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

DBRS Limited (DBRS) has today upgraded the ratings on the following classes of Commercial Mortgage Pass-Through Certificates (the Certificates), Series 2013-FL1, issued by ACRE Commercial Mortgage Trust 2013-FL1:

-- Class C to AAA (sf) from AA (high) (sf)
-- Class D to AAA (sf) from BBB (sf)
-- Class E to BBB (sf) from BB (low) (sf)
-- Class F to BB (sf) from B (low) (sf)

DBRS has also confirmed the rating on the following class:

-- Class X at AAA (sf)

All trends are Stable.

The rating upgrades reflect the increased credit enhancement to the transaction as a result of the full repayment of 11 loans and the improved performance of the outstanding loans remaining within the pool. At issuance in November 2013, the collateral consisted of 18 floating-rate mortgage loans secured by 27 transitional commercial and multifamily properties. Based on recently reported financials and occupancy rates, the majority of the remaining seven collateral properties are approaching stabilization as the respective borrowers have successfully executed their respective business plans. As of October 2015, the transaction has an outstanding principal balance of $160.6 million, resulting in total collateral reduction of 67.5% since issuance. In the last 12 months, five loans have fully repaid from the trust accounting for $157.2 million in repayments, representing a collateral reduction of 31.9%. The credit quality of the pool has improved overall since issuance with a weighted-average debt service coverage ratio (DSCR), loan-to-value and Debt Yield of 1.88 times (x), 65.9% and 8.4%, respectively, based on the most recent year-end reporting available for the individual loans as of October 2015. All remaining loans are scheduled to mature by July 2016. There are currently no loans in special servicing and two loans on the servicer’s watchlist, representing 20.8% of the current pool balance, which are highlighted below.

The 7701 Southern Drive loan (Prospectus ID#15, 11.8% of current pool balance) is secured by a 251,178 sf industrial building in Springfield, Virginia. The loan was added to the servicer’s watchlist in October 2015 and has an upcoming maturity in December 2015. As of October 2015, the borrower has notified the servicer that it plans to refinance and payoff the loan at maturity. The property occupancy rate has improved to 100.0% as of October 2015 compared with 68.2% at YE2014 as the borrower has been successful in executing a new lease with MGP Retail Consulting (31.8% of the net rentable area (NRA)) accounting for the remaining vacancy at the subject. The tenant’s lease is scheduled to expire past loan maturity. In addition, Baystate (9.7% of the NRA) has extended its lease from October 2014 to December 2017 at a reduced rental rate of $8.75 per square foot (psf) compared with $9.18 psf prior to the renewal. As a result, the loan’s cash flow coverage has considerably improved as of October 2015 at 1.96x compared with the YE2014 DSCR of 1.05x.

The North 189 Bernardo Avenue loan (Prospectus ID#18, 9.0% of current pool balance) is secured by a 63,271 sf two-story office building in Mountain View, California. The loan was added to the servicer’s watchlist as a result of a decline in occupancy following the departure of Jasper Wireless in January 2015. As a result, the property occupancy declined to 65.6%, according to the August 2015 rent roll, compared with 100.0% at issuance. In August 2015, the borrower successfully executed a new lease with xAd at a rental rate of $45.00 psf, well above the previous tenant’s rental rate of $19.67 psf. The property is now currently 100% leased to two tenants as of October 2015. xAd is actually taking space that the property’s other tenant, SETI Institute (SETI) has agreed to give back. The tenant will assume the entire first floor of the property, representing 50.0% of the NRA, on a lease scheduled to expire in November 2020. xAD received one month of free rent and $30.00 psf in tenant improvement/leasing commission funds, with its scheduled move-in date to occur by YE2015. SETI will continue to occupy the entire second-floor space at the property through October 2021. SETI currently pays a rental rate of $20.26 psf, which is well below the rental rate to be paid by xAd, providing additional cash flow upside for the property moving forward. Although the Q2 2015 DSCR remains depressed at 0.88x compared with the YE2014 DSCR of 1.36x, the debt service shortfall is being covered by a $652,000 cash reserve held by the lender and cash flow is expected to increase once xAd begins paying rent.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

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

The applicable methodologies are North American CMBS Rating Methodology (June 2015) and CMBS North American Surveillance (January 2015), which can be found on our website under Methodologies.