DBRS Morningstar Assigns Provisional Ratings to ACRES Commercial Realty 2021-FL2 Issuer, Ltd.

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of notes to be issued by ACRES Commercial Realty 2021-FL2 Issuer, Ltd. (the Issuer):

-- 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)

All trends are Stable.

The initial collateral consists of 23 short-term floating-rate mortgage assets with an aggregate cutoff date balance of $558.8 million secured by 24 mortgaged properties. The aggregate unfunded future funding commitment of the future funding participations as of the cutoff date is approximately $69.9 million. The holder of the future funding companion participations, ACRES Capital Corp. (ACRES), has full responsibility to fund the future funding companion participations. The transaction is a managed vehicle that includes a 24-month reinvestment period. As part of the reinvestment period, the transaction includes a 180-day ramp-up acquisition period that will be used to increase the trust balance by $141.2 million to a total target collateral principal balance of $700.0 million. DBRS Morningstar assessed the $141.2 million ramp component using a conservative pool construct and, as a result, the ramp loans have expected losses generally in line with the pool weighted-average (WA) loan expected loss. During the reinvestment period, so long as the note protection tests are satisfied and no event of default (EOD) has occurred and is continuing, the collateral manager may direct the reinvestment of principal proceeds to acquire reinvestment collateral interest, including funded companion participations, meeting the eligibility criteria. The eligibility criteria, among other things, have a minimum debt service coverage ratio (DSCR), loan-to-value (LTV) ratio, 16.0 Herfindahl score, and property type limitations. Of the 23 loans, one (The Vic at Interpose; Prospectus ID#5), representing a total initial pool balance of 7.3%, is a delayed-close loan, unclosed as of December 1, 2021. The Issuer has 90 days after the closing to acquire the delayed-close interest. If the delayed-close collateral interest is not acquired within 90 days of the closing date, the Issuer can use the allocated balance of the delayed-close loan to acquire additional ramp loans. Acquisitions of future funding participations of $500,000 or greater will require rating agency confirmation. Interest can be deferred for the Class F and Class G notes, and interest deferral will not result in an EOD. The transaction will have a sequential-pay structure.

Of the 24 properties, 18 are multifamily assets (87.0% of the mortgage asset cutoff date balance). The remaining loans are secured by self-storage (three loans, 6.6% of the pool) and hotel (two loans, 6.4% of the pool) properties.

For the floating-rate loans, DBRS Morningstar used the one-month Libor index, which is based on the lower of a DBRS Morningstar stressed rate that corresponded to the remaining fully extended term of the loans or the strike price of the interest rate cap with the respective contractual loan spread added to determine a stressed interest rate over the loan term. When the debt service payments were measured against the DBRS Morningstar As-Is Net Cash Flow (NCF), 18 loans, comprising 75.3% of the initial pool balance, had a DBRS Morningstar As-Is DSCR of 1.00 times (x) or below, a threshold indicative of default risk. However, the DBRS Morningstar Stabilized DSCR of only three loans, comprising 18.1% of the initial pool balance, was 1.00x or below, which is indicative of elevated refinance risk. The properties are often transitioning with potential upside in cash flow; however, DBRS Morningstar does not give full credit to the stabilization if there are no holdbacks or if other structural features in place are insufficient to support such treatment. Furthermore, even with the structure provided, DBRS Morningstar generally does not assume the assets to stabilize above market levels.

The Sponsor is ACRES Commercial Realty Corp. (NYSE: ACR). In July 2020, ACRES, through its subsidiary, ACRES Capital, LLC, acquired the management agreement of ACRES Commercial Realty Corp. (formerly known as Exantas Capital Corp). ACRES is a publicly traded commercial mortgage real estate investment trust focused on self-originated commercial mortgage loans and other commercial real estate (CRE) debt investments. It provides nationwide, middle-market CRE lending with a focus on multifamily, student housing, hospitality, office, and independent senior living properties in the U.S. The Sponsor has been an Issuer on 12 securitized CRE financings totaling approximately $5.4 billion, including ACRES 2021-FL1, which was rated by DBRS Morningstar and closed in May 2021.

An affiliate of the sponsor, Retention Holder, will be acquiring and holding 100% of the first-loss position (including the Class F Notes, the Class G Notes, and the Preferred Shares) on this transaction as an eligible horizontal residual interest (EHRI). The Retention Holder will retain the EHRI in accordance with the U.S. Credit Risk Retention Rules. The Sponsor and the Retention Holder will both agree and undertake in the EU/UK Risk Retention Letter to comply with the EU/UK Risk Retention Requirements in accordance with the terms of the EU/UK Risk Retention Letter. Collectively, the retained notes and membership interests represent 19.0% of the trust balance

Twenty loans, representing 90.1% of the initial pool, are backed by multifamily properties (83.5%), excluding student housing, and self-storage properties (6.6%). These property types have historically shown lower defaults and losses. Multifamily properties benefit from staggered lease rollovers and generally low expense ratios compared with other property types. While revenue is quick to decline in a downturn because of the short-term nature of the leases, it is also quick to respond when the market improves. Furthermore, the pool has limited office, retail, mixed-use, and hospitality exposure with only two loans, representing 6.4% of the pool, backed by such property types. These property types have experienced considerable disruption as a result of the coronavirus pandemic with mandatory closures, stay-at-home orders, travel restrictions, retail bankruptcies, and consumer shifts to online purchasing.

As no loans in the pool were originated prior to the onset of the coronavirus pandemic, the WA remaining fully extended term is 57 months, which gives the Sponsor enough time to execute its business plans without risk of imminent maturity. In addition, the appraisal and financial data provided are reflective of conditions after the onset of the pandemic.

Sixteen loans, representing 66.4% of the pool balance, represent acquisition financing. Acquisition financing generally requires the respective sponsor(s) to contribute material cash equity as a source of funding in conjunction with the mortgage loan, resulting in a higher sponsor cost basis in the underlying collateral and aligning the financial interests between the sponsor and lender.

DBRS Morningstar has analyzed the loans to a stabilized cash flow that is, in some instances, above the in-place cash flow. It is possible that a related loan sponsor will not successfully execute its business plans and that the higher stabilized cash flow will not materialize during the loan term, particularly with the ongoing coronavirus pandemic and its impact on the overall economy. The loan sponsor’s failure to execute the business plans could result in a term default or the inability to refinance the fully funded loan balance. DBRS Morningstar made relatively conservative stabilization assumptions and, in each instance, considered the business plans to be rational and the loan structure to be sufficient to substantially implement such plans. In addition, DBRS Morningstar analyzes loss given default based on the as-is credit metrics, assuming the loan is fully funded with no NCF or value upside.

Thirty-one loans, representing 41.5% of the trust balance, have DBRS Morningstar As-Is LTVs (fully funded loan amount) greater than 85.0%, which represents significantly high leverage. Four of those loans, 26.4% of the trust balance, are among the 10 largest loans in the pool. All 21 loans were originated in 2021 and have sufficient time to reach stabilization. Additionally, all the loans have DBRS Morningstar Stabilized LTVs of 71.8% or less, indicating improvements to value based on the related sponsors’ business plans. The DBRS Morningstar WA Stabilized LTV for the pool is 65.3% and no loans have a DBRS Morningstar Stabilized LTV greater than 71.8%.

DBRS Morningstar did not conduct site inspections for any of the properties in the pool because of health and safety constraints associated with the ongoing coronavirus pandemic. As a result, DBRS Morningstar relied more heavily on third-party reports, online data sources, and information provided by the Issuer to determine the overall DBRS Morningstar property quality assigned to each loan. Recent third-party reports were provided for all loans and contained property quality commentary and photos. DBRS Morningstar made relatively conservative property quality adjustments with only three loans (Linden on the GreeneWay, The Vic at Interpose, and 55 Resort Apartments), representing a combined 22.2% of the pool balance, being modeled with Average + property quality. These properties were recently built or renovated. No loans received a property quality distinction of Excellent.

The transaction is managed and includes a delayed-close loan, a ramp-up component, and a reinvestment period, which could result in negative credit migration and/or an increased concentration profile over the life of the transaction. The risk of negative migration is also partially offset by eligibility criteria that outline DSCR, LTV, 16.0 Herfindahl score minimum, property type, and loan size limitations for ramp and reinvestment assets. DBRS Morningstar accounted for the uncertainty introduced by the 180-day ramp-up period by running a ramp scenario that simulates the potential negative credit migration in the transaction based on the eligibility criteria. As a result, the ramp component has an expected loss generally in line with the WA pre-ramp pool.

All loans have floating interest rates and all 23 loans are interest-only (IO) during the entire initial loan term, creating interest rate risk should interest rates increase. For the floating-rate loans, DBRS Morningstar used the one-month Libor index, which is based on the lower of a DBRS Morningstar stressed rate that corresponded to the remaining fully extended term of the loans or the strike price of the interest rate cap with the respective contractual loan spread added to determine a stressed interest rate over the loan term. Additionally, all loans have extension options and, in order to qualify for these options, the loans must meet minimum DSCR, debt yield, and/or LTV requirements.

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.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

DBRS Morningstar provides updates and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#1 – Linden on the GreeneWay (9.6% of the pool)
-- Prospectus ID#2 – Hanley Place Apartments (9.1% of the pool)
-- Prospectus ID#3 – Coronado Apartments (7.7% of the pool)
-- Prospectus ID#4 – Westshore Crossing (7.5% of the pool)
-- Prospectus ID#5 – The Vic at Interpose (7.3% of the pool)
-- Prospectus ID#6 – Montelago (6.1% of the pool)
-- Prospectus ID#7 – 55 Resort Apartments (5.4% of the pool)
-- Prospectus ID#8 – McCallum Crossing (5.0% of the pool)
-- Prospectus ID#9 – Boundary Village Apartments (4.9% of the pool)
-- Prospectus ID#10 – Tobin Lofts (4.6% of the pool)
-- Prospectus ID#11 – Hilton President (3.6% of the pool)
-- Prospectus ID#12 – DFW Student Housing Portfolio (3.5% of the pool)
-- Prospectus ID#14 – Goodfriend Self Storage(3.2% of the pool)
-- Prospectus ID#18 – Towneplace Suites Port St. Lucie (2.8% 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.

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is North American CMBS Multi-Borrower Rating 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

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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