Morningstar DBRS Confirms Credit Ratings on All Classes of MF1 2022-FL9, LLC; Changes Trend to Negative from Stable on Nine Classes

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on all the classes of notes issued by MF1 2022-FL9, LLC 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 (high) (sf)
-- Class F-E at BB (high) (sf)
-- Class F-X at BB (high) (sf)
-- Class G at BB (low) (sf)
-- Class G-E at BB (low) (sf)
-- Class G-X at BB (low) (sf)
-- Class H at B (low) (sf)
-- Class H-E at B (low) (sf)
-- Class H-X at B (low) (sf)

Morningstar DBRS also changed the trends on Classes F, F-E, F-X, G, G-E, G-X, H, H-E, and H-X to Negative from Stable. The trends on the remaining classes remain Stable.

The trend changes reflect the increased credit risk to the transaction as a result of increased loan-level loss expectations for the majority of the loans in the transaction. Morningstar DBRS notes many borrowers are facing execution risk with their respective business plans because of a combination of factors, including decreased property values, increased construction costs, slower rent growth, and increases in debt service costs stemming from the current elevated interest rate environment as all loans have floating interest rates. As a result of lagging business plans and loan exit strategies, the borrowers of 18 loans, representing 46.8% of the current trust balance, have received loan modifications and/or forbearances. Terms for the modifications vary from loan to loan; however, common terms include interest deferrals via a hard and soft pay structure, waiving interest rate cap agreement requirements. Forbearance agreements have been executed to facilitate further modification discussions between the lender and borrowers. Additionally, the transaction faces a heighted maturity risk as 12 loans, representing 27.4% of the current trust balance, have past due maturity dates or will mature by YE2024. While all of the loans have built-in extension options, Morningstar DBRS notes most loans will not qualify to exercise the related options based on current collateral performance and therefore will likely need to be modified.

The credit rating confirmations reflect the overall collateral composition of the pool as the majority of loan collateral, 42 loans, representing 90.4% of the current trust balance, is secured by multifamily properties. Multifamily properties have historically proven to be better able to retain property value and cash flow compared with other property types. While individual borrowers are proceeding with their business plans to increase property cash flow and property value, the headwinds and challenges noted above continue to present challenges. In conjunction with this press release, Morningstar DBRS has published a Surveillance Performance Update report with an in-depth analysis and credit metrics for the transaction and with business plan updates on select loans. To access this report, please click on the link under Related Documents below or contact us at info-DBRS@morningstar.com.

The initial collateral consisted of 45 loans secured by 61 transitional multifamily and one manufactured housing community (MHC) properties, totaling $1.74 billion. The transaction had a maximum funded balance of $1.80 billion and was formerly a managed vehicle as the 24-month reinvestment period expired with the May 2024 Payment Date. As of the August 2024 remittance, the pool comprises 47 loans secured by 98 properties with a cumulative trust balance of $1.79 billion, reflecting a collateral reduction of 0.4% since issuance. Of the original 45 loans, 37 loans, representing 87.0% of the current trust balance, remain in the pool. Since the previous Morningstar DBRS credit rating action in September 2023, seven loans, totaling $171.9 million (9.6% of the current trust balance), have been added to the trust while seven loans, totaling $178.8 million, have paid in full, including one loan (former trust balance of $38.8 million), which was purchased out of the trust by the Issuer as a credit risk asset.

The remaining collateral in the transaction beyond the multifamily concentration noted above includes four loans secured by manufactured housing community properties (8.6% of the current trust balance). The pool is primarily secured by properties in suburban markets, with 31 loans, representing 60.5% of the pool, assigned a Morningstar DBRS Market Rank of 3, 4, or 5. An additional 11 loans, representing 33.2% of the pool, are secured by properties in urban markets, with a Morningstar DBRS Market Rank of 6, 7, or 8. The remaining loans are backed by properties with a Morningstar DBRS Market Rank of 1 or 2, denoting tertiary markets. These property-type and market-type concentrations remain generally in line with both the pool composition and the September 2023 credit rating action.

Leverage across the pool has remained consistent as of August 2024 reporting when compared with issuance metrics, as the current weighted-average (WA) as-is appraised loan-to-value ratio (LTV) is 74.4%, with a current WA stabilized LTV of 62.7%. In comparison, these figures were 71.8% and 63.3%, respectively, at issuance. Morningstar DBRS recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2022 and may not fully reflect the effects of increased interest rates and/or widening capitalization rates in the current environment. In the analysis for this review, Morningstar DBRS applied upward LTV adjustments across 29 loans, representing 75.8% of the current trust balance, generally reflective of higher cap rate assumptions as compared with the implied cap rates based on the appraisals.

As of the August 2024 reporting, one loan, Highline Lofts (Prospectus ID#32; 1.4% of the current trust balance) is delinquent and in special servicing. The loan is secured by a 112-unit Class B, multifamily property in Aurora, Colorado. The loan transferred to special servicing in May 2024 after the loan matured in March 2023 as the borrower was unable to successfully exit the loan or qualify for a 12-month maturity extension. The loan is currently six months delinquent on debt service payments. According to the Q2 2024 collateral manager report, the lender and borrower were negotiating an agreement to extend the loan; however, no further update is available at this time. As of April 2024, the property was 91.0% occupied, and the borrower had completed over 90.0% of the$2.0 million capital improvement plan to upgrade 111 unit interiors and property common areas and exteriors. At loan closing, the property was valued at $29.8 million ($266,000 per unit). In its analysis, Morningstar DBRS identified comparable sales transactions near the subject since the start of 2023, which sold for a median price per unit of approximately $210,000 and an average price per unit of approximately $230,000, suggesting the current value of the subject has declined. In its analysis, Morningstar DBRS liquidated the loan from the trust with a resulting loan loss severity of approximately 20.0%.

There are 40 loans on the servicer's watchlist, representing 88.5% of the current trust balance, which have primarily been flagged for below-breakeven debt service coverage ratios (DSCRs) and upcoming maturity dates. The largest loan on the servicer's watchlist and in the trust, LA Lofts Portfolio (Prospectus ID #1; 12.7% of current trust balance), is secured by a portfolio of five properties totaling 1,037 units in downtown Los Angeles. The loan has been on the servicer's watchlist for multiple years for low net cash flow (NCF), which was most recently reported as $-4.4 million for the trailing 12-month period ended May 31, 2024, according to the Q2 2024 collateral manager update. The original borrower's business plan was to utilize up to $22.7 million of loan future funding to complete a significant capital expenditure (capex) plan focused on unit renovations, property exterior and amenity upgrades, and the correction of deferred maintenance.

The original borrower experienced financial distress and operational challenges implementing the business plan, partly due to the extended tenant eviction moratorium for Los Angeles County. The loan was subsequently assumed and modified in March 2023 with the new borrower depositing $5.0 million into a shortfall reserve. The modification also reduced the floating rate spread by 75 basis points (bps) and allows the borrower to defer up to 100 bps of interest due in for 12 months and up to 50 bps in the following 12 months. When the modification closed, $18.5 million of future funding remained available, which was reallocated as $12.5 million for capex and up to $6.0 million for additional operating shortfalls. As of August 2024, the loan has an outstanding balance of $333.1 million with a $227.9 million in the trust.

The loan matured in April 2024 and while the only requirement to exercise the first 12-month extension option is the purchase of a new interest rate cap agreement, according to the Q2 2024 update from the collateral manager, the borrower has expressed liquidity issues. As a result, the loan is currently under a forbearance agreement while resolution negotiations are ongoing. In terms of business plan progression, the borrower has utilized $7.6 million of additional advances for its capex project with a focus on elevator modernization across the portfolio, which is expected to be completed by YE2024. The Q2 2024 update noted unit renovations have commenced; however, the count of completed unit upgrades and units in progress was not provided. There remains approximately $4.9 million of future funding for capex projects per the terms of the loan modification. As of May 2024, the portfolio was 60.0% occupied, down from 72.0% in May 2023. The collateral manager also noted 180 tenant evictions were in process across the portfolio as of June 2024, which could allow the borrower access to additional units to complete upgrades.

An updated portfolio valuation was conducted in March 2023 in conjunction with the loan assumption and modification, resulting in an As-Is value of $370.0 million and an As-Stabilized value of $438.5 million. Given the portfolio is currently generating negative cash flow, Morningstar DBRS assumed a current LTV of 100.0% in its current analysis despite the progress the borrower has made in the capex program. At closing, Morningstar DBRS concluded to a Stabilized NCF of $17.0 million, while the issuer concluded to a figure of $21.2 million, which was updated to $22.7 million following the loan modification. Based on the updated As-Stabilized portfolio value of $438.5 million, the implied cap rate using the updated Issuer's stabilized NCF is 5.2% with a fully funded LTV of 77.1%. Given the increased credit risk of the loan regarding the payment status and the business plan execution risk, Morningstar DBRS also adjusted the As-Stabilized LTV upwards in addition to applying an additional probability of default penalty to increase the loan expected loss. The resulting loan expected loss is similar with the overall expected loss of the pool.

Through August 2024, the lender had advanced cumulative loan future funding of $273.5 million to each of the 38 outstanding individual borrowers. The largest advance, $62.5 million, was made to the borrower of The 600 loan (Prospectus ID#54; 2.8% of the current trust balance), which is secured by a 30-story, 404-unit multifamily tower in Birmingham, Alabama. The advanced funds have been used by the borrower to fund the complete conversion and renovation of the property into a multifamily use from its former office use. According to the Q2 2024 update from the collateral manager, the capex project was 92.5% complete and was projected to be finished in Q3 2024. As of May 2024, 371 units were rentable, and 109 units were occupied. There is no more future funding available to the borrower. The loan matured in July 2024 and was modified to allow the borrower to exercise the first 12-month extension option. Terms of the modification included reduction in the floating interest rate spread to 4.50% from 5.90%. The borrower was required to purchase an interest rate cap agreement with a 5.25% strike rate and deposit $5.4 million into a shortfall reserve with the obligation to replenish the reserve to $3.0 million if it falls below $1.0 million.

An additional $72.8 million of loan future funding allocated to 26 of the outstanding individual borrowers remains available. The largest portion of available funding ($18.5 million) is allocated to the borrower of The Reserve at Brandon loan (Prospectus ID#2; 5.0% of the current trust balance), which is secured by a 982-unit multifamily complex in Brandon, Florida. The funds are available to fund the borrower's significant capex program originally budgeted at $27.6 million with $15.4 million allocated for unit upgrades and the remaining funds allocated for propertywide improvements. According to the Q2 2024 collateral manager update, the borrower had requested loan advances of $11.6 million and had completed 426 unit upgrades as well as all planned property exterior improvements. Renovated and leased units reportedly achieved an average rental rate of $1,569 per unit, representing a 40.0% premium over the average rental rate for similar nonrenovated units. The loan was modified in July 2024 to allow the borrower to exercise the first 12-month maturity extension option to April 2025. The borrower made a $7.5 million principal curtailment and deposited $2.5 million into a shortfall reserve to receive a hard pay/soft pay interest structure on the loan. The hard pay rate through October 2025 is 5.35% with any additional amounts deferrable and due at loan maturity. An additional $8.5 million of deferred interest, which accrued when the borrower received a forbearance when the loan matured in April 2024 was also categorized as deferred interest and is also due at loan maturity.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective private rating letters at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or 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 DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

Classes F-X, G-X, and H-X are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches.

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 the 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 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

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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 Version 1.2.0.0 https://dbrs.morningstar.com/research/428797
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024) https://dbrs.morningstar.com/research/435293
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024) https://dbrs.morningstar.com/research/438283/
-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024) https://dbrs.morningstar.com/research/428623
-- Legal Criteria for U.S. Structured Finance (April 15, 2024) https://dbrs.morningstar.com/research/431205
-- Rating North American CMBS Interest-Only Certificates (June 28, 2023) https://dbrs.morningstar.com/research/435294

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/410863.

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