Morningstar DBRS Confirms Credit Ratings on All Classes of ACRE Commercial Mortgage 2021-FL4 Ltd., Changes Trends on Three Classes

DBRS, Inc. (Morningstar DBRS) confirmed all credit ratings on all classes of notes issued by ACRE Commercial Mortgage 2021-FL4 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)

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

The trend changes reflect the increased loss expectations across two loans in special servicing, representing 33.2% of the current trust balance coupled with concerns around the ultimate recoverability for the remaining loans in the pool. The Landing (Prospectus ID #10; 10.6% of the current trust balance), is secured by a 193,355-sf office property in Oakland, CA. The loan transferred to special servicing in October 2023 for imminent monetary default and since matured in December 2023. According to the servicer, the likely resolution strategy is foreclosure. The borrower's business plan at closing was to utilize future funding of $6.3 million to complete various capital expenditures throughout the property to increase rental rates and occupancy to market.

According to documents provided by the servicer, the property was 60.6% occupied as of year-end 2023, down from 88.9% at issuance. As of the year-end 2023, reporting the property generated a net cash flow (NCF) of $0.8 million, resulting in a debt service coverage ratio (DSCR) of 0.30 times (x). At closing, the property had an As-Is appraised value of $38.0 million, which Morningstar DBRS believes has significantly decreased due to the property's recent performance. In its current analysis, Morningstar DBRS assumed a distressed property value given the status of the loan and liquidated it from the trust. The resulting loan loss severity was approximately 64%.

The largest-largest loan in special servicing, Exchange (Prospectus ID#3; 22.5% of the current trust balance), is secured by a 567,859-sf office property in Charlotte, NC. The loan transferred to special servicing for maturity default in May 2024. According to the servicer, the lender is pursuing foreclosure. According to the collateral manager, the loan is fully funded as the borrower has completed its planned capital expenditures. Since completing the capital expenditures, occupancy improved to 67.8% as of the year-end 2023 reporting, up from 53.0% as of the year-end 2022 reporting. As of the year-end 2023 reporting, the property generated a net cash flow (NCF) of $4.4 million, resulting in a DSCR of 0.65x. The property was recently appraised for $83.0 million, down 24.7% from the issuance value of $110.2 million. The updated value implies an loan-to value ratio (LTV) of 82.7% based on the current funded A-note of $68.6 million. In its analysis, Morningstar DBRS applied a haircut to the most recent appraisal value, resulting in a minor loss severity. The projected cumulative losses across both specially serviced loans are expected to be contained to the unrated $64.2 million first loss piece.

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, four of the remaining six loans, representing 84.3% of the current trust balance, are secured by office properties.

The credit rating confirmations reflect the increased credit support to the bonds as a result of successful loan repayments, with collateral reduction of 53.9% since issuance.

The transaction closed in January 2021 with an initial collateral pool of 23 floating-rate mortgage loans secured by 34 mostly transitional real estate properties with a cut-off-date pool balance of approximately $667.2 million. The collateral pool for the transaction is static; however, the Issuer was able to acquire funded loan participation interests into the trust over the Permitted Funded Companion Participation Acquisition Period, which ended with the April 2024 Payment Date.

As of the June 2024 remittance, the pool comprises six loans with a cumulative trust balance of $307.9 million. Since Morningstar DBRS' previous credit rating action in June 2023, three loans with a cumulative trust balance of $45.8 million were paid in full and two loans with a cumulative trust balance of $56.6 million liquidated from the pool with aggregate losses of $3.3 million. In addition to the office loans noted above, the two remaining loans in the pool are each secured by a multifamily property (9.3%) and an industrial property (6.4%).

The largest loan in the pool, 311 West Monroe (Prospectus ID #1; 27.1% of the current trust balance) is secured by a 15-story, 390,512-sf, Class A office property in the West Loop submarket of Chicago. The borrower used the advanced funds to pay for leasing costs for tenants that had executed leases at loan closing and to fund debt service shortfalls. Future funding proceeds of $48.0 million was allocated $34.7 million of leasing costs and $13.3 million for debt service carry costs. The borrower's business plan was to stabilize operations after signing new leases to secure takeout financing or sell the asset. The loan matured in March 2023; however, the loan was modified to extend the loan maturity to March 2025. As part of the modification, the borrower purchased a new interest rate cap agreement and deposited $2.2 million into the carry reserve. According to documents provided by the servicer, the property was 92.5% occupied as of December 2023 with a year-end NCF $4.3 million equating to a DSCR of 0.72x. In its analysis Morningstar DBRS assumed a stressed value which resulted in an LTV in excess of 100%.

Morningstar DBRS also has concerns for the only loan on the servicer's watchlist, 1023 Mission Street (Prospectus ID# 17; 6.4% of the pool). The loan is secured by a 33,000-sf flex industrial property in San Francisco. The borrower's initial business plan included investing approximately $6.0 million in capital expenditures to white box the interior of the vacant property and install power and amenities, ultimately leasing the available space to a production, distribution, and repair user by 2023; however, the property remains vacant, and the San Francisco market suffers from challenges related to an oversupply and lack of demand resulting in stagnant leasing momentum. Given the expectation for continued softness in this market and uncertainty around the ultimate time frame for leasing traction to pick up, Morningstar DBRS considered the potential for a full loss for this loan.

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 Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (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.

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.

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), https://dbrs.morningstar.com/research/428797
-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623
-- 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
-- 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].