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

DBRS Limited (DBRS Morningstar) confirmed the ratings on the following classes of secured Floating Rate Notes (the Notes) issued by ACRE Commercial Mortgage 2017-FL3 Ltd.:

-- 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 BB (low) (sf)
-- Class F at B (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations. At issuance, the collateral for the transaction consisted of 12 floating-rate mortgages secured by 16 transitional commercial real estate properties, with a total balance of $341.2 million. The transaction is structured with a reinvestment period that was recently extended from March 2021 to March 2024, during which Ares Management (Ares) can substitute collateral in the pool subject to certain reinvestment criteria, including rating agency confirmation by DBRS Morningstar. As of the May 2021 remittance, there were 12 floating-rate mortgages with a total loan balance of $465.1 million as all of the original collateral from the pool has been replaced with reinvestment assets, with the exception of Sheraton Ann Arbor (Prospectus ID#5, 7.1% of the pool). The majority of the loans were structured with three-year initial terms with two 12-month extension options that are subject to performance-based criteria. These assets are in various stages of stabilization and eight of these loans, representing 69.6% of the outstanding loan pool balance, have pari passu companion participations held by a subsidiary of the trust asset seller and sponsor, ACRC Lender LLC.

Amid the pandemic, DBRS Morningstar has made inquiries to Ares about potential business plan stoppages or delays, as well as foreseeable debt service payment disruptions. Ares noted that no borrowers have open requests for any sort of relief or have forewarned of future cash flow problems, and all loans remain current as of the May 2021 remittance report. Although a previous forbearance request made by the borrower for Sheraton Ann Arbor was denied, the loan underwent a modification in August 2020, which extended the initial maturity to July 2022 from July 2020.

As of May 2021, three loans, representing 28.6% of the current trust balance, are on the servicer’s watchlist because of low occupancy and/or a low debt service coverage ratio (DSCR). However, these loans are secured by properties that are generally in the process of executing their respective stabilization plans. Two pivotal loans within the top 10 are highlighted below.

The Old Orchard Towers loan (Prospectus ID#23, 12.3% of the trust balance) is secured by a 355,195-square-foot office building in the Chicago suburb of Skokie, Illinois. At issuance, the borrower’s business plan was to re-tenant or secure a long-term renewal for the largest tenant at the property, National Louis University (NLU), which represents 24.7% of the net rentable area (NRA) on a lease that is scheduled to expire in July 2021. The borrower has confirmed that the space will be vacated and is actively marketing the space. As a result, all excess cash from project operations is being swept and any request for capital expenditures or leasing costs will be drawn from excess cash before future funding is released. According to the December 2020 rent roll, the property was 89.8% occupied with an average rental rate of $21.70 per square foot (psf). With NLU’s departure in July 2021, the implied occupancy rate will drop to 65.1% with an average rental rate of $21.17 psf. The three largest tenants, excluding NLU, represent 44.1% of the NRA with leases that are scheduled to expire between May 2022 and October 2024. DBRS Morningstar will continue to monitor the loan for developments related to the leasing status of the upcoming vacancy.

The Sheraton Ann Arbor loan is secured by a 197-key, six-story, full-service hotel in Ann Arbor, Michigan. The collateral manager previously noted that the borrower made a forbearance request, which was subsequently denied. The loan was eventually modified, which extended loan’s maturity to July 2022 from July 2020. As of the May 2021 portfolio update provided by the collateral manager, the property’s occupancy has continued to improve since the beginning of 2021. The servicer is working with the borrower to better understand future bookings and the recovery plan, with an expectation that the occupancy rate will remain soft until students return to the market for the fall semester. The borrower completed a mandated property improvement plan (PIP) renovation at a cost of $8.0 million ($40,000 per key), which began post-loan contribution and was funded out-of-pocket by the borrower. According to the servicer, the PIP was fully completed in May 2020.

As of YE2020, the occupancy, average daily rate, and revenue per available room were reported at 20.6%, $119.97, $24.70, respectively, and the YE2020 DSCR was reported at -0.90 times. This loan was analyzed with an elevated risk profile to reflect DBRS Morningstar’s concerns about the hospitality industry and the ultimate delay in property stabilization.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:
-- Prospectus ID#23 – Old Orchard Towers (12.3% of the pool)
-- Prospectus ID#5 – Sheraton Ann Arbor (7.1% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 26, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that 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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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