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

DBRS, Inc. (Morningstar DBRS) confirmed its credit 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 credit rating confirmations reflect the overall stable performance of the collateral in the transaction as borrowers are generally progressing with the stated business plans. The pool also benefits from a favorable property type concentration as the trust is primarily secured by multifamily collateral, representing 93.4% of the current trust balance. Historically, loans secured by multifamily properties have exhibited lower default rates and the ability to retain and increase asset value. 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 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 that expired with the December 2023 Payment Date.

As of the May 2024 remittance, the pool comprised 21 loans secured by 22 properties with a cumulative trust balance of $624.9 million. Of the original 23 loans, 16 loans, representing 72.1% of the current trust balance, remain in the transaction. Since the previous Morningstar DBRS rating action in June 2023, three loans totaling $95.5 million have paid off while one loan, Sycamore Street Apartments, was added into the trust.

Beyond the multifamily concentration noted above, one loan, representing 4.6% of the current trust balance, is secured by a mixed-use property and one loan, representing 2.0% of the current trust balance, is secured by a self-storage property. In comparison with June 2023 reporting, multifamily properties represented 95.2% of the collateral, while self-storage properties represented 4.8% of the collateral.

The pool is primarily secured by properties in suburban markets, with 17 loans, representing 78.0% of the pool, with a Morningstar DBRS Market Rank of 3, 4, or 5. An additional three loans, representing 17.4% of the pool, are secured by properties with a Morningstar DBRS Market Rank of 1 or 2, denoting a rural or tertiary market. The remaining loan, representing 4.6% of the pool, is secured by a property with a Morningstar DBRS Market Rank of 6, denoting an urban market. In comparison, in June 2023, properties in suburban markets represented 84.2% of the collateral, and properties in tertiary markets represented 15.8% of the collateral.

The current weighted-average (WA) as-is appraised loan-to-value (LTV) ratio is 71.9% as of the May 2024 reporting, with a current WA stabilized LTV of 61.9%. In comparison, these figures were 72.2% and 56.8%, 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 or 2022 and may not reflect the current rising interest rate or widening capitalization rate (cap rate) environment. In the analysis for this review, Morningstar DBRS applied upward LTV adjustments for 13 loans, representing 77.1% of the current trust balance.

Through March 2024, the collateral manager had advanced cumulative loan future funding of $47.7 million to 17 of the outstanding individual borrowers. The largest cumulative advance, $8.9 million since loan closing, has been made to the borrower of the Sycamore Street Apartments loan, which is secured by a 155-unit, multifamily property in Cincinnati, Ohio. The business plan was to complete the initial construction of the property and the initial lease-up phase. Future funding of up to $13.9 million was allocated, including $6.4 million as a construction reserve, $750,000 for debt service shortfalls, and $600,0000 for leasing costs. The remaining $6.4 million was available as a performance-based earnout reserve. Morningstar DBRS did not receive an update regarding the allocation of the advanced funds to date, but according to the collateral manager's Q1 2024 update, the borrower received the full certificate of occupancy and is finalizing plans to convert some of the originally designed retail space into additional residential units and 6,600 square feet of coworking space. According to the January 2024 rent roll, the residential units were 90.5% occupied.

An additional $28.4 million of loan future funding allocated to 17 individual borrowers remains available. The largest portion of available funds, $3.6 million, is allocated to the borrower of The Vic at Interpose loan, which is secured by a 168-unit multifamily property in Houston, Texas. The available cash will be used to fund accretive leasing costs for the ground floor retail space, cover debt service shortfalls, and fund a performance-based earnout. While the retail portion of the property is 100.0% occupied, the residential component continues to struggle as the property was 78.9% occupied as of the March 2024 rent roll. According to the Q1 2024 collateral manager report, the sponsor plans to market the asset for sale prior to the loan's January 2025 maturity. Morningstar DBRS applied an upward LTV adjustment, increasing the loan's expected loss to be in line with the pool average.

As of the May 2024 remittance, there are no delinquent or specially serviced loans, however there are five loans, representing 24.6% of the pool balance on the servicer's watchlist. The loans have primarily been flagged for below breakeven debt service coverage ratios and low occupancy rates. All loans remain current with performance declines expected to be temporary as multifamily units are being taken offline by respective borrowers to complete interior renovations. 

Maturity risk is elevated as 14 loans, representing 58.4% of the pool balance, are scheduled to mature by YE2024. Each loan has outstanding maturity extension options, and Morningstar DBRS expects individual borrowers to exercise these options, if necessary, which may require loan modifications on a case-by-case basis if performance-based test requirements are not achieved.

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 DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024); 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.

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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://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 (February 26, 2024), https://dbrs.morningstar.com/research/428623/interest-rate-stresses-for-us-structured-finance-transactions
-- Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205/legal-criteria-for-us-structured-finance

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/410863.

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