DBRS Morningstar Confirms Ratings on All Classes of ACRE Commercial Mortgage 2021-FL4 Ltd.

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of notes issued by ACRE Commercial Mortgage 2021-FL4 Ltd. (the Issuer):

-- 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 increased credit support to the bonds as a result of successful loan repayment, resulting in a collateral reduction of 37.5% since issuance. The increased credit support to the bonds serves as a mitigant to potential adverse selection in the transaction as four loans are secured by office properties, representing 63.7% of the current trust loan balance. As a result of complications initially arising from impacts of the Coronavirus Disease (COVID-19) pandemic and the ongoing challenges with leasing available space, 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.

While all loans 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. In the analysis for this review, DBRS Morningstar evaluated these risks by stressing the current property values or increasing the probability of default for five loans, representing 69.7% of the current trust balance, collateralized by both office and nonoffice property types. That analysis suggested the rated bonds remain sufficiently insulated (relative to the respective rating categories) against potential loan delinquency and increased credit risk. 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 closed in January 2021 with an initial collateral pool of 23 floating-rate mortgage loans secured by 34 mostly transitional real estate properties with a cut-off-date pool balance of approximately $667.2 million. Most loans are in a period of transition with plans to stabilize and improve asset value. The transaction includes a Permitted Funded Companion Participation Acquisition Period through the April 2024 Payment Date whereby the Issuer may acquire Funded Companion Participations into the trust. As of June 2023, there were no available funds in the Permitted Funded Companion Participation Acquisition Account as the cumulative trust loan balance equaled the outstanding cumulative bond balance.

As of the June 2023 remittance, the pool comprises 11 loans secured by 22 properties with a cumulative trust balance of $417.9 million. Since issuance, 12 loans have successfully repaid from the pool including two loans with a former cumulative trust balance of $95.0 million since the previous DBRS Morningstar rating action in November 2022. The transaction is concentrated by loan size, as the largest five loans represent 73.3% of the current trust balance. The remaining loans in the transaction beyond the office concentration noted above include two loans secured by multifamily properties (11.5% of the current trust loan balance), one loan secured by a mixed-use property (9.1% of the current trust loan balance), and one loan secured by a student housing property (8.2% of the current trust loan balance). For comparison, in January 2022, 49.9% of the pool was secured by office collateral, 15.4% of the pool was secured by mixed-use collateral, and 9.2% of the pool was secured by multifamily collateral.

Through June 2023, a total of $105.0 million of loan future funding had been advanced to nine of the remaining individual borrowers to aid in property stabilization efforts. The largest advances have been made to the borrowers of the 311 West Monroe ($34.6 million) and Exchange ($26.4 million) loans. The 311 West Monroe loan is secured by an office property in Chicago. The borrower used the advanced funds to pay for leasing costs for tenants that had executed leases at loan closing and to fund debt service shortfalls while the new tenants were in rent abatement periods. The Exchange loan is secured by an office property in Charlotte, North Carolina. The borrower used funds to complete its capital improvement program and to fund leasing costs. The borrower completed the capital improvement plan but has struggled to improve occupancy. The loan originally had future funding of $41.5 million; however, the lender and borrower agreed to terminate the unadvanced remaining $15.1 million for leasing costs.

A total of $2.1 million of loan future funding remains available to two remaining borrowers, but the $1.7 million allocated to the borrower of the Packing House Square loan is unlikely to be advanced as the loan matured in March 2023 and is currently categorized as a nonperforming matured balloon. However, according to the collateral manager, the borrower is current on the loan’s interest payments. The loan is secured by a mixed-use property in Yorba Linda, California, consisting of office and retail space. According to an update from the collateral manager, the sponsor has engaged a third-party broker to sell the asset, though no potential sale price or timing is known at this time.

As of the June 2023 remittance, there are seven loans, representing 58.2% of the current pool balance, on the servicer’s watchlist with the majority of loans flagged for upcoming maturity. The largest watchlist loan, RealOp Southeast Portfolio (representing 19.7% of the current pool) was initially flagged for the January 2023 maturity date; however, the loan has also been noted for multiple delinquent payments in the past 12 months. The loan is current and the borrower exercised an extension option, extending the maturity to January 2024. As property performance did not meet the required minimum thresholds, the loan was modified to allow the extension. The borrower has one remaining extension option, which if exercised, will extend the loan maturity through January 2025. As of YE2022, the net cash flow was $9.8 million, up from $8.5 million at YE2021 and the portfolio was 72.3% occupied, relatively in line with the prior year. The borrower was previously looking to sell two of the assets; however, an update from the collateral manager reported the sale of the properties is on hold and the borrower will re-evaluate the potential sale next year.

Of the remaining loans, seven loans, representing 58.2% of the current pool balance, have been modified. Generally, the modifications have allowed borrowers to exercise loan extension options by waiving the associated performance tests. In exchange, borrowers must purchase new interest rate cap agreements, deposit fresh equity into operating and debt service reserves, and pay modification fees.

ENVIRONMENTAL, SOCIAL, AND 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.

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 credit rating assigned to Class F materially deviates from the higher rating implied by the predictive model. DBRS Morningstar typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit rating would consider a three-notch or more deviation from the credit rating stress implied by the predictive model to be a significant factor in evaluating the credit rating. The rationale for the material deviation is sustainability of loan performance trends has not been demonstrated as the pool is concentrated by office collateral, and 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.

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 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 Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

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 v 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)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

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)

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