DBRS Morningstar Confirms All Ratings on Arbor Realty Commercial Real Estate Notes 2021-FL3, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on all classes of commercial mortgage-backed notes issued by Arbor Realty Commercial Real Estate Notes 2021-FL3, 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 transaction closed in September 2021 with the initial collateral consisting of 36 floating-rate mortgages and senior participations secured by 50 mostly transitional properties with a cut-off balance of $1.50 billion. Most loans were in a period of transition with plans to stabilize performance and improve the asset value. The transaction has a maximum funded balance of $1.5 billion and is a managed vehicle with its reinvestment period scheduled to expire with the March 2024 Payment Date. As of August 2023 reporting, the Reinvestment Account has a balance of $98.3 million.

As of the August 2023 remittance, the pool comprises 49 loans secured by 67 properties with a cumulative trust balance of $1.40 billion. Thirteen of the original loans in the transaction at closing, representing 36.4% of the current trust balance, remain in the trust. Since issuance, 26 loans with a former cumulative trust balance of $717.7 million have been successfully repaid from the pool, including 16 loans totaling $386.7 million since the previous DBRS Morningstar rating action in November 2022. An additional 13 loans, totaling $420.5 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 36 loans, representing 75.3% 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 10 loans, representing 17.6% of the pool, are secured by properties with DBRS Morningstar Market Ranks of 1 and 2, denoting rural and tertiary markets, while three loans, representing 7.0% of the pool, are secured by properties with DBRS Morningstar Market Ranks of 6 or 7, denoting urban markets. In comparison, at transaction issuance, properties in suburban markets represented 68.5% of the collateral, properties in tertiary and rural markets represented 18.2% of the collateral, and properties in urban markets represented 13.3% of the collateral.

Leverage across the pool has decreased slightly as of the August 2023 reporting when the current weighted-average (WA) as-is appraised value loan-to-value ratio (LTV) was 83.1%, with a current WA stabilized LTV of 69.2%. In comparison, these figures were 84.1% and 71.6%, 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 $99.6 million to 42 of the 47 outstanding individual borrowers to aid in property stabilization efforts. The largest advance has been made to the borrower of the Diplomat Tower ($25.1 million) loan. The loan is secured by a recently built 27-story, Class A multifamily tower and adjoining parking structure in Hallandale Beach, Florida. The advanced funds have been provided as an earnout based on the property achieving occupancy benchmarks and 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.

An additional $102.5 million of loan future funding allocated to 48 of the outstanding individual borrowers remains available. Available loan proceeds for each respective borrower, excluding the borrower of the Diplomat Tower loan, are for planned capital expenditure improvements with the largest portion of available funds, $9.7 million, allocated to the borrower of the 41 Marietta loan. At issuance, the loan was backed by a vacant 13-story high-rise office building in Atlanta with the borrower’s business plan consisting of implementing a $20.9 million capital improvement and transition plan to convert the asset into a multifamily property. Through March 2023, $11.2 million of advanced funds have been used to fund the borrower’s redevelopment of the property. According to the Q1 2023 collateral manager’s report, the redevelopment is expected to be completed by February 2024 with pre-leasing expected to commence in December 2023. While the renovation reserve has a balance of $9.4 million, the collateral manager noted that the borrower secured a $4.8 million mezzanine loan to assist in the remaining renovation work, suggesting the incurred costs have been above budget.

As of the August 2023 reporting, no loans are specially serviced or watchlisted, however, two loans, totaling $56.4 million and representing 4.0% of the pool balance, are delinquent. The loans, Landings at Brittany Acres and 100 Riverbend, were both reported 30-days delinquent. The Landings at Brittany Acres loan, which is backed by a 77-unit garden-style multifamily property in suburban St. Louis, Missouri, was 87.9% occupied as of the February 2023 rent roll, with an average rental rate of $994/unit. The achieved rental rate represented a 16.0% increase over rents at issuance. According to the collateral manager, the borrower will be required to replenish the interest reserve. The loan matures in April 2024 and includes two 12-month extension options. According to the collateral manager, the borrower for the 100 Riverbend loan is expected to conduct a capital call with its investors to bring the loan current and to market the property for sale in September 2023 upon completion of the property renovations.

Maturity risk is concentrated in 2024 as collateral representing 64.4% of the pool is scheduled to mature; however, the majority of the loans have extension options ranging between 12 and 24 months. Only two loans, representing 1.9% of the pool, mature in 2023 and both include a 12-month extension option.

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 (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

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