Morningstar DBRS Confirms All Credit Ratings of ACRE Commercial Mortgage 2017-FL3 Ltd.

DBRS, Inc. (Morningstar DBRS) confirmed all credit ratings on the classes of Floating Rate Notes issued by ACRE Commercial Mortgage 2017-FL3 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 (low) (sf)
-- Class E at B (low) (sf)
-- Class F at CCC (sf)

All trends are Stable with the exception of Class F, which does not carry a trend given the CCC (sf) or lower credit rating.

The credit rating confirmations reflect the increased credit support to the bonds as a result of successful loan repayments, with total collateral reduction of 39.0% since issuance, an increase from 5.6% at the previous Morningstar DBRS credit rating action in March 2024. While the loan repayment is credit positive to the transaction at the top of the capital stack, one loan was also liquidated from the trust in April 2024 as expected, which resolved with a realized loss of $50.1 million, reducing the current balance of the unrated, first loss piece to $2.8 million and credit support at the bottom of the capital stack. Most borrowers are progressing with the individual business plans to increase property cash flow and value; however, Morningstar DBRS notes a handful of borrowers are facing increased execution risk because of a combination of factors, including slower than expected rent growth and increases in debt service costs stemming from the current elevated interest rate environment.

As a result of lagging business plans, Morningstar DBRS notes several borrowers have received short-term modifications to extend loan maturity dates to allow borrowers to either sell loan collateral or secure take-out financing. While the majority of the modifications required deleveraging and/or reserve deposits, Morningstar DBRS notes there remains increased risks for those loans. As such, the analysis for this review generally considered stressed scenarios to increase the loan-level expected losses (ELs), generally reflective of stressed values for the collateral properties or upward probability of default (POD) adjustments based on the level and source of the increased stress. While this approach increased the pool EL by more than a full percentage point from the prior credit rating action's analysis, there was no downward pressure for the credit ratings given the collateral reduction noted above.

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.

As of the January 2025 remittance, the pool comprises 11 loans secured by 12 properties with a cumulative trust balance of $339.6 million. Since the previous Morningstar DBRS rating action in March 2024, four loans with a former cumulative trust balance of $158.3 million have been repaid in full. The transaction was structured with a Reinvestment Period, which ended with the March 2024 Payment Date. The property type concentration is evenly distributed as the transaction consists of three loans, representing 40.9% of the current trust balance, secured by multifamily properties, two loans, representing 22.0% of the current trust balance, secured by industrial properties, and two loans, representing 20.0% of the current trust balance, secured by office properties. The remaining four loans are secured by self-storage properties.

Leverage across the pool has increased slightly from issuance levels as the current weighted-average (WA) as-is appraised value loan-to-value ratio (LTV) is 67.5%, with a current WA stabilized LTV of 62.3%. In comparison, these figures were 64.4% and 58.0%, 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 environments. In the analysis for this review, Morningstar DBRS applied upward LTV adjustments for seven loans, representing 71.5% of the current trust balance, generally reflective of higher cap rate assumptions compared with the implied cap rates based on the appraisals.

As of the January 2025 reporting, one loan, representing 8.2% of the current trust balance, is in special servicing. The loan, 251 Monro Avenue Prospectus ID# 41; 8.2% of the current trust balance), is secured by a 1.7 million-square-foot (sf) outdoor industrial property spread across 21 buildings in Northern New Jersey. The loan transferred to special servicing in November 2024 for maturity default. According to the collateral manager, the borrower is trying to refinance the loan; however, the potential timing is unclear. According to the financials provided by the collateral manager, the property was 71.0% occupied while generating net operating income (NOI) of $4.3 million for the trailing 12-month period ended September 30, 2024, resulting in a debt service coverage ratio (DSCR) of 1.76 times (x) and debt yield of 15.2%. In its current analysis, Morningstar DBRS applied an upward LTV adjustment of approximately 72.5% as well as an increased Probability of Default penalty to reflect the increased credit risk of the loan. The loan expected loss is approximately 1.25x times greater than the expected loss for the pool.

The Northridge Commons (Prospectus ID 34; 14.1% of the current trust balance), represents the pool's only loan being monitored on the servicer's watchlist. The loan is secured by seven Class B office/flex industrial buildings in Sandy Springs, Georgia. The loan was structured with a future funding of $19.4 million, of which $10.0 million was reserved for capital renovations at the property, while the remaining $9.4 million was reserved for leasing costs. As of YE2024 the loan is fully funded as the borrower has completed all capital expenditures. In January 2025, the loan was modified, extending loan maturity three months to March 2025 to provide additional time for the sponsor to market the property for sale. As of September 30, 2024, the property was 90.2% occupied, an improvement compared with the occupancy rate of 68.4% at closing. According to servicer reporting, as of the trailing 12-month period ended September 30, 2024, the property generated an NCF of $4.6 million, equating to a DSCR of 1.03x and a debt yield of 9.7%. Net cash flow (NCF) has surpassed the Morningstar DBRS Stabilized NCF figure of $4.0 million but slightly trails the Issuer's stabilized NCF figure of $4.9 million. In its current analysis, Morningstar DBRS applied an upward LTV adjustment of approximately 93.2% as well as an increased Probability of Default penalty to reflect the increased credit risk of the loan regarding the pending maturity. The loan expected loss is approximately two times greater than the expected loss for the pool.

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, 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 Factors in Credit Ratings (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.

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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The Morningstar DBRS Long-Term Obligation Rating Scale definition indicates that credit ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity 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 (December 13, 2024)
https://dbrs.morningstar.com/research/444616
-- North American CMBS Insight Model Version 1.2.0.0 (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
-- 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
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024)
https://dbrs.morningstar.com/research/437781
-- Legal Criteria for U.S. Structured Finance (December 3, 2024)
https://dbrs.morningstar.com/research/444064

For more information on this credit or on this industry, visit http://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.