Morningstar DBRS Confirms Credit Ratings on All Classes of Arbor Realty Commercial Real Estate Notes 2021-FL1, Ltd.

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of commercial mortgage-backed notes issued by Arbor Realty Commercial Real Estate Notes 2021-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 and Stable trends reflect the overall stable performance of the outstanding collateral in the transaction and the increased credit enhancement to the bonds as a result of successful loan repayment. Since the previous Morningstar DBRS credit rating action in June 2023, there has been a collateral reduction of 26.6%. This collateral reduction and the $60.8 million unrated first-loss piece serve as mitigants to the specially serviced loan concentration, which includes three loans, representing 5.1% of the current trust balance. Based on information provided by the servicer, Morningstar DBRS expects these loans to ultimately be liquidated with any realized losses expected to be contained to the unrated equity piece. Additionally, 12 loans, representing 37.0% of the current trust balance, have scheduled maturity dates throughout 2024. Based on YE2023 reporting, these loans reported debt yields ranging from 1.1% to 9.3%. Given the current financing and property sale environments, select borrowers are expected to face difficulties in executing exit strategies, potentially increasing credit risk on those loans. In conjunction with this press release, Morningstar DBRS 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 March 2021 with the initial collateral pool consisting of 37 floating-rate mortgages and senior participations secured by 64 mostly transitional properties, totaling $635.2 million. Most of the loans were secured by cash-flowing assets, with some level of stabilization remaining. The transaction included a 180-day ramp-up acquisition period, which was completed in August 2021 when the cumulative loan balance totaled $785.0 million.

The transaction was structured with a Reinvestment Period that expired with the September 2023 Payment Date. As of the April 2024 remittance, the pool comprises 29 loans with a cumulative loan balance of $576.6 million. Since Morningstar DBRS' previous credit rating action, 16 loans with a former cumulative trust loan balance of $261.5 million have repaid from the trust while 11 loans totaling $182.7 million were contributed to the trust prior to the end of the Reinvestment Period in September 2023.

The transaction is concentrated by property type as all loans are secured by multifamily properties. The transaction is also concentrated by loan size, as the largest 10 loans represent 59.5% of the pool. The loans are primarily secured by properties in suburban markets as 21 loans, representing 72.7% of the pool, are secured by properties in suburban markets, as defined by Morningstar DBRS, with a Morningstar DBRS Market Rank of 3, 4, or 5. An additional five loans, representing 9.5% of the pool, are secured by properties with a Morningstar DBRS Market Rank of 1 and 2, denoting a rural or tertiary market while one loan, representing 3.5% of the pool, is secured by a property with a DBRS Morningstar Market Rank of 7, denoting an urban market.

The largest loan in special servicing, Tivoli at Vintage Park (Prospectus ID#59; 3.2% of the current pool balance) is secured by a 158-unit, garden-style property built in 1999 in Houston. The loan transferred to the special servicer in February 2024 for payment default. According to the April 2024 remittance, the December 2023 loan payment remains due. After an attempt to sell the property fell through in July 2023, the borrower exercised a 12-month extension option, pushing the maturity to November 2024 to aid in efforts to sell the asset. The special servicer is currently dual tracking the sale of the asset and foreclosure proceedings. The business plan at origination included the renovation of 118 units budgeted at $494,600; however, after renovating 58 units for approximately $250,000, the remaining funds were used to pay an outstanding property tax bill. According to the collateral manager's December 2023 report, property occupancy, cash flow, and the debt service coverage ratio (DSCR) had fallen below issuance levels and were short of projected stabilized levels. In particular, the in-place occupancy rate and cash flow were 3.2% and $0.4 million below projected stabilized levels, respectively. Given the inability of the borrower to complete the business plan and the current status of the loan, Morningstar DBRS analyzed the loan with a liquidation scenario for this review with a resulting loss severity of approximately 15.0%.

Morningstar DBRS also analyzed the second-largest specially serviced loan with a liquidation scenario for this review. The loan, Nirvana at Riverdale (Prospectus ID#86; 1.8% of the current pool balance), is secured by a 165-unit garden-style property located in the College Park neighborhood of Atlanta. The loan transferred to special servicing for imminent monetary default in November 2023 because the borrower was unable to repay the loan at maturity. The special servicer and borrower are currently working on a resolution for the loan that may include either the sale of the property or a loan assumption; however, discussions are ongoing. The loan is delinquent and the September 2023 payment remains due. The borrower originally planned to renovate the property at a total budgeted cost of $1.1 million, which included the interior renovations for 43 units. As of the December 2023 collateral report, the lender had advanced 97.0% of the renovation reserves; however, performance had not improved to stabilized projections. In particular, the occupancy rate was 57.2% compared with the projected 95.2% figure, while cash flow and DSCR levels were close to zero. In its liquidation scenario, Morningstar DBRS concluded a resulting loss severity of 20.0%.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS   
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030.

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

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

The principal methodology is North American CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798.

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

The credit ratings assigned to Classes B, C, and F materially deviate from the credit ratings implied by the predictive model. Morningstar DBRS typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider a three-notch or more deviation from the credit rating stress(es) implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviations is uncertain loan level event risk as, although the transaction benefits from significant paydown in the last year, there remains a high concentration of loans in special servicing and loans with upcoming loan maturity dates throughout 2024.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

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.

Morningstar DBRS 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 Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

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

North American CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model v 1.2.0.0, https://dbrs.morningstar.com/research/428797

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023), https://dbrs.morningstar.com/research/420982

Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623

North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592

Legal Criteria for U.S Structured Finance (April 15, 2024),
https://dbrs.morningstar.com/research/431205

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.