DBRS Morningstar Confirms All Ratings on ACRES Commercial Realty 2021-FL1

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the following classes of notes issued by ACRES Commercial Realty 2021-FL1:

-- 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. For access to this report, please click on the link under Related Documents below or contact us at [email protected].

The transaction closed in May 2021 with an initial collateral pool of 33 floating-rate mortgage loans secured by 37 mostly transitional real estate properties, with a cut-off pool balance of $802.6 million. Most loans were in a period of transition with plans to stabilize and improve asset value. The transaction was structured with a Reinvestment Period through the May 2023 Payment Date. As the Reinvestment Period has not ended, any subsequent loan repayment proceeds will be used to pay down the bonds sequentially.

As of the May 2023 remittance, the pool comprises 32 loans secured by 33 properties with a cumulative trust balance of $801.8 million, as there has been minimal collateral reduction of 0.1%. Since issuance, 27 loans with a former cumulative trust balance of $592.0 million have been successfully repaid from the pool. Only one of those loans, 209 West Jackson, which had a former trust balance of $22.8 million, was purchased out of the trust by the collateral manager as a credit risk asset. Of the original 33 loans, only 10 loans, representing 33.3% of the current trust balance, remain in the transaction as of May 2023 reporting. Since the previous DBRS Morningstar rating action in November 2022, five loans with a current trust balance of 17.2% have been added to the trust.

The transaction is concentrated by property type, as 19 loans are secured by multifamily properties, representing 65.3% of the current trust balance, and eight loans are secured by office properties, representing 21.3% of the current trust balance. The remaining pool consists of loans secured by hotel, self-storage, and student housing properties. In comparison, as of March 2022 reporting, loans secured by multifamily properties represented 71.9% of the trust balance while loans secured by office properties represented 20.4% of the trust balance.

While all loans secured by office collateral remain current, given the decline in desirability for office product across tenants, investors, and lenders alike, there is greater uncertainty regarding the borrowers’ exit strategies upon loan maturity as the borrowers of these loans have generally been unable to increase occupancy and rental rates to initially projected levels, resulting in lower-than-expected cash flows. In its analysis, DBRS Morningstar applied probability of default adjustments to three loans secured by office properties: Latham Square, 225 East Colorado, and 960 Penn Avenue (0.7%); these cumulatively represent 8.0% of the current trust balance. The adjustments resulted in loan expected loss levels ranging from approximately one to two times the transaction-wide expected loss.

The remaining loans are primarily secured by properties in urban and suburban markets. Six loans, representing 19.7% of the pool, are secured by properties in urban markets, as defined by DBRS Morningstar, with a DBRS Morningstar Market Rank of 6, 7, or 8. Twenty-four loans, representing 73.8% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 3, 4, or 5, denoting a suburban market. In comparison, in March 2022, properties in urban markets represented 23.3% of the collateral and properties in suburban markets represented 69.7% of the collateral. The location of the assets within urban markets potentially serves as a mitigant to loan maturity risk, as urban markets have historically shown greater liquidity and investor demand.

Leverage across the pool has remained relatively in line with issuance levels as the current weighted-average (WA) as-is appraised value loan-to-value (LTV) ratio is 70.8%, with a current WA stabilized LTV ratio of 65.0%. In comparison, these figures were 69.1% and 64.6%, respectively, at issuance and 70.1% and 64.4%, respectively, as of March 2022. DBRS Morningstar recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2021 and 2022 and may not reflect the current rising interest rate or widening capitalization rate environments.

Through March 2023, the lender has advanced cumulative loan future funding of $46.8 million to 23 individual borrowers to aid in property stabilization efforts. The largest advances have been made to the borrowers of the Latham Square ($5.7 million) and 2201 Renaissance ($5.5 million) loans, which are secured by office properties in Oakland, California, and King of Prussia, Pennsylvania, respectively. Funds were advanced to each borrower to complete capital improvements and to fund accretive leasing costs at each property. An additional $33.8 million of loan future funding allocated to 26 individual borrowers remains available. The largest portion of available funds, $6.5 million, is allocated to the borrower of the Plaza West loan, which is secured by an office property in Kansas City, Missouri. The available funds are solely available to fund accretive leasing costs.

As of the May 2023 remittance, there are no loans on the servicer’s watchlist, and there are two loans in special servicing, representing 6.2% of the current trust balance. The larger of the two loans, Century Skyline (5.5% of the current trust balance), was transferred in May 2023 for potential payment default. The loan is secured by a multifamily property in Atlanta, and, according to the collateral manager, the borrower’s original business plan to renovate all 225 units has stalled. Reportedly, only 85 units have been upgraded and the borrower has chosen to not continue the unit upgrade program. Additionally, one of the loan guarantors passed away and has yet to be replaced as required by the loan documents. The property was briefly listed for sale in February 2023 but garnered offers of only approximately $50.0 million, below the $53.5 million purchase price. The loan is not reporting as delinquent and the sponsorship group is reportedly discussing options to improve performance; however, in its current analysis, DBRS Morningstar assumed an elevated probability of default to realize the increased credit risk. The resulting loan-level expected loss is approximately 1.2 times the transaction-wide expected loss.

The other loan in special servicing, 960 Penn Avenue (0.7% of the current trust balance), is secured by an office property in downtown Pittsburgh. The loan originally transferred in August 2022 for imminent maturity default; however, the loan was modified and extended to August 2023. Terms of the modification included a $1.0 million principal curtailment, and the borrower was required to purchase a new interest rate cap agreement. The loan remains cash managed and, according, to the collateral manager, the property was 60.8% occupied as of March 2023. The borrower does have one remaining 12-month extension option but property performance may not achieve the minimum 9.5% debt yield and maximum 65.0% LTV tests. The property was reappraised in July 2022 with a value of $9.0 million (current LTV of 63.1%); however, when the property was briefly listed for sale in Q3 2022, offers ranged from $7.8 million to $8.8 million, suggesting the current market value may be lower. Given the pending August 2023 maturity date, difficult financing market, and non-stabilized nature of the property, DBRS Morningstar adjusted the probability of default on the loan in its analysis as noted above, resulting in a loan-level expected loss approximately two times the transaction-wide expected loss.

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 (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; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model Version 1.1.0.0
https://www.dbrsmorningstar.com/research/410913

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022)
https://www.dbrsmorningstar.com/research/402646/dbrs-morningstar-north-american-commercial-real-estate-property-analysis-criteria

North American Commercial Mortgage Servicer Rankings (September 8, 2022)
https://www.dbrsmorningstar.com/research/402499/north-american-commercial-mortgage-servicer-rankings

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022)
https://www.dbrsmorningstar.com/research/402153/interest-rate-stresses-for-us-structured-finance-transactions

Legal Criteria for U.S. Structured Finance (December 7, 2022)
https://www.dbrsmorningstar.com/research/407008/legal-criteria-for-us-structured-finance

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