Morningstar DBRS Confirms All Credit Ratings on ACREC 2021-FL1, Ltd.

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on all classes of notes issued by ACREC 2021-FL1 Ltd. 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)

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 their stated business plans. The pool also benefits from a favorable property type concentration as the trust is secured by multifamily properties. 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 initial collateral consisted of 23 floating-rate mortgages secured by 23 transitional multifamily properties with a cut-off date balance totaling approximately $875.6 million. Most loans were in a period of transition with plans to stabilize performance and improve the asset value. The transaction was structured with a reinvestment period that expired with the July 2023 payment date.

As of the June 2024 remittance, the pool comprises 17 loans secured by 17 properties with a cumulative trust balance of $726.4 million. Eleven of the original 23 loans, representing 63.7% of the current trust balance, remain in the transaction. Since the previous Morningstar DBRS rating action in July 2023, four loans, totaling $124.3 million, have repaid in full from the pool, resulting in a collateral reduction of 17.0%.

Twelve loans of the remaining loans, representing 73.2% of the pool, are secured by properties in suburban markets, as defined by Morningstar DBRS, with a Morningstar DBRS Market Rank of 3, 4, or 5. Four loans, representing 20.3% of the pool, are secured by properties with a Morningstar DBRS Market Rank of 6 or 7, denoting an urban market, while one loan, representing 6.5% of the pool, is secured by property with a Morningstar DBRS Market Rank of 2, denoting a tertiary market. Properties in secondary and tertiary markets have generally correlated with higher rates of default over time compared with properties in urban markets, which have historically shown greater liquidity and investor demand. In comparison, in July 2023, properties in suburban markets represented 65.9% of the collateral while properties in urban markets represented 28.7%.

The current weighted-average (WA) as-is appraised loan-to-value (LTV) ratio is 72.5% as of the June 2024 reporting, with a current WA stabilized LTV of 63.5%. In comparison, these figures were 74.5% and 69.2%, 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 widening of capitalization rates (cap rates) amid the current rising interest rate environment. In the analysis for this review, Morningstar DBRS applied upward LTV adjustments for 14 loans, representing 88.1% of the current trust balance.

Through March 2024, the collateral manager had advanced cumulative loan future funding of $9.3 million to four of the outstanding individual borrowers. The largest cumulative advances were made to the borrowers of Belmont Apartments ($3.0 million) and Lakewood Greens ($2.5 million). The Belmont Apartments loan is secured by a 260-unit garden-style multifamily property located in Grand Prairie, Texas. Funds were advanced to the borrower to complete its capital improvement project across the property. The Lakewood Greens loan is secured by a 252-unit garden-style multifamily property located in Dallas. The business plan included completing various capital expenditure projects throughout the property, including unit renovations and common area upgrades. The loan is sponsored by Tides Equities, which, according to published reports, had previously expressed concerns related to its ability to cover debt service shortfalls across its portfolio given the rise in its floating interest-rate debt. The loan benefits from an interest rate cap agreement with a pay rate of 5.61%; however, according to the YE2023 servicer reporting, the debt service coverage ratio (DSCR) was 0.39 times. An additional $8.4 million of loan future funding allocated to six individual borrowers remains available. Belmont Apartments ($2.4 million) and Lakewood Green ($2.1 million) are the largest loans with available future funding.

As of the June 2024 remittance, there are no delinquent or specially serviced loans, however, two loans, representing 6.5% of the pool balance, are on the servicer's watchlist. The loans, Heinz at 950 and The Otis, were both flagged for below breakeven DSCRs.

Maturity risk is elevated as 11 loans, representing 63.0% 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, or 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) 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 the 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.

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

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].