DBRS Morningstar Confirms All Classes of ACRE Commercial Mortgage 2017-FL3 Ltd.

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of secured Floating Rate Notes issued by ACRE Commercial Mortgage 2017-FL3 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 (low) (sf)
-- Class E at BB (low) (sf)
-- Class F 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. 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 transaction originally closed in March 2017 with an initial collateral pool of 12 floating-rate mortgages secured by 16 transitional commercial real estate properties, with a total balance of $341.2 million. In March 2019, the collateral pool was upsized to a balance of $557.0 million. The transaction is structured with a Reinvestment Period, which was extended from March 2021 through the March 2024 Payment Date, whereby the Issuer may acquire Funded Companion Participations and introduce new loan collateral into the trust.

As of the March 2023 remittance, the pool comprises 16 loans secured by 17 properties with a cumulative trust balance of $428.7 million. Most loans are in a period of transition with plans to stabilize and improve asset value. Since issuance, 40 loans with a former cumulative trust balance of $1.15 billion have been successfully repaid from the pool, including all 12 original loans. Of the remaining loans, only three loans, representing 22.6% of the maximum funded pool balance, were originated prior to 2021. As of the March 2023 remittance, the Reinvestment Account had a balance of $128.3 million.

In general, borrowers are progressing toward completion of the stated business plans. Nine of the 16 outstanding loans were structured with future funding components and, according to an update from the collateral manager, it had advanced $82.9 million in loan future funding through March 2023 to eight individual borrowers to aid in property stabilization efforts. The largest advances were made to the borrowers of the Caterpillar Aurora ($36.7 million) and Northridge Commons ($19.3 million) loans. The Caterpillar Aurora loan is secured by a 4.0 million-square-foot industrial property in Montgomery, Illinois, and the Northridge Commons loan is secured by an office property in Sandy Springs, Georgia. The borrowers of both loans have used loan future funding for accretive leasing costs and capital improvements. An additional $7.1 million of unadvanced loan future funding allocated to four individual borrowers remains outstanding with the largest portion ($3.7 million) allocated to the borrower of the 251 Monroe loan. The loan is secured by an industrial property in Kenilworth, New Jersey, with loan future funding available to fund leasing costs and as a performance-based earn-out.

The transaction is concentrated by loan size, as the largest 10 loans represent 86.6% of the current trust balance and 66.6% of the maximum funded pool balance. The transaction consists of three loans (totaling 29.4% of the current trust balance) secured by office properties, three loans (totaling 27.8% of the current trust balance) secured by industrial properties, one loan (totaling 15.6% of the current trust balance) secured by a mixed-use property, and six loans (totaling 14.8% of the current trust balance) secured by self-storage properties. In comparison with the transaction as of May 2022, there were three loans secured by office properties (24.0% of the trust balance), two loans secured by industrial properties (17.8% of the trust balance), two loans secured by hotel properties (16.8% of the trust balance), and three loans secured by multifamily properties (15.0% of the trust balance).

As of the March 2023 remittance, one loan (Old Orchard Towers), representing 10.2% of the maximum funded pool balance, is on the servicer’s watchlist as a result of occupancy and debt service coverage ratio (DSCR) declines. The loan is secured by two seven-story office buildings in Skokie, Illinois. At YE2022, the property was 65.1% occupied and operations yielded a DSCR of 0.54 times. Prolonged property performance declines are a result of historical tenant departures, which have been exacerbated by an overall decrease in the desirability of suburban office product. The loan matures in June 2023, after the lender and borrower agreed to extension terms; however, there are no remaining loan extension options. The loan is expected to remain current through maturity as the borrower was required to deposit projected debt service shortfalls into a reserve. Additionally, according to March 2023 reporting, there is $0.9 million remaining in the debt service reserve following a $0.1 million disbursement. DBRS Morningstar has identified the loan as having increased credit risk given the upcoming loan maturity, as an updated 2022 property appraisal valued the property at $48.4 million, indicative of a currently funded loan-to-value ratio of 117.6%.

According to March 2023 reporting, the 6140 Lipan Street loan (2.1% of the maximum funded pool balance) has been categorized as a performing matured balloon as the loan matured in February 2023. The loan is secured by a 34-acre industrial parking and outdoor storage site in Denver, Colorado, 3.5 miles north of the Denver central business district. The loan is structured with one 12-month extension option, and based on the YE2022 servicer-provided net cash flow of $2.2 million and 10.7% debt yield, property operations pass the performance-based loan extension tests. According to servicer commentary, it is awaiting loan extension documentation from the sub-servicer and lender as it appears the loan maturity will be extended to February 2024. The borrower will be required to pay an extension fee and purchase a new 12-month interest rate cap agreement.

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 (May 17, 2022).

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 in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023), 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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

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.

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

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