.9 million to 25 of the 28 outstanding individual borrowers to aid in property stabilization efforts. The largest advances have been made to the borrowers of the Diplomat Towers ($25.1 million) and 2 East Oak Street ($12.2 million) loans. The Diplomat Towers loan is secured by a high-rise multifamily building in Hallandale Beach, Florida, built in 2022. The advanced funds have been provided as an earnout based on the property achieving occupancy benchmarks as well as for debt service reserves to keep the loan current during the initial lease-up phase. An additional $5.0 million of future funding for future debt service shortfalls remains outstanding. The 2 East Oak Street loan is secured by a multifamily property in Chicago. The advanced funds were used as $0.8 million to purchase former condominium units as collateral for the loan with an additional $11.5 million for unit renovations. The borrower has used all loan future funding as it has completed its capital expenditure program. In February 2023, the borrower successfully exercised a one-year maturity extension option.

An additional $34.5 million of loan future funding allocated to 25 of the outstanding individual borrowers remains available. The largest portion of available funds, $5.0 million, is allocated to the borrower of the Diplomat Towers loan, noted above. The second largest portion, $3.8 million, is allocated to the borrower of The 910 Apartments loan, which is secured by a multifamily property in Houston. The loan future funding is available to the borrower to complete a planned $4.2 million capital expenditure program, which included $3.3 million ($7,000/unit) for unit-interior upgrades.

As of the July 2023 remittance, there are no delinquent loans or loans in special servicing, and there are no loans on the servicer’s watchlist. According to the collateral manager, four loans, representing 19.6% of the current cumulative trust loan balance, have been modified. The modified loans include Diplomat Towers, 2 East Oak Street, Parc at 505, and Marbury Plaza. In general, the modifications have allowed a reallocation of existing reserves or uses for future funding dollars and maturity extensions. In exchange, borrowers have been required to make principal curtailment payments on loans or deposit additional dollars into existing reserves.

Only one loan, Fontana Village, representing 6.3% of the current cumulative trust balance, has a loan maturity date by YE2023. The loan matures in November 2023 and is secured by a multifamily property in Rosedale, Maryland. According to the collateral manager, the borrower had renovated 301 of the total 356 units through March 2023 as the borrower was successfully implementing the planned $6.0 million capital expenditure plan. The property was only 53% occupied; however, as the borrower noted it would begin its lease-up plan in the near term. The loan is structured with one one-year extension option, which DBRS Morningstar expects will be exercised if the renovation program and lease-up of the property are not completed by YE2023.

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 the 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/dbrs-morningstar-north-american-commercial-real-estate-property-analysis-criteria

-- North American Commercial Mortgage Servicer Rankings (September 8, 2022),
https://www.dbrsmorningstar.com/research/402499/north-american-commercial-mortgage-servicer-rankings

-- 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.