Experienced CRE CLO manager MF1 Collateral Manager, sponsored by Berkshire Residential Investments and Limekiln Real Estate, is in the market with $1.0 billion commercial mortgage-backed securities (CMBS) deal that provides investors with a richer spread than comparable deals. However, they must also rely on the sponsors executing business plans to stabilize cash flow in a volatile business and financial environment.
The MF1 2022-FL10 LLC deal, MF1’s third this year, securitizes 24 floating-rate mortgage loans secured by 34 transitional multifamily and manufactured housing properties. Credit Suisse Securities is the structuring agent, and the other underwriters are J.P. Morgan Securities, Morgan Stanley and Amherst Pierpont securities. KeyBank National is servicing the deal, which is schedule to close August 2.
In a July 20 presale report, Moody’s Investors Service notes deal strengths include predominantly first-lien senior secured loans, restrictions on asset maturity amendments and no long-dated assets. Challenges include low asset-type diversity—100% first-lien mortgages and senior pari-passu participants—as well as 100% interest-only assets and low-rated asset concentration.
At the top of Moody’s list is the deal’s 120-day ramp-up period and two-year reinvestment period that the rating agency says will be subject to eligibility criteria and concentration limits.
DBRS Morningstar’s presale report says that it has analyzed the loans to a stabilized cashflow that mostly exceeds the deal’s current cash flow, but the sponsors may not successfully execute their business plans and the higher stabilized cash flow may not materialize during the loan term.
The Park at Sheffield loan, for example, presents $41 million of future funding to demolish and construct a second floor to existing buildings over 12 to 15 months. Another loan in the pool includes $62.5 million of future funding to convert a vacant office building to a Class A multifamily property over one to two years. Both projects could be impacted by an unexpectedly severe Corona virus wave or other factor.
DBRS Morningstar also notes the deal’s elevated leverage and weak sponsor strength on seven loans that represent $29.4% of the initial pool balance.
In terms of deal strengths, DBRS Morningstar says eight loans representing 46.6% of the pool balance have collateral that the rating agency ranks as the best performing group in terms of historical CMBS default rates. The rating agency also sees the multifamily concentration as a strength, since those loans typically benefit from rent growth, staggered lease rollover, and lower expense ratios.
“While revenue is quick to decline in a downturn because of the short-term nature of the leases, it is also quick to rebound when the market improves,” according to the DBRS report.
Moody’s notes that the current MF1 deal’s spread is 3.7% compared with 3.00 for its deal priced in May and 2.5% for its January transaction. The spread is similarly higher compared to recent deals by other sponsors.
