DBRS Morningstar Confirms All Ratings on ACRES Commercial Realty 2021-FL2 Issuer, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the following classes of notes issued by ACRES Commercial Realty 2021-FL2 Issuer, 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 (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 December 2021 with an initial collateral pool of 23 floating-rate mortgage loans secured by 24 mostly transitional real estate properties, with a cut-off pool balance of $558.8 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 December 2023 Payment Date whereby the Issuer can acquire new loan collateral into the trust subject to defined Eligibility Criteria. As of June 2023 reporting, the Reinvestment Account had a balance of $14.0 million.

As of the June 2023 remittance, the pool comprised 23 loans secured by 25 properties with a cumulative trust balance of $686 million. Of the original 23 loans, 19 loans, representing 78.9% of the current trust balance, remain in the transaction. Since the previous DBRS Morningstar rating action in November 2022, the $15.4 million TownePlace Suites Port St. Lucie loan paid off and no additional loans were added into the trust.

The transaction is concentrated by property type, as 21 loans are secured by multifamily properties, representing 95.2% of the current trust balance, and the remaining two loans are secured by self-storage properties, representing 4.8% of the current trust balance. In comparison, at issuance, loans secured by multifamily properties represented 87.0% of the trust balance while loans secured by self-storage properties represented 6.6% and loans secured by hotel properties represented 6.4% of the trust balance.

The loans are primarily secured by properties in suburban markets. Twenty loans, representing 84.2% of the pool, are secured by properties in suburban markets, as defined by DBRS Morningstar, with a DBRS Morningstar Market Rank of 3, 4, or 5. The remaining three loan loans, representing 15.8% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 1 or 2, denoting rural and tertiary markets, respectively. In comparison, at issuance, properties in suburban markets represented 86.0% of the collateral, properties in tertiary markets represented 10.4% of the collateral, and properties in urban markets represented 3.6% of the collateral.

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 71.9%, with a current WA stabilized LTV ratio of 63.8%. In comparison, these figures were 72.2% and 56.8%, respectively, at issuance. 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 had advanced cumulative loan future funding of $38.2 million to 18 individual borrowers to aid in property stabilization efforts. The largest advances have been made to the borrowers of the Goodfriend Self Storage ($4.2 million) and Bermuda Cay Apartments ($4.1 million) loans, which are respectively secured by a self-storage property in Cutchogue, New York, and a multifamily property in Boynton Beach, Florida. Funds were advanced to each borrower to complete capital improvements at each property. An additional $36.0 million of loan future funding allocated to 20 individual borrowers remains available. The largest portion of available funds, $3.9 million, is allocated to the borrower of the The Vic at Interpose loan, which is secured by a multifamily property in Kansas City, Missouri. The available funds are available to fund accretive leasing costs for the ground floor retail space, cover debt service shortfalls, and fund a performance-based earn-out. It appears funds have been advanced for debt service shortfalls (up to $1.4 million) as well as for leasing costs (up to $1.9 million); however, as the property has not achieved the required minimum 6.8% debt yield, the $2.7 million earn-out remains unfunded.

As of the June 2023 remittance, there are no loans in special servicing or on the servicer’s watchlist. The majority of the borrowers remain in the midst of executing the respective business plans with no single loan maturity occurring until 2024.

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 (May 17, 2022) 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.

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 (June 9, 2023)
https://www.dbrsmorningstar.com/research/415687

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].