DBRS Morningstar Assigns Provisional Ratings to ACRE Commercial Mortgage 2021-FL4 Ltd.

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of notes to be issued by ACRE Commercial Mortgage 2021-FL4 Ltd.:

-- 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 (low) (sf)
-- Class G at B (low) (sf)

The initial collateral consists of 23 floating-rate mortgage loans secured by 34 mostly transitional real estate properties with a cut-off-date pool balance of approximately $667.2 million, excluding $77.1 million of future funding commitments ($77.1 million of which remained outstanding as of the mortgage loan cut-off date). Most loans are in a period of transition with plans to stabilize and improve asset value. During the Permitted Funded Companion Participation Acquisition Period, the Issuer may acquire Funded Companion Participations subject to, among other criteria, receipt of a no-downgrade confirmation (commonly referred to as a rating agency confirmation). The transaction does not permit the ability to reinvest or add unidentified assets to the pool post closing, except that principal proceeds can be used to acquire the aforementioned Funded Companion Participations.

For all 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 loan 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 property-level as-is appraised values were measured against the fully funded mortgage loan commitments, the pool exhibited a relatively high Weighted-Average (WA) As-Is Loan-to-Value ratio (LTV) of 77.7%. However, DBRS Morningstar estimates the pool’s WA LTV to improve to 66.3% through stabilization. When the debt service payments associated with the fully funded loan balances were measured against the DBRS Morningstar As-Is Net Cash Flow (NCF), 19 loans, representing 95.7% of the cut-off-date pool balance, had a DBRS Morningstar As-IS Debt Service Coverage Ratio (DSCR) below 1.00 times (x), a threshold indicative of higher default risk. Additionally, when the debt service payments associated with the fully funded loan amounts were measured against the DBRS Morningstar Stabilized NCF, 11 loans, representing a collective 56.1% of the pool, exhibited a stabilized DBRS Morningstar DSCR of below 1.00x, a threshold indicative of elevated refinance risk. The properties are often transitional 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 structural features are insufficient to support such treatment. Furthermore, even with the structure provided, DBRS Morningstar generally does not assume the assets will stabilize above market levels.

With regard to the Coronavirus Disease (COVID-19) pandemic, the magnitude and extent of performance stress posed to global structured finance transactions remain highly uncertain. This considers the fiscal and monetary policy measures and statutory law changes that have already been implemented or will be implemented to soften the impact of the crisis on global economies. Some regions, jurisdictions, and asset classes are, however, affected more immediately. Accordingly, DBRS Morningstar may apply additional short-term stresses to its rating analysis, for example by front-loading default expectations and/or assessing the liquidity position of a structured finance transaction with more stressful operational risk and/or cash flow timing considerations.

For more information regarding rating methodologies and the coronavirus pandemic, please see the following DBRS Morningstar press releases: https://www.dbrsmorningstar.com/research/357883 and https://www.dbrsmorningstar.com/research/358308.

The borrowers for all 23 loans have purchased Libor caps with strike prices that range from 1.15% to 3.50% to protect against rising interest rates through the duration of the loan term. In addition to the fulfillment of certain minimum performance requirements, exercise of any extension options would also require the repurchase of interest rate cap protection through the duration of the respectively exercised options. The loans are generally secured by traditional property types (i.e., retail, multifamily, and office) with only eight loans, representing 14.9% of the cut-off-date pool balance, secured by nontraditional property types such as hospitality and self-storage. Additionally, only two multifamily loans in the pool are secured by student-housing properties, which often exhibit higher cash flow volatility than traditional multifamily properties.

Based on the initial pool balances, the overall WA DBRS Morningstar As-Is DSCR of 0.47x and WA As-Is LTV of 77.7% are generally reflective of high-leverage financing. Most of the assets are generally well positioned to stabilize, and any realized cash flow growth would help to offset a rise in interest rates and improve the overall debt yield of the loans. DBRS Morningstar associates its loss given default based on the assets’ as-is LTV, which does not assume that the stabilization plan and cash flow growth will ever materialize. The DBRS Morningstar As-Is DSCR at issuance does not consider the sponsor’s business plan, as the DBRS Morningstar As-Is NCF was generally based on the most recent annualized period. The sponsor’s business plan could have an immediate impact on the underlying asset performance that the DBRS Morningstar As-Is NCF is not accounting for. When measured against the DBRS Morningstar Stabilized NCF, DBRS Morningstar estimates that the WA DBRS Morningstar As-Stabilized DSCR to improve to 0.98x, suggesting the properties are likely to have improved NCFs once the sponsor’s business plan has been implemented.

Sixteen loans, comprising 82.8% of the cut-off-date pool balance, represent refinance financing. The refinancings within this securitization generally do not require the respective sponsor(s) to contribute material cash equity as a source of funding in conjunction with the mortgage loan, resulting in a lower sponsor equity basis in the underlying collateral. Of the 16 refinance loans, five loans, comprising 28.4% of the pool, reported occupancy rates higher than 80.0%. Additionally, the 16 refinance loans exhibited a WA growth between as-is and stabilized appraised value estimates of 17.4% compared with the overall WA appraised value growth of 17.9% for the pool and the WA appraised value growth of 20.0% exhibited by the pool’s acquisition loans.

Six loans, comprising 40.0% of the cut-off-date pool balance, are structured to be interest only (IO) through most of or all of the initial loan term but switch to 30-year amortization schedules during the last year of the loan term or during the extension periods. Loans structured with partial IO periods generally exhibit higher-than-average default frequencies relative to loans structured with full-term IO periods or no IO periods. All identified floating-rate loans have extension options and, in order to qualify for such options, must generally meet minimum and/or maximum leverage, debt yield, and/or DSCR requirements.

The transaction will likely be subject to a benchmark rate replacement, which will depend on the availability of various alternative benchmarks. The current selected benchmark is the Secured Overnight Financing Rate (SOFR). Term SOFR, which is expected to be a similar forward-looking term rate compared with Libor, is the first alternative benchmark replacement rate but is currently being developed. There is no assurance Term SOFR development will be completed or that it will be widely endorsed and adopted. This could lead to volatility in the interest rate on the mortgage assets and floating-rate notes. The transaction could be exposed to a timing mismatch between the notes and the underlying mortgage assets as a result of the mortgage benchmark rates adjusting on different dates than the benchmark on the note, or a mismatch between the benchmark and/or the benchmark replacement adjustment (if any) applicable to the mortgage loans. In order to compensate for differences between the successor benchmark rate and then-current benchmark rate, a benchmark replacement adjustment has been contemplated in the indenture as a way to compensate for the rate change. Currently, Wells Fargo, National Association, in its capacity as Designated Transaction Representative, will generally be responsible for handling any benchmark rate change and will be held to a gross negligence standard only with regard to any liability for its actions.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 analysis and in-depth commentary in the DBRS Viewpoint platform.

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

-- Prospectus ID#1 - 311 West Monroe (10.5% of the pool)
-- Prospectus ID#2 - RealOp Southeast Portfolio (10.5% of the pool)
-- Prospectus ID#3 - Exchange (9.2% of the pool)
-- Prospectus ID#4 - Promenade on the Peninsula (6.7% of the pool)
-- Prospectus ID#5 - BELA Apartments (6.1% of the pool)
-- Prospectus ID#6 - Homewood Suites Redondo Beach (6% of the pool)
-- Prospectus ID#7 - Retreat at College Station (6% of the pool)
-- Prospectus ID#8 - Glen at University Park (5.5% of the pool)
-- Prospectus ID#9 - Mansions at Canyon Creek (5.4% of the pool)
-- Prospectus ID#10 - The Landing (4.7% of the pool)
-- Prospectus ID#11 - Arch Apartments (4.4% of the pool)
-- Prospectus ID#12 - Packing House Square (4% of the pool)
-- Prospectus ID#13 - Santal Apartments (3.7% of the pool)
-- Prospectus ID#17 - 1023 Mission Street (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 the North American CMBS Multi-Borrower Rating Methodology (August 7, 2020), which can be found on www.dbrsmorningstar.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.dbrsmorningstar.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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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.dbrsmorningstar.com or contact us at [email protected].

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 696-6293