DBRS Morningstar Assigns Provisional Ratings to ACAM 2019-FL1, Ltd.

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Commercial Mortgage-Backed Notes to be issued by ACAM 2019-FL1, Ltd. (the Issuer):

-- 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 (high) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable. Classes F and G will be privately placed.

The initial collateral consists of 21 floating-rate mortgages secured by 35 mostly transitional properties with a cut-off balance totaling $400.3 million, excluding approximately $87.4 million of future funding commitments. Most loans are in a period of transition with plans to stabilize and improve the asset value. During the Reinvestment Period, the Issuer may acquire future funding commitments and additional eligible loans subject to the Eligibility Criteria. The transaction stipulates a $1.0 million threshold on pari passu participation acquisitions before a rating agency condition is required if the underlying loan is already participating in the trust.

For the floating-rate loans, the index DBRS Morningstar used (one-month LIBOR) was the lower of a DBRS Morningstar stressed rate that corresponded with the remaining fully extended term of the loans or the strike price of the interest-rate cap, with the respective contractual loan spread added to determine a stressed interest rate over the loan term. When the cut-off balances were measured against the DBRS Morningstar As-Is Net Cash Flow, 18 loans, comprising 86.9% of the initial pool, had a DBRS Morningstar As-Is Debt Service Coverage Ratio (DSCR) below 1.00 times (x), a threshold indicative of elevated term default risk. Additionally, the DBRS Morningstar Stabilized DSCR for six loans, comprising 29.8% of the initial pool balance, is below 1.00x, which is indicative of elevated refinance risk. The majority of the properties are transitioning with potential upside in cash flow; however, DBRS Morningstar does not give full credit to the stabilization if there are no holdbacks or if other loan structural features in place are insufficient to support such treatment. Furthermore, even with the structure provided, DBRS Morningstar generally does not assume the assets to stabilize above market levels.

The transaction will have a sequential-pay structure.

The properties are primarily located in core markets with the overall pool’s weighted-average (WA) DBRS Morningstar Market Rank at a very high 5.1. Eight loans, totaling 41.0% of the pool, are in markets with a DBRS Morningstar Market Rank of 8, 7 and 6. These higher DBRS Morningstar Market Ranks correspond with zip codes that are more urbanized in nature.

Three loans in the pool, totaling 33.8% of the DBRS Morningstar sample by cut-off date pool balance, are backed by a property whose quality DBRS Morningstar deemed to be Average (+) or Above Average.

The borrowers of all 21 floating-rate loans have purchased LIBOR rate caps that range between 2.5% and 3.75% to protect against rising interest rates over the term of the loan.

Thirteen loans, representing 51.8% of the initial pool balance, represent acquisition financing. Acquisition financing generally requires the respective sponsor(s) to contribute material cash equity as a source of funding in conjunction with the mortgage loan, resulting in a higher sponsor cost basis in the underlying collateral.

The Class F Notes, Class G Notes and Preferred Shares, which represent 15.6% of the transaction balance, will be retained by ACAM 2019-FL1 Retention Holder, LLC, an affiliate of the trust asset seller.

The pool consists of mostly transitional assets. Given the nature of the assets, DBRS Morningstar determined a sample size, representing 77.7% of the pool cut-off date balance. This is higher than the typical sample size for traditional conduit commercial mortgage-backed security (CMBS) transactions. DBRS Morningstar also performed physical site inspections, including management meetings. When DBRS Morningstar visits these markets, it may actually visit properties more than once to follow the progress (or lack thereof) toward stabilization. The servicer is also in constant contact with the borrowers to track progress.

Five loans, representing 27.7% of the pool, are secured by hotels, including three of the largest ten loans. Hotels have the highest cash flow volatility of all major property types as their income, which is derived from daily contracts rather than multi-year leases, and expenses, which are often mostly fixed, are quite high as a percentage of revenue. These two factors cause revenue to fall swiftly during a downturn and cash flow to fall even faster as a result of high operating leverage. The loans in the pool secured by hotel properties have a WA As-Is Loan-to-Value (LTV) ratio of 57.4% based on their fully funded loan amount and as-is appraised value, which compares favorably with the WA LTV of 89.7% for non-hotel properties in the pool. Additionally, the WA market index for the hotel properties in the pool is 6.3, with 61.5% of the hotel properties located in markets ranked 7 and 8, indicating concentration in urban locations.

Based on the weighted initial pool balances, the overall WA DBRS Morningstar As-Is DSCR of 0.77x reflects high-leverage financing. The assets are generally well positioned to stabilize and any realized cash flow growth would help to offset rising interest rates and also improve the overall debt yield of the loans. DBRS Morningstar associates its loss given default (LGD) with the assets’ As-Is LTV and does not assume that the stabilization plan and cash flow growth will ever materialize. Additionally, including all future funding in the calculation, the WA DBRS Morningstar As-Stabilized LTV is low at 53.8%. The WA DBRS Morningstar As-Stabilized LTV reflects downward stabilized value adjustments that DBRS Morningstar made to two loans.

All loans in the pool have floating interest rates. Eighteen loans, comprising 78.0% of the pool balance, are interest only during the original term and have original terms ranging from 24 months to 60 months, creating interest-rate risk. All loans are short-term loans and, even with extension options, they have a fully extended maximum loan term of five years. Additionally, for the floating-rate loans, DBRS Morningstar used the one-month LIBOR index, which is based on the lower of a DBRS Morningstar stressed rate that corresponded with the remaining fully extended term of the loans or the strike price of the interest-rate cap with the respective contractual loan spread added to determine a stressed interest rate over the loan term. Additionally, all loans have extension options and, to qualify for these options, the loans must meet minimum DSCR and LTV requirements.

DBRS Morningstar analyzed the loans to a stabilized cash flow that is, in some instances, above the current in-place cash flow. The sponsors may not execute their business plans as expected and the higher stabilized cash flow may not materialize during the loan term. Failure to execute the business plan could result in a term default or the inability to refinance the fully funded loan balance. DBRS Morningstar made relatively conservative stabilization assumptions and, in each instance, considered the business plan to be rational and the future funding amounts to be sufficient to execute such plans. In addition, DBRS Morningstar analyzes LGD based on the As-Is LTV, assuming that the loan is fully funded.

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

For supporting data and more information on this transaction, please log into www.viewpoint.dbrs.com.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#1 – Leeds Park International (10.1% of the pool)
-- Prospectus ID#2 – Oak Street (9.7% of the pool)
-- Prospectus ID#3 – James Hotel NYC (9.6% of the pool)
-- Prospectus ID#4 – Valencia Corporate Plaza (7.5% of the pool)
-- Prospectus ID#5 – Marriott Winston-Salem (6.9% of the pool)
-- Prospectus ID#6 – St. Clair Hotel (5.0% of the pool)
-- Prospectus ID#7 – Maxim Crane Portfolio (5.0% of the pool)
-- Prospectus ID#8 – Interchange Office Center (4.9% of the pool)
-- Prospectus ID#9 – Elliot Center (4.8% of the pool)
-- Prospectus ID#10 – One Hanson Place (4.6% of the pool)
-- Prospectus ID#11 – 2700 North Central (4.0% of the pool)
-- Prospectus ID#16 – 2400 Weccacoe (3.4% of the pool)
-- Prospectus ID#20 – Gibson Brands Church Street Building (2.1% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrs.com. The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is North American CMBS Multi-borrower Rating Methodology, which can be found on www.dbrs.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on www.dbrs.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

DBRS, Inc.
333 West Wacker Drive, Suite 1800
Chicago, IL 60606 USA