DBRS Morningstar Finalizes Provisional Ratings on ACRES Commercial Realty 2021-FL1 Issuer, Ltd. and ACRES Commercial Realty 2021-FL1 Co-Issuer, LLC.

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes issued/co-issued by ACRES Commercial Realty 2021-FL1 Issuer, Ltd. (Issuer) and ACRES Commercial Realty 2021-FL1 Co-Issuer, LLC. (Co-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 (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable

CORONAVIRUS OVERVIEW
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, feeling more immediate effects. Accordingly, DBRS Morningstar may apply additional short-term stresses to its rating analysis. For example, DBRS Morningstar may front-load default expectations and/or assess 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, please see the following DBRS Morningstar press releases: https://www.dbrsmorningstar.com/research/357883 and https://www.dbrsmorningstar.com/research/358308.

DBRS Morningstar analyzed the pool to determine the provisional ratings, reflecting the long-term risk that the Issuer will default and fail to satisfy its financial obligations in accordance with the terms of the transaction. The initial collateral consists of 33 floating-rate mortgage loans secured by 37 mostly transitional real estate properties, with a cut-off pool balance totaling approximately $802.6 million, excluding approximately $50.1 million of future funding commitments. The initial pool is composed of 19 whole loans and 14 participations. Most loans are in a period of transition with plans to stabilize and improve the asset value. The transaction is a managed vehicle with a 24-month reinvestment period. During the reinvestment period, so long as the note protection tests are satisfied and no EOD has occurred and is continuing, the Issuer may acquire future funding commitments and additional eligible loans subject to the eligibility criteria, which among other things, has a minimum debt service coverage ratio (DSCR) and loan-to-value ratio (LTV), a 16.0 Herfindahl score, and loan size limitations. The eligibility criteria stipulate rating agency confirmation (RAC) on reinvestment loans (except in the case of acquisitions of up to a $5.0 million pari passu participation interest if a portion of the underlying loan is already included in the pool) thereby allowing DBRS Morningstar the ability to review the new collateral interest and any potential impacts to the overall ratings. There is no ramp period; however, there is one delayed close asset, representing 4.3% of the cut-off balance, which is expected to close prior to or within 90 days of the closing date. The transaction will have a sequential-pay structure. For so long as any class of notes with a higher priority is outstanding, any interest due on the Class F Notes or the Class G Notes can be deferred and interest deferral will not result in an EOD.

All the loans in the pool have floating interest rates initially indexed to Libor and are interest only (IO) (except for one loan) through their initial terms. As such, to determine a stressed interest rate over the loan term, DBRS Morningstar used the one-month Libor rate, which was the lower of DBRS Morningstar’s stressed rates that corresponded to the remaining fully extended term of the loans and the strike price of the interest rate cap with the respective contractual loan spread added. The pool exhibited a relatively high WA DBRS Morningstar Issuance LTV of 77.6%, though it is estimated to improve to 69.1% through stabilization. When the cut-off date balances were measured against the DBRS Morningstar As-Is NCF, 26 loans, representing 78.9% of the cut-off date pool balance, had a DBRS Morningstar As-Is DSCR below 1.00x, a threshold indicative of high default risk. Additionally, the DBRS Morningstar Stabilized DSCR for 18 loans, representing 56.6% of the initial pool balance, was below 1.00x, a threshold indicative of elevated refinance risk. The properties are often transitioned with potential upside in cash flow. However, DBRS Morningstar does not give full credit to the stabilization if there are no holdbacks of if other loan 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.

The Sponsor is ACRES Commercial Realty Corp. (NYSE:ACR). In July 2020, ACRES Capital Corp. (ACRES) through its subsidiary, ACRES Capital, LLC, acquired the management agreement of ACRES Commercial Realty Corp (formerly known as ExantasCapital Corp). ACRES is a publicly traded commercial mortgage REIT focused on self-originated commercial mortgage loans and other commercial real estate (CRE) debt investments. It provides nationwide, middle-market commercial real estate lending with a focus on multifamily, student-housing, hospitality, office, and independent senior living properties in the U.S.. The Sponsor has been an Issuer on 11 securitized CRE financings totaling approximately $4.6 billion.

An affiliate of the sponsor, Retention Holder, will be acquiring and holding 100% the first-loss position (including Class F Notes, Class G Notes, and the Preferred Shares) on this transaction as an eligible horizontal residual interest (EHRI). The Retention Holder will retain the EHRI in accordance with the U.S. Credit Risk Retention Rules. The Sponsor and the Retention Holder will both agree and undertake in the EU/UK Risk Retention Letter to comply with the EU/UK Risk Retention Requirements in accordance with the terms of the EU/UK Risk Retention Letter. Collectively, the retained notes and membership interests represent 15.9% of the trust balance.

Twenty-three loans, representing 75.2% of the initial pool, are backed by multifamily properties (65.7%), excluding student housing, and self-storage properties (9.4%). These property types have historically shown lower defaults and losses. Multifamily properties benefit from staggered lease rollover and generally low expense ratios compared with other property types. While revenue is quick to decline in a downturn because of the short-term nature of the leases, it is also quick to respond when the market improves. Furthermore, the pool has limited office, retail, mixed-used, and hospitality exposure with only eight loans, representing 17.7% of the pool, backed by such property types. These property types have experienced considerable disruption as a result of the coronavirus pandemic with mandatory closures, stay-at-home orders, travel restrictions, retail bankruptcies, and consumer shifts to online purchasing.

The DBRS Morningstar Business Plan Scores (BPS) for loans DBRS Morningstar analyzed ranged from 1.15 to 2.53, with an average of 1.90. On a scale of 1 to 5, a higher DBRS Morningstar BPS is indicative of more risk in the sponsor’s business plan. Consideration is given to the anticipated lift at the property from current performance, planned property improvements, sponsor experience, projected time horizon, and overall complexity. Compared with similar transactions, the subject has a relatively low average BPS, which is indicative of lower risk. In addition, the WA remaining fully extended term for the pool is 44 months, which allows the sponsors time to execute their business plans without risk of imminent maturity.

Twenty-two loans, comprising 73.7% of the initial trust balance, represent acquisition financing wherein sponsors contributed cash equity as a source of funding in conjunction with the mortgage loan. The cash equity in the deal will incentivize the sponsors to perform on the loan and protect their equity.

The majority of the floating-rate loans have purchased Libor rate caps that range from 0.25% to 4.0% 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 option.

The ongoing coronavirus pandemic continues to pose challenges and risks to the CRE sector. While DBRS Morningstar expects multifamily (65.7% of the pool) to fare better than most other property types, the long-term effects on the general economy and consumer sentiment are still unclear. DBRS Morningstar received coronavirus and business plan updates for all loans in the pool, confirming that all debt service payments have been received in full for the months of January 2021, February 2021, March 2021, and April 2021. Furthermore, no loans are in forbearance or other debt service relief except for 16 Penn property and Cypress Crossing property, which, combined, represent 4.08% of the initial trust balance. More than half of the loans in the pool were originated after December 2020. Loans originated during the pandemic have, in general, taken into consideration the risks associated with the pandemic into their cash flow analyses. In addition, the majority of the loans in this pool have recently completed appraisal reports reflecting the appropriate values of properties during the pandemic.

The transaction is a managed collateralized loan obligation (CLO) and includes one delayed-close loan and a 24-month reinvestment period, which could result in negative credit migration and/or an increased concentration profile over the life of the transaction. The risk of negative migration is partially offset by the eligibility criteria that outlines the DSCR, LTV, 16.0 Herfindahl score minimum, property type, and loan size limitations for the reinvestment assets. DBRS Morningstar has the ability to provide a no-downgrade confirmation for new reinvestment loans and for participation interests in loans the Issuer already owns a participation interest if the interest to be acquired exceeds $5.0 million. DBRS Morningstar will analyze these loans before they come into the pool and review them for potential ratings impact.

Sixteen loans, representing 46.8% of the pool, were originated in 2018 and 2019. In some cases, the original business plans have not materialized as expected, significantly increasing the loans’ risk profile. Given the nature of the assets, DBRS Morningstar sampled a large portion of the pool at 79.4% of the cut-off date balance, or 21 of the 34 loans. This sample size is higher than the typical sample for traditional conduit CMBS transactions. In addition, DBRS Morningstar also sampled 11 of the 16 seasoned loans, representing 36.4% of the pool balance, to evaluate the current performance on these properties. Five of the seasoned loans sampled have yet to reach stability but are maturing over the next 12 months and are at risk of not being able to meet the extension requirements. For these loans, DBRS Morningstar applied minimal upside credit and treated the as-stabilized NCF the same as the as-is NCF to these loans (Westwood & Audobon, Goodfriend NY Self Storage, Advenir at Park Boulevard, West Eleven Apartments, and Stonelake 1-5). Some of these loans may receive short-term loan extensions from the Issuer to facilitate the sale or refinance of the properties. All seasoned loans were provided with updated business plans and appraisal reports.

DBRS Morningstar has analyzed the loans to a stabilized cash flow that is, in some instances, above the current in-place cash flow. There is a possibility that the sponsors will not execute their business plans as expected and that the higher stabilized cash flow will not materialize during the loan term, particularly with the ongoing coronavirus pandemic and its impact on the overall economy. 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 loss given default (LGD) based on the DBRS Morningstar As-Is LTV assuming the loan is fully funded.

The overall WA DBRS Morningstar As-Is DSCR of 0.76x and WA As-Is LTV of 77.6% are generally reflective of high-leverage financing. The DBRS Morningstar As-Is DSCR is based on the DBRS Morningstar In-Place NCF and debt service calculated using a stressed interest rate. The WA stressed rate used is 4.75%, which is greater than the current WA interest rate of 3.61% (based on WA mortgage spread and an assumed 0.11% one-month Libor index). When measured against the DBRS Morningstar Stabilized NCF, the WA DBRS Morningstar As-Stabilized DSCR is estimated to improve to 1.00x, suggesting the properties are likely to have improved NCFs assuming completion of the sponsor’s business plan. DBRS Morningstar associates its LGD based on the assets’ as-is LTV and does not assume that the stabilization plan and cash flow growth will ever materialize but does account for the loan having been fully funded. DBRS Morningstar’s As-Stabilized LTV is expected to decrease to 69.1%.

All loans have floating interest rates and all but one loans are IO during the initial loan term, creating interest rate risk should interest rates increase. 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 to 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. Most loans have extension options, and, in order to qualify for these options, the loans must meet minimum DSCR and LTV requirements. All loans are short-term and, even with extension options, have a fully extended loan term of five years maximum. The majority of the floating-rate loans have purchased Libor rate caps that range from 0.25% to 4.0% to protect against rising interest rates through the duration of the loan term.

Because of the ongoing coronavirus pandemic, DBRS Morningstar was unable to perform site inspections on any of the properties in the pool. As a result, DBRS Morningstar relied more heavily on third-party reports, online data sources, and information provided by the Issuer to determine the overall DBRS Morningstar property quality assigned for each loan. Recent appraisal reports were provided for all loans and contained property quality commentary and photos. DBRS Morningstar made relatively conservative property quality adjustments with only four loans (Skygarden, Advenir at Park Boulevard, Chapel Hill Apartments, and 16 Penn), representing a combined 14.3% of the pool balance, being modeled with Average + property quality. These properties were recently built or renovated. No loans received a property quality distinction of Excellent.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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.dbrsmorningstar.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 – Lantana Apartments (8.1% of the pool)
-- Prospectus ID#2 – Latham Square (5.6% of the pool)
-- Prospectus ID#3 – Green Tree Apartments (Village at Eastpointe) (5.4% of the pool)
-- Prospectus ID#4 – Century Skyline (5.2% of the pool)
-- Prospectus ID#5 – SkyGarden (4.3% of the pool)
-- Prospectus ID#6 – Westwood & Audubon (4.2% of the pool)
-- Prospectus ID#7 – The Ambassador (4.1% of the pool)
-- Prospectus ID#8 – Chapel Hill Apartments (4.0% of the pool)
-- Prospectus ID#9 – Goodfriend NY Self Storage (4.0% of the pool)
-- Prospectus ID#10 – Columns at Allen's Creek (3.9% of the pool)
-- Prospectus ID#11 – Bitterwood and Fifth Avenue (3.8% of the pool)
-- Prospectus ID#12 – Serrano North & South (3.4% of the pool)
-- Prospectus ID#14 – Cary Pines Apartments & Townhomes (3.1% of the pool)
-- Prospectus ID#15 – Advenir at Park Boulevard (3.1% of the pool)
-- Prospectus ID#16 – West Eleven Apartments (3.1% of the pool)
-- Prospectus ID#17 – 16 Penn (2.9% of the pool)
-- Prospectus ID#18 – 2818 Place & Parkway Place (2.9% of the pool)
-- Prospectus ID#19 – Stonelake 1-5 (2.7% of the pool)
-- Prospectus ID#20 – Mesa Tower (2.6% of the pool)
-- Prospectus ID#25 – Sawmill Plaza Shopping Center (2.0% of the pool)
-- Prospectus ID#29 – Cypresswood Crossing (1.1% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.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 (March 26, 2021), which can be found on 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 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 rating 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].

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