DBRS Morningstar Confirms Credit Ratings on All Classes of ACREC 2023-FL2 LLC

DBRS, Inc. (DBRS Morningstar) confirmed its credit ratings on all classes of notes issued by ACREC 2023-FL2 LLC (the Issuer) as follows:

-- 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 credit rating confirmations reflect the overall stable performance of the transaction, which has generally remained in line with DBRS Morningstar’s expectations since issuance as the trust is solely secured by multifamily collateral. 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 initial collateral consisted of 15 floating-rate mortgage loans secured by 18 mostly transitional properties with a cut-off balance totaling $534.2 million. All loans in the pool had some seasoning at issuance, having been originated in 2021 and 2022 with most loans in a period of transition with plans to stabilize performance and improve values of the underlying assets. As of the November 2023 remittance, there has been no change to the pool composition since issuance. The transaction is static; however, there is a two-year Replenishment Period, whereby the Issuer can purchase funded loan participation interests into the trust. The Replenishment Period is scheduled to end with the February 2025 Payment Date. As of November 2023, the Replenishment Account had no balance.

The transaction is concentrated by property type as all 15 loans are secured by multifamily properties. The pool is primarily secured by properties in suburban markets, with 10 loans, representing 68.9% of the pool, with a DBRS Morningstar Market Rank of 3, 4, or 5. An additional four loans, representing 23.3% of the pool, are secured by properties in tertiary markets, with a DBRS Morningstar Market Rank of 2, while one loan, representing 7.9% of the pool, is secured by a property with a DBRS Morningstar Market Rank of 6, denoting an urban market.

Leverage across the pool remains unchanged as of the November 2023 reporting when compared with issuance metrics. The current weighted-average (WA) as-is appraised loan-to-value ratio (LTV) is 73.0%, with a current WA stabilized LTV of 64.0%. DBRS Morningstar recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2022 and may not reflect the current rising interest rate or widening capitalization rate environment. As such, in the analysis for this review, DBRS Morningstar applied upward LTV adjustments across 10 loans, representing 68.8% of the current trust balance.

Through November 2023, the lender had advanced cumulative loan future funding of $23.6 million to nine of the 15 outstanding individual borrowers to aid in property stabilization efforts. The largest advance ($4.5 million) has been made to the borrower of the Brandon Portfolio loan, which is secured by a portfolio of two multifamily properties in Brandon, Florida, totaling 285 units. The borrower’s business plan is to complete a significant capital expenditure (capex) project totaling $7.3 million across the portfolio. The borrower appears to be progressing with its capex plan as according to the Q2 2023 Quarterly Asset Review report provided by the collateral manager, the borrower had completed clubhouse upgrades as well as interior upgrades to 110 units with additional unit upgrades in progress. The properties had a combined occupancy rate of 87.0% with an average rental of $1,588 per unit as of September 2023. The achieved rental rate is in line with the lender’s stabilized expectation. An additional $2.8 million of loan future funding remains available to the borrower.

An additional $14.5 million allocated to seven individual borrowers remains available. The largest portion ($4.6 million) is allocated to the borrower of the Galleria Courtyards loan, which is secured by a multifamily property in Smyrna, Georgia. Total loan future funding of $8.4 million is available to the borrower to complete its capex plan, which consists of upgrading all 240 unit interiors and property exteriors. According to the Q2 2023 update from the collateral manager, only 96 units had been upgraded at that time, suggesting the borrower may be behind schedule in terms of unit upgrades. As of October 2023, the property was 88.8% occupied with an average rental rate of $1,698 per unit, which represents a $378 rental premium over the in-place average rental rate at loan closing in December 2021.

Three loans are scheduled to mature in the next six months, representing 17.4% of the pool balance. According to the collateral manager, two borrowers are expected to exercise available extensions options, which will require borrowers to purchase replacement interest rate cap agreements and to rebalance the loans if performance does not meet required minimum thresholds. The remaining loan is secured by a stabilized property, and the borrower is expected to execute its exit strategy prior to loan maturity.

As of November 2023 reporting, there are no specially serviced or delinquent loans nor are there any loans on the servicer’s watchlist. Servicer reporting notes that six loans, representing 42.1% of the pool balance, have been modified; however, the modifications relate to the individual loan’s floating rate benchmark transition to the Secured Overnight Financing Rate (SOFR) from LIBOR, which DBRS Morningstar views as credit neutral. The credit quality of these loans remains consistent from issuance.

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 at https://www.dbrsmorningstar.com/research/416784 (July 4, 2023).

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

All credit ratings are subject to surveillance, which could result in credit 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 the 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 credit rating was initiated at the request of the rated entity.

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

This is a solicited credit rating.

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

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

The credit 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 (November 3, 2023), https://www.dbrsmorningstar.com/research/422859

-- Rating North American CMBS Interest-Only Certificates (December 19, 2022), https://www.dbrsmorningstar.com/research/407577

-- DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023), https://www.dbrsmorningstar.com/research/420982

-- North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://www.dbrsmorningstar.com/research/419592

-- 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].