Morningstar DBRS Downgrades Credit Rating on One Class of ACRE Commercial Mortgage 2021-FL4 Ltd.
CMBSDBRS, Inc. (Morningstar DBRS) downgraded its credit rating on one class of notes issued by ACRE Commercial Mortgage 2021-FL4 Ltd. (the Issuer) as follows:
-- Class G to CCC (sf) from B (low) (sf)
In addition, Morningstar DBRS confirmed the following credit ratings:
-- 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)
The trends on Classes E and F remain Negative. Class G no longer carries a trend as it has a credit rating that typically does not carry a trend in Commercial Mortgage-Backed Securities (CMBS) credit ratings. The trends on all remaining classes are Stable.
The credit rating downgrade to Class G reflects ongoing accumulated interest shortfalls due, which will soon exceed Morningstar DBRS' tolerance relative to the current credit rating. Class G has not received full interest due since the June 2024 remittance. Morningstar DBRS' tolerance for unpaid interest is limited to six consecutive remittance periods at the B (sf) credit rating category. The Negative trends are reflective of the increased propensity for interest shortfalls, as well as the uncertainty around the recoverability of the majority of the loans in this maturing pool.
The transaction is in wind down, with a cumulative trust balance of $279.2 million, composed of five loans as of the December 2024 remittance. Since the previous Morningstar DBRS credit rating action in June 2024, one loan with a former trust balance of $32.4 million was liquidated from the pool with a realized loss of $20.2 million, in line with Morningstar DBRS' expectations. Of the remaining loans, three loans, representing more than 80.0% of the pool balance, are secured by office properties. Morningstar DBRS believes the values of the assets have declined from respective loan closing as the borrowers of each loan have been unable to successfully implement their respective business plans. One of these loans, highlighted below, is currently in special servicing.
Exchange (Prospectus ID#3; 26.9% of the current trust balance), the second largest asset in the pool, is secured by a 567,859-square-foot (sf) office property in Charlotte, North Carolina. The loan transferred to special servicing for maturity default in May 2024 and is currently paid through April 2024. According to the servicer, the asset is currently real estate owned. As of the trailing 12-month period (T-12) ended September 30, 2024, the property generated net cash flow (NCF) of $4.5 million, resulting in a DSCR of 0.72 times (x). The property was appraised for $83.0 million as of February 2024, down 24.7% from the issuance value of $110.2 million. The February 2024 value implies a loan-to value ratio (LTV) of 82.7% based on the current funded A-note of $68.6 million. Morningstar DBRS believes the current market value is likely lower and, in its analysis, Morningstar DBRS applied a haircut to the most recent appraisal value, resulting in a minor loss severity. The projected losses for this loan are expected to be contained to the unrated first loss piece.
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.
The largest loan in the pool, 311 West Monroe (Prospectus ID#1; 32.3% 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. Of the $48.0 million future funding proceeds, $34.7 million was allocated for leasing costs and $13.3 million was allocated 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's initial maturity date was 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 93.0% occupied as of the T-12 period ended September 30, 2024, with an NCF figure of $7.5 million, which equated to a DSCR of 0.65x. In its analysis, Morningstar DBRS assumed a stressed value, which resulted in an LTV in excess of 100%.
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 press releases 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 factor(s) 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 at (August 13, 2024; 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 (December 13, 2024; https://dbrs.morningstar.com/research/444617/north-american-cmbs-surveillance-methodology).
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 traditional model-based sensitivity was not performed; however, the credit ratings are sensitive to the recoverability assumptions on the five remaining loans that are detailed in this press release. Should recoverability of the remaining loans be lower than that implied by the stressed values in the latest analysis, credit ratings lower in the capital stack would be those most negatively impacted.
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 (December 13, 2024; https://dbrs.morningstar.com/research/444616)
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024; https://dbrs.morningstar.com/research/439702)
-- Legal Criteria for U.S. Structured Finance (December 03, 2024; https://dbrs.morningstar.com/research/444064)
-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024; https://dbrs.morningstar.com/research/428623)
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024; https://dbrs.morningstar.com/research/438283)
For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.
Ratings
ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.