DBRS Morningstar Confirms Ratings on ACREC 2021-FL1 Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on all classes of commercial mortgage-backed notes issued by ACREC 2021-FL1 Ltd. (the Issuer) as follows:

-- 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.

The rating confirmations reflect the overall stable performance of the transaction, which has remained in line with DBRS Morningstar’s expectations since issuance. In conjunction with this press release, DBRS Morningstar has published a Surveillance Performance Update report with in-depth analysis and credit metrics for the transaction and with business plan updates on select loans. To access this report, please click on the link under Related Documents below or contact us at [email protected].

The initial collateral consisted of 23 floating-rate mortgages secured by 23 transitional multifamily properties with a cut-off date balance totaling approximately $875.6 million, excluding approximately $18.4 million of future funding commitments. Most loans are in a period of transition with plans to stabilize performance and improve the asset value.
The transaction is a managed vehicle, which includes an 18-month reinvestment period expiring with the April 2023 Payment Date, whereby the Issuer may acquire Funded Companion Participations and new loan collateral into the trust subject to Eligibility Criteria as defined at issuance. According to the Eligibility Criteria, all collateral will be secured by multifamily assets. As of July 2022, the Replenishment Account has a balance of $93.7 million.

According to the July 2022 remittance report, 20 loans remain in the pool with a current principal balance of $782.0 million. Since issuance, five loans with a former cumulative trust balance of $172.5 million have successfully repaid from the pool, and two loans with a current cumulative trust balance of $78.8 million have been contributed to the trust.

In general, borrowers are progressing toward completion of their stated business plans with many plans still in the early stages. According to the collateral manager, cumulative loan future funding of $2.1 million has been advanced across nine individual borrowers through June 2022 to aid in business plan completion. An additional $19.8 million of loan future funding allocated to 11 individual borrowers remains outstanding.

The pool is concentrated by property type as all 20 loans, representing 100.0% of the current trust balance, are secured by traditional multifamily assets. Additionally, most loans in the pool are secured by traditional multifamily properties, such as garden-style communities or mid-rise/high-rise buildings, with no independent-living/assisted-living/memory care facilities or student housing properties included in this pool. Furthermore, during the transaction’s reinvestment period, only multifamily properties (excluding senior housing and student housing properties) are eligible to be brought into the trust.

The pool continues to be predominantly composed of properties in suburban markets, defined as markets with a DBRS Morningstar Market Rank of 3, 4, and 5. As of the July 2022 reporting, this includes 15 loans, representing 71.9% of the current trust balance. In addition, there are no properties in tertiary markets, defined as markets with a DBRS Morningstar Market Rank of 2. In comparison, at issuance, 16 loans, representing 67.3% of the trust balance, were secured by properties in suburban markets and two loans, representing 7.6% of the trust balance, were secured by properties in tertiary markets. The transaction is also concentrated by loan size, as the 10 largest loans represent 66.8% of the pool. Overall pool leverage has remained relatively consistent from issuance. According to July 2022 reporting, the weighted-average (WA) as-is appraised loan-to-value (LTV) ratio is 74.5% and the WA stabilized appraised LTV is 69.8%. In comparison, these figures were 74.5% and 69.2%, respectively, at closing.

As of the July 2022 remittance, three loans, representing 12.1% of the pool, are on the servicer’s watchlist for cash flow concerns. The largest of these, The Duncan (Prospectus ID#5, 6.6% of the pool), is secured by a 260-unit multifamily property in Chicago’s West Loop submarket. While the loan reported a debt service coverage ratio (DSCR) of 0.36 times (x) as of YE2021, the property benefits from strong leasing momentum as it was 95.0% occupied as of the July 2022 rent roll, an increase from 64.5% at issuance. According to the servicer-provided financials for the trailing 12-month period ended April 30, 2022, property performance has improved with a reported net cash flow of $1.9 million, equating to a DSCR of 0.82x.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data. For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com.

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

The principal methodology is North American CMBS Surveillance Methodology (March 4, 2022), 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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

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