Morningstar DBRS Changes Trends on Four Classes of ACRES Commercial Realty 2021-FL1 to Negative, Confirms All Credit Ratings

DBRS, Inc. (Morningstar DBRS) confirmed all credit ratings on the classes of notes issued by ACRES Commercial Realty 2021-FL1 as follows:

-- 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)

Morningstar DBRS also changed the trends on Classes D, E, F, and G to Negative from Stable. The trends on the remaining classes remain Stable.

The trend changes reflect the increased loss expectations across the three loans in special servicing, representing 12.9% of the current trust balance. The primary loan of concern and the second-largest loan in the pool, Latham Square, representing 6.1% of the current trust balance, is secured by a 115,946-square-foot office building in downtown Oakland, California. While the loan was recently modified, it remains specially serviced. Modification terms included extending the loan maturity through December 2025, decreasing the interest rate, and allowing the borrower the option to defer interest; however, the modification does not quell Morningstar DBRS' credit concerns associated with the asset as the borrower was not required to deleverage the loan or deposit fresh equity into reserve accounts. Property performance declined throughout 2023 as occupancy decreased to 58.3% as of the December 2023 rent roll from a prior high of 75.6% in February 2023. The property was reappraised in September 2023 at a value of $54.0 million, reflecting a 21.6% decline from the issuance appraisal of $69.4 million. Morningstar DBRS believes the asset's current market value has declined further with a loan-to-value ratio (LTV) above 100.0%. While the recent modification mitigates any near-term loss, Morningstar DBRS maintains that the loan has heightened credit risk due to the ongoing leasing challenges facing office properties in the downtown Oakland submarket. As such, Morningstar DBRS also increased the loan's probability of default in its current analysis, bringing the loan's expected loss to approximately two times greater than the transaction's expected loss.

In addition to the loans in special servicing, the pool also exhibits a high concentration of office loans, which have been susceptible to value declines as the properties have been unable to successfully execute the stated business plans. In total, seven loans, representing 21.5% of the current trust balance, are secured by office properties.

The credit rating confirmations reflect the overall stable performance of the transaction, which continues to be primarily secured by the multifamily collateral totaling 63.8% of the 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 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 that expired with the May 2023 Payment Date. As of the April 2024 remittance, the pool comprises 29 loans secured by 30 properties with a cumulative trust balance of $733.4 million. Since Morningstar DBRS' previous credit rating action in May 2023, three loans with a current trust balance of $65.5 million were paid in full, resulting in a collateral reduction of 8.6%.

The outstanding loans are primarily secured by properties in suburban markets and urban markets. Twenty-two loans, representing 74.6% of the pool, are secured by properties with a Morningstar DBRS Market Rank of 3, 4, or 5, denoting a suburban market. Five loans, representing 18.4% of the pool, are secured by properties in urban markets, as defined by Morningstar DBRS, with a Morningstar DBRS Market Rank of 6 or 7. 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 was generally stable as of the April 2024 reporting when compared with issuance metrics. The current weighted-average (WA) as-is appraised LTV is 70.6%, with a current WA stabilized LTV of 65.2%. In comparison, these figures were 69.1% and 64.6%, respectively, at issuance. Morningstar DBRS 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 environment. In the analysis for this review, Morningstar DBRS applied upward LTV adjustments across 14 loans, representing 64.7% of the current trust balance.

Through April 2024, the lender has advanced cumulative loan future funding of $42.9 million to 20 individual borrowers to aid in property stabilization efforts. The largest advance has been made to the borrower of the 2201 Renaissance loan ($5.9 million), which is secured by an office property in King of Prussia, Pennsylvania. Funds were advanced to complete capital improvements and finance accretive leasing costs. An additional $27.5 million of loan future funding allocated to 23 individual borrowers remains available. The largest portion of available funds, $5.5 million, is allocated to the borrower of the aforementioned Latham Square loan. Following its recent modification, the remaining future funding is available to finance leasing costs.

As of the April 2024 remittance, there are three loans in special servicing totaling 12.9% of the current trust balance. The second-largest specially serviced loan, Century Skyline, is secured by a 225-unit, mid-rise multifamily property in Atlanta's Midtown neighborhood. The loan transferred to special servicing in May 2023 for a nonpayment default as the borrower did not purchase a new interest rate cap agreement as required at the April 2023 deadline. According to the servicer, the loan is reported as 30 days delinquent. The loan matures in April 2024, and according to an update from the collateral manager, the loan is currently under a forbearance agreement while the lender and borrower negotiate a potential loan modification agreement. As of the November 2023 rent roll, the property was 91.6% occupied; however, the loan reported a debt service coverage ratio of 0.34 times per the financials for the trailing 12 months ended November 30, 2023. In its analysis, Morningstar DBRS applied an upward LTV adjustment, reflective of an in-place LTV approaching 100.0%. Morningstar DBRS also increased the loan's probability of default in its current analysis to bring the loan's expected loss to approximately two times the transaction's expected loss.

The third-largest loan in special servicing, 960 Penn Avenue, is secured by a Class B office building within Pittsburgh's central business district. The loan transferred to special servicing in August 2022 for maturity default; however, the loan was modified to waive extension tests and extend the loan maturity to August 2024. According to the December 2023 rent roll, the property was only 60.0% occupied. In its analysis, Morningstar DBRS applied an upward LTV adjustment and increased the loan's probability of default to increase the loan's expected loss to approximately two times the transaction's expected loss.

As of the April 2024 remittance, there are no loans on the servicer's watchlist; however, the pool's largest loan, Paces River, was reported as 30 days delinquent. The loan is secured by a 470-unit, Class B multifamily property in Rock Hill, South Carolina. According to published reports, the loan's sponsor, GVA Real Estate Group, remains delinquent on a number of loans within its portfolio as it contends with a substantial amount of debt amid the elevated interest rate environment. According to the December 2023 rent roll, the property was 74.5% occupied, down from 91.3% as of June 2023. According to the servicer, the borrower attributes the decline in occupancy to issues related to the former property manager, which was replaced in Q4 2023. In its analysis, Morningstar DBRS applied an upward LTV adjustment and increased the loan's probability of default to increase the loan's expected loss to approximately two times the transaction's expected loss.

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 (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

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 1, 2024), https://dbrs.morningstar.com/research/428798.

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.

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

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

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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 (March 1, 2024)/North American CMBS Insight Model version 1.2.0.0, https://dbrs.morningstar.com/research/428797

-- 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 (February 26, 2024), https://dbrs.morningstar.com/research/428623

-- Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205

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