Morningstar DBRS Confirms Credit Ratings on All Classes of ACAM 2019-FL1, Ltd.

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage-Backed Notes issued by ACAM 2019-FL1, Ltd. as follows:

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AAA (sf)
-- Class C at A (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable.

The credit rating confirmations reflect the increased credit support to the bonds as a result of successful loan repayment, as there has been collateral reduction of 50.1% since issuance. The collateral reduction serves as a mitigant to the increased concentration of loans secured by office properties across the transaction, as the select borrowers of these loans are behind in the respective business plans, and all borrowers of these loans are likely to face difficulties in securing refinance capital or selling the properties at respective loan maturity. As of the January 2024 reporting, there were seven loans secured by office properties in the transaction, representing 49.5% of the current trust balance. In conjunction with this press release, Morningstar DBRS has published a Surveillance Performance Update report with in-depth analysis and credit metrics for the transaction as well as 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 pool’s collateral initially consisted of 21 floating-rate loans secured by 35 properties, many of which were in a period of transition with plans to stabilize and improve asset values. At issuance, the cut-off balance was $400.3 million, with an additional $87.4 million of available future funding commitments held outside of the trust. The transaction included a 24-month reinvestment period, which expired in December 2021. Following this date, the bonds began to amortize sequentially with loan repayments and scheduled loan amortization.

As of the January 2024 remittance, there were 11 loans in the transaction with a current trust balance of $199.9 million. Since Morningstar DBRS’ previous credit rating action in February 2023, three loans, with a former cumulative trust loan balance of $64.3 million, have been repaid from the transaction. Only two of the original 21 loans, which represent 18.7% of the current trust balance, remain in the transaction. Both loans are secured by office properties. Beyond the office concentration noted above, there are two multifamily properties, representing 20.0% of the current pool balance, followed by one mixed-use property, representing 18.0% of the current pool balance, and one industrial property, representing 12.4% of the current pool balance.

In terms of property location, the transaction is split evenly between properties in urban and suburban markets. Morningstar DBRS defines urban markets as markets with a Morningstar DBRS Market Rank of 6, 7, or 8, while suburban markets have a Morningstar DBRS Market Rank of 3, 4, or 5. As of January 2024, five loans, representing 50.1% of the cumulative loan balance, were secured by properties in urban markets while six loans, representing 49.9% of the cumulative loan balance, were secured by properties in suburban markets. Historically, urban markets have shown greater liquidity and demand.

The collateral pool exhibits elevated leverage from issuance with a current weighted-average (WA) appraised loan-to-value ratio (LTV) of 76.1% and a WA stabilized LTV of 64.1%. In comparison, these figures were 65.4% and 53.5%, respectively, at closing. As the majority of individual property appraisals were conducted between 2019 and 2022, and the pool composition has changed significantly from closing with only two of the original loans remaining, it is possible select individual property values may have decreased given the current interest rate and capitalization rate environment. In the analysis for this review, Morningstar DBRS applied a recoverability analysis using in-place property-level financial reporting with stressed market- and property type-specific capitalization rates to determine if individual property valuations can support the respective outstanding loan balances. Morningstar DBRS determined in its current analysis that any potential cumulative exposure to loans with LTVs above 100.0% would be contained to the unrated equity bond, which has a current balance of $30.5 million.

Through November 2023, the lender had advanced cumulative loan future funding of $37.4 million to nine of the outstanding individual borrowers. The largest advance ($8.6 million) has been made to the borrower of the Canyon Corporate Plaza loan (10.0% of the pool), which is secured by a two-building office property in Phoenix’s Northwest submarket. The borrower used advanced loan proceeds to fund various capital expenditures to improve the property’s overall quality. An additional $5.7 million of future funding remains available to fund leasing costs; however, the borrower is significantly behind schedule in its business plan as the property was only 5.0% occupied as of September 2023. The loan is currently 30 to 59 days delinquent and is on the servicer’s watchlist for the past due January 2024 maturity date. While there is one remaining 12-month extension option available, the borrower will not qualify for the extension given current property performance. The property was last valued at $31.6 million at loan closing in January 2020; however, in its analysis, Morningstar DBRS assumed the current market value has significantly declined. The loan has an outstanding A note balance of $27.8 million with a $20.0 million piece in the trust; however, the loan does benefit from outstanding cash reserves of $10.3 million, according to January 2024 reporting, reducing the current loan exposure to $17.5 million. At this exposure, the value of the asset would need to decline by approximately 40.0% before the trust would experience a realized loss. If the borrower and lender agree to a maturity extension, Morningstar DBRS expects the loan to be modified.

Including the Canyon Corporate Plaza loan, $27.3 million of unadvanced loan future funding allocated to eight individual borrowers remains outstanding. The largest portion of unadvanced future funding dollars ($12.5 million) is allocated to the borrower of the 500 West Jefferson Street loan (9.7% of the pool), which is secured by a Class A high-rise office building in downtown Louisville, Kentucky. The funds are for future leasing costs as the borrower has already completed its capital expenditure plan, using $2.6 million of future funding and $10.4 million of cash equity. The loan is currently on the servicer’s watchlist for the December 2023 maturity; however, the loan is structured with two 12-month extension options. Morningstar DBRS expects the borrower to exercise the first extension option, which may require a fresh equity deposit into the interest reserve and/or the purchase of a new interest rate cap agreement, among other lender requirements. As of the September 2023 rent roll, the property was 46.4% occupied, but the second-largest tenant was expected to vacate at lease expiration in October 2023. The tenant contributed $1.3 million in rental revenue. Occupancy is expected to decline temporarily to 36.6% with the loss of the tenant; however, an update from the collateral manager noted the borrower has signed a new tenant, which will bring occupancy to 43.0% upon the tenant taking occupancy. According to the financials for the trailing 12-month period ended June 30, 2023, the loan reported a debt service coverage ratio (DSCR) of 0.80 times. The loan remains current, however, categorized as a performing matured balloon.

As of January 2024, there were no loans in special servicing; however, eight loans are on the servicer’s watchlist, representing 60.7% of the pool balance. All loans have been flagged for upcoming loan maturity, though select loans have also been flagged for below-breakeven DSCRs. The largest loan on the servicer’s watchlist is Kenridge Apartments (11.2% of the pool), which is secured by a multifamily property in Decatur, Georgia. The loan matured in December 2023 and is structured with two, 12-month extension options. The property reported a low net cash flow of $0.7 million for the trailing 12-month period ended June 30, 2023, because of increased vacancy surrounding ongoing unit renovations and the eviction of delinquent tenants. An update from the collateral manager noted all unit renovations are completed, with achieved average monthly rental rate premiums of $200 per unit. Cash flow is expected to improve as all units are leased and as bad debt and concession loss improve. Morningstar DBRS expects the lender and borrower to agree to a maturity extension. Two loans, representing 13.5% of the pool balance, have been modified. The modified terms for individual loans have allowed the specific borrowers maturity date and capital expenditure completion date extensions.

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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

All credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023), https://dbrs.morningstar.com/research/410912.

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

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.

Morningstar DBRS 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.

Morningstar DBRS notes that a sensitivity analysis was not performed for this review as the transaction is in wind-down, with only six remaining loans. In these cases, Morningstar DBRS credit ratings are typically based on a recoverability analysis for the remaining loans.

DBRS, Inc.
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The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- North American CMBS Multi-Borrower Rating Methodology (November 3, 2023)/North American CMBS Insight Model Version 1.2.0.0, https://dbrs.morningstar.com/research/422859
-- DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023), https://dbrs.morningstar.com/research/420982
-- North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592
-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023), https://dbrs.morningstar.com/research/415687
-- Legal Criteria for U.S. Structured Finance (December 7, 2023), https://dbrs.morningstar.com/research/425081

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