DBRS Morningstar Assigns Provisional Ratings to ACREC 2023-FL2 LLC

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of notes to be issued by ACREC 2023-FL2 LLC:

--Class A Notes at AAA (sf)
--Class A-S Notes at AAA (sf)
--Class B Notes at AA (low) (sf)
--Class C Notes at A (low) (sf)
--Class D Notes at BBB (sf)
--Class D-E Notes at BBB (sf)
--Class D-X Notes at BBB (sf)
--Class E Notes at BBB (low) (sf)
--Class E-E Notes at BBB (low) (sf)
--Class E-X Notes at BBB (low) (sf)
--Class F Notes at BB (low) (sf)
--Class G Notes at B (low) (sf)

All trends are Stable.

The initial collateral consists of 15 floating-rate mortgage loans secured by 18 mostly transitional properties with a cut-off date balance of $534.2 million. The loans have an aggregate $63.5 million of pari passu debt and approximately $25.7 million of unfunded future funding commitment of the future funding participations as of the cut-off date. Of the 15 loans, one is a delayed-close loan, unclosed as of January 31, 2023 (Waters Edge; Prospectus ID #11), that represents 5.8% of the total initial pool balance. If the loan does not close prior to the closing date, a deposit will be made to the Unused Proceeds Account in an amount equal to the expected initial principal balance of $31.2 million. To the extent that any or all of the loans are not purchased within 90 days of securitization closing (target amortization date), the unused proceeds will pay down the notes in sequential order in an amount necessary to cause the credit enhancement of each class to equal its targeted credit enhancement. DBRS Morningstar believes subordination from the current levels to the adjusted levels appropriately accounts for the possible deterioration in both credit quality and diversity profile if the loan does not close within 90 days of securitization.

The transaction will consist of a fully identified static pool of assets with no ability to add unidentified assets after the closing date. The transaction includes a replenishment period where the Issuer may use available proceeds to acquire all or a portion of any funded companion participation, subject to the satisfaction of the Replenishment Criteria and the Acquisition and Disposition Requirements, which includes a no-downgrade rating agency confirmation by DBRS Morningstar for all funded companion participations. The holder of the future funding companion participations, ACREC Loan Seller I LLC, has full responsibility to fund the future funding companion participations. The transaction will have a sequential-pay structure.

The loans are mostly secured by cash-flowing assets, many of which are in a period of transition with plans to stabilize and improve the asset value. In total, nine loans, representing 59.6% of the pool, have remaining future funding participations totaling $25.7 million, which the Issuer may acquire in the future. Nine loans, representing 65.0% of the pool, have pari passu debt held outside of the trust, totaling $63.5 million. Please see the chart below for the participations that the Issuer will be allowed to acquire.

All of the loans in the pool have floating rates and, in its analysis, DBRS Morningstar incorporates an interest rate stress that is based on the lower of a DBRS Morningstar stressed rate that corresponds 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. When the debt service payments were measured against the DBRS Morningstar As-Is NCF, 14 of the15 loans, representing 92.2% of the initial pool balance, had a DBRS Morningstar As-Is DSCR of 1.00x or lower, a threshold indicative of default risk. Additionally, the DBRS Morningstar Stabilized DSCR for 11 loans, representing 72.0% of the initial pool balance, was below 1.00x, which is indicative of elevated refinance risk. The properties are often 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 structural features in place 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.

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.

Classes D-E, D-X, E-E, and E-X are interest-only (IO) that reference a single rated tranche or multiple tranches. The IO rating mirrors the lowest-rated applicable reference to obligation tranche adjusted upward by one notch if senior in the waterfall.

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

Notes:
All figures are 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 (November 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 not 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.

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

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