DBRS Morningstar Confirms Ratings on Arbor Realty Commercial Real Estate Notes 2022-FL1, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on all classes of notes issued by Arbor Realty Commercial Real Estate Notes 2022-FL1, 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 the 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 44 floating-rate mortgages secured by 59 transitional multifamily properties with a cut-off date balance totaling $1.61 billion. 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 $2.05 billion in June 2022. The transaction is a managed vehicle with a 30-month reinvestment period scheduled to expire with the August 2024 Payment Date.

As of the August 2023 remittance, the pool comprises 58 loans secured by 75 properties with a cumulative trust balance of $2.03 billion. The cash balance of the Reinvestment Account is $16.8 million. Forty-seven of the original loans in the transaction at closing, representing 86.5% of the current trust balance, remain in the trust. Since issuance, 11 loans with a former cumulative trust balance of $273.4 million have been successfully repaid from the pool, including 10 loans totaling $253.0 million since the previous DBRS Morningstar rating action in November 2022. One of these loans, The Redford, which had a former balance of $68.8 million was purchased from the trust at par by the collateral managers as the asset was identified as a credit risk asset. An additional seven loans, totaling $244.3 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 52 loans, representing 91.3% 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 five loans, representing 7.4% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 1 and 2, denoting rural and tertiary markets, while one loan, representing 1.3% of the pool, is secured by a property with a DBRS Morningstar Market Rank of 6, denoting an urban market. In comparison at transaction issuance, properties in suburban markets represented 89.5% of the collateral, properties in tertiary and rural markets represented 8.3% of the collateral, and properties in urban markets represented 2.2% of the collateral.

Leverage across the pool has increased slightly as of August 2023 reporting when compares with issuance metrics as the current weighted-average (WA) as-is appraised value loan-to-value (LTV) ratio is 69.9%, with a current WA stabilized LTV ratio of 69.7%. In comparison, these figures were 78.5% and 72.3%, respectively, at issuance. 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 $72.9 million to 51 of the 58 outstanding individual borrowers to aid in property stabilization efforts. The largest advance has been made to the borrower of the Georgia Portfolio 2 ($8.4 million) loan. The loan is secured by a portfolio of six garden-style apartment properties throughout metro Atlanta area, totaling 1,187 units built between 1969 and 1985. The advanced funds have been used to fund the borrower’s extensive $16.8 million planned capital expenditure (capex) plan across the portfolio, which contemplated upgrades to all unit interiors, property exteriors, and the correction of deferred maintenance at loan closing. According to the Q1 2023 update from the collateral manager, the portfolio was 81.0% occupied with an average rental rate of $1,192/unit, which represented a 31.4% increase over in-place rental rates at loan closing. The loan was also modified in June 2022 to allow borrower a $1.0 million rolling advance to continually access loan future funding to complete upgrades. There remains an additional $8.4 million of available loan funding.

An additional $128.8 million of loan future funding allocated to 52 of the outstanding individual borrowers remains available. Available loan proceeds for each respective borrower are for planned capex improvements with the largest portion of available funds, $9.5 million, allocated to the borrower of the Solace on Peachtree loan. The loan is secured by a 538-unit, high-rise multifamily property in the Midtown neighborhood of Atlanta. As of March 2023, the loan had a funded balance of $81.3 million with a $23.8 million pari passu piece in the subject transaction and a $57.5 million pari passu piece in the Arbor Realty Commercial Real Estate Notes 2022-FL2, LLC transaction (also rated by DBRS Morningstar). The loan future funding is available to the borrower to complete a planned $10.6 million capex program. According to the Q1 2023 collateral manager update, the renovation program had yet to begin; however, the borrower was provided a $1.1 million advance as working capital at loan closing.

As of the August 2023 remittance, there is one delinquent loan, The Graham, representing 1.8% of the current trust balance. According to the collateral manager, the borrower was expected to remit the delinquent July payment in mid-August; however, no update was provided regarding the August debt service payment. The collateral manager also noted the borrower was also expected to deposit $1.0 million into a debt service reserve, though confirmation of receipt has yet to be received. The value of the property has likely fallen, and as such, DBRS Morningstar assumed a current LTV ratio in excess of 100.0% in its current analysis. There are no loans on the servicer’s watchlist.

According to the collateral manager, four loans, representing 2.8% of the current cumulative trust loan balance, have been modified. The modified loans include Riverwalk Vista, Black Hawk Apartments, Idlewild 45, and The Fields One Center as the collateral manager does not consider the Georgia Portfolio 2 loan to be modified. In general, the modifications have allowed a reallocation of existing reserves or uses for future funding dollars, maturity extensions, and changes in property management. Six loans, representing 9.5% of the current cumulative trust balance, have a loan maturity date in the next six months. The largest of these loans, Cantera Residences ($85.0 million), matures at month-end August 2023 and is secured by a multifamily property in Warrenville, Illinois. The borrower’s business plan was to complete the initial lease-up phase of the property as it was built in 2020 and suffered as a result of the Coronavirus Disease (COVID-19) pandemic. According to the collateral manager, the borrower and the lender were actively working to close a refinance loan; however, no further details are available at this time. The loan is structured with one 12-month extension option available to the borrower and based on the current operating performance, the loan qualifies for the extension.

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

-- North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://www.dbrsmorningstar.com/research/419592

-- 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

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