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 notes issued by ACAM 2019-FL1, Ltd. as follows:

-- 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 61.7% since issuance, an increase from 50.1% at Morningstar DBRS' previous credit rating action in January 2024. The collateral reduction continues to serve as a mitigant to the increased credit risk to the transaction as a result of six loans secured by office properties, totaling 51.3% of the current trust balance as of the November 2024 reporting. The majority of these borrowers are behind in their respective business plans, with all borrowers likely to face difficulties in securing refinance capital or selling the properties at respective loan maturity. The transaction structure provides further insulation from this adverse selection risk, as the unrated first-loss bond and the two below investment-grade rated bonds total $62.5 million, supporting the credit rating confirmations and Stable trends.

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 info-DBRS@morningstar.com.

The pool initially consisted of 21 floating-rate loans secured by 35 properties with a cut-off balance of $400.3 million. Most loans were in a period of transition with plans to stabilize and improve asset values. The transaction became static in December 2021 at the conclusion of the 24-month reinvestment period. As of November 2024, the pool consisted of nine loans totaling $153.8 million, including two of the original loans, representing 24.3% of the current trust balance. Both loans are secured by office properties. Since Morningstar DBRS' previous credit rating action, two loans with a former cumulative trust balance of $37.5 million have paid in full. Beyond the office concentration noted above, there are two multifamily properties, representing 25.3% of the current trust balance, and one mixed-use property, representing 18.0% of the current trust balance.

The collateral pool exhibits elevated leverage from issuance with a current weighted-average (WA) appraised loan-to-value ratio (LTV) of 71.1% and a WA stabilized LTV of 66.3%. 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, Morningstar DBRS notes individual property values may have decreased given the current interest rate and capitalization (cap) rate environments relative to when the individual loans closed. In the analysis for this review, Morningstar DBRS applied a recoverability analysis to most loans by applying haircuts to property appraised values or using in-place property-level financial reporting with stressed market- and property type-specific cap 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.

As of November 2024, there were no loans in special servicing; however, seven loans, representing 81.8% of the trust balance, are on the servicer's watchlist. All loans have been flagged for upcoming loan maturity, though select loans have also been flagged for below-breakeven debt service coverage ratios (DSCRs). The 138 Ludlow loan (Prospectus ID#33; 11.5% of the current trust balance) is also categorized as a nonperforming matured balloon as the loan matured in July 2024 and the borrower has not made monthly debt service payments since May 2024. The loan is secured by a 27-unit multifamily property with two ground-floor commercial units on Manhattan's Lower East Side. The borrower's business plan at closing was to lease the remaining vacant commercial unit and increase rental rates on the multifamily units as leases rolled. According to the July 2024 rent roll, the multifamily component was 96.3% occupied with an average rental rate of $4,420 per unit and the commercial component was fully occupied with no scheduled tenant lease expirations until March 2032. The annualized July 2024, (net cash flow) NCF of $1.4 million represents an improvement over the YE2023 NCF of $1.1 million. The most recent appraisal, dated September 2021, valued the property at $25.4 million, indicative of a 69.7% LTV and a 5.6% cap rate using the annualized July 2024 NCF. Given the status of the loan and the borrower's inability to sell the property or refinance the loan, Morningstar DBRS believes the current market value has declined by up to 30.0%. Morningstar DBRS is also concerned about a potentially prolonged resolution process if the lender decides to pursue foreclosure. In its analysis for the current credit rating actions, Morningstar DBRS liquidated the loan from the trust, resulting in a loan loss severity in excess of 20.0%.

In the next six months, six loans, representing 68.0% of the current trust balance, are scheduled to mature. The borrower of the 600 Bushwick loan (Prospectus ID#31; 23.4% of the current trust balance), which is the largest in the trust, is expected to exercise an available 12-month maturity extension option, pushing loan maturity to December 2025. The second-largest loan in the trust, Kenridge Apartments (Prospectus ID#27; 13.8% of the current trust balance), also matures in December 2024; however, the loan will not qualify for the available extension option. As such, Morningstar DBRS expects the lender and borrower to negotiate a loan modification and extension. If loans are modified and extended, Morningstar DBRS expects the lender to require borrowers to contribute fresh equity in the form of principal curtailments, deposits into reserve accounts, and/or purchasing new interest rate cap agreements.

Through November 2024, the lender had advanced cumulative loan future funding of $30.0 million to seven of the outstanding individual borrowers. The lender has advanced $4.8 million to the borrower of the 500 West Jefferson Street loan (Prospectus ID#23; 12.6% of the current trust balance), which is secured by a Class A high-rise office building in downtown Louisville, Kentucky. At loan closing, up to $15.9 million of future funding and additional borrower equity were available to fund the borrower's capital expenditure (capex) and leasing plan. The borrower has completed its $16.0 million capex plan. The loan is not on the servicer's watchlist; however, according to the trailing 12-months ended September 2024 (T-12) income statement, the property yielded net operating income of $1.5 million, equating to a below-breakeven DSCR of 0.56 times. According to the September 2024 rent roll, the property was 48.0% occupied with an average base rental rate of $18.39 psf, which remained relatively unchanged from the September 2023 occupancy rate of 46.4%. According to the property's website; however, the leased rate has increased to 62.5% as the collateral manager noted the borrower has signed new leases and lease expansions totaling approximately 76,000 square feet. While Morningstar DBRS was unable to confirm lease terms and tenant build-out costs, the improvement in occupancy is expected to result in increased NCF from the T-12 September 2024 figure once tenants begin paying rent. There remain 16 full floors of vacant space, and according to LoopNet, the available office space is marketed at a base rental rate of $18.00 per square foot. The lender reduced the originally contemplated loan future funding by $6.2 million; however, there remains $4.9 million of available loan future funding to finance additional leasing costs. While the loan does not mature until December 2025, in its analysis for this review, Morningstar DBRS applied a haircut to the original property value of $33.5 million, which resulted in an in-place LTV slightly above 100.0%.

There remains $12.8 million of unadvanced loan future funding allocated to five individual borrowers. The largest portion of unadvanced future funding dollars ($5.8 million) is allocated to the borrower of the 5419 Sunset loan (Prospectus ID#30; 5.6% of the current trust balance). The funds are believed to be available for the buildout of the space as the property has been fully leased to the County of Los Angeles on a 10-year lease, which was expected to commence in Q2 2024. According to the tenant's website, it has taken occupancy of its space. As the loan matures in December 2024; however, it is unclear if the funds will be advanced to the borrower. Given the property is fully occupied on a long-term lease, the credit risk of the loan is low and the loan is expected to pay in full.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective private rating letters at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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 Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

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.

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

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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
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283
-- 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 (December 3, 2024), https://dbrs.morningstar.com/research/444064
-- Rating North American CMBS Interest-Only Certificates (June 28, 2024), https://dbrs.morningstar.com/research/435294

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 http://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.