DBRS Upgrades Three and Confirms Four Classes of ACRE Commercial Mortgage Trust 2013-FL1

DBRS, Inc. (DBRS) has today upgraded the following Commercial Mortgage Pass-Through Certificates, Series 2013-FL1 issued by ACRE Commercial Mortgage Trust 2013-FL1:

-- Class B to AAA (sf) from AA (low) (sf)
-- Class C to AA (high) (sf) from A (low) (sf)
-- Class D to BBB (sf) from BBB (low) (sf)

In addition, DBRS has confirmed the remaining classes as follows:

-- Class A at AAA (sf)
-- Class X at AAA (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

All trends are Stable.

The transaction consists of loans secured by transitioning assets with a current mortgage balance of $317.8 million as of the October 2014 remittance. The mortgage balance includes $7.3 million of future funding available to the loans, which are held as separate participations outside the trust by a subsidiary of the originator. Originally, the pool consisted of 18 loans secured by 27 commercial properties with an original trust balance of $493.8 million, including a total of $42.7 million in future funding commitments. The above-noted upgrades reflect the significant improvement in credit support to the bonds as a result of prepayments and amortization. Since the deal closed, six loans have been repaid from the trust, contributing to collateral reduction of 35.6% in the last 12 months. Based on recently reported rental and occupancy rates, many of the collateral properties have reached stabilization; however, at this time, there are no servicer reports available that would be based on a full year of stabilized property operations given that the deal closed in November 2013.

There are two loans on the servicer’s watchlist as of the October 2014 remittance. 189 Bernardo (4.5% of the current loan balance) is the smallest loan in the pool and is secured by a 63,271 sf office building in Mountain View, California. The property is 100% occupied by two tenants; however, the smaller tenant, Jasper Technologies, Inc. (Jasper), occupies 34.4% of the NRA on a lease that is scheduled to expire in January 2015. Jasper has given notice of its intent to vacate and the loan has been placed on the servicer’s watchlist. Without this rental income, the property cash flow would not cover the loan’s debt service obligation. The space is currently leased at $19.10 psf gross and, according to CoStar, Class B office space in the South Moffett Triangle submarket achieves an average rental rate of $35.79 psf and experiences an average vacancy of 3.3%. The borrower is reportedly marketing the space for $36.00 psf gross, suggesting an upside should the Jasper space be released at market rate. The largest tenant, SETI Institute, is also marketing a small portion of its space, representing 15.6% of the NRA, as available for sublet at a rate of $23.40 triple net. SETI Institute leases the remainder of the building on multiple leases expiring in September and October 2021. As of the October 2014 remittance, the loan’s cash leasing reserve had a balance of $840,388 ($13.28 psf).

The second-largest loan in the pool is also on the servicer’s watchlist for a decline in occupancy. Saxon Woods (12.4% of the current pool balance) is secured by a multifamily property in McKinney, Texas, and was 97.0% occupied at contribution, with an average rental rate of $919 per unit. The stabilization plan includes unit renovations, which would require management to take units offline. The June 2014 occupancy dipped to 85.0%; however, as of September 2014, occupancy has improved to 89.6% and the average rental rate has increased to $1,054 per unit.

The pool is concentrated based on loan size as there are only 12 loans outstanding. Additionally, the pool has a sponsorship concentration as seven loans, representing 67.8% of the current pool balance, share affiliates of Colony Capital, LLC (Colony Capital) as a loan sponsor. Colony Capital is the sole sponsor for two loans and is 75% owner of a joint venture that sponsors five other loans. All loans were originated by ACRC Lender LLC, a subsidiary of Ares Commercial Real Estate Corporation. Typically, the loans were issued with three-year terms with extension options that can take some loans to a full term of five years. Future funding may be advanced by the master servicer to be used for capital improvements conditional upon completion of stabilization projects. The special servicer is responsible for determining whether or not funding may be advanced. As of the October 2014 remittance, there is only one loan that has not received any of its originally allocated future funding. All but one outstanding loan are scheduled to mature by July 1, 2016. The transaction is a sequential-pay structure and the pool is static.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are CMBS Rating Methodology (January 2012) and Rating North American Commercial Real Estate Non-Performing Loan Liquidating Trusts (February 2012), which can be found on our website under Methodologies.