DBRS Morningstar Confirms Ratings on ACREC 2021-FL1, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on all classes of notes issued by ACREC 2021-FL1 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 (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which has remained in line with DBRS Morningstar’s expectations since issuance. In conjunction with this press release, DBRS Morningstar has published a Surveillance Performance Update report with in-depth analysis and credit metrics for the transaction and with 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@dbrsmorningstar.com.

The initial collateral consisted of 23 floating-rate mortgages secured by 23 transitional multifamily properties with a cut-off date balance totaling approximately $875.6 million. Most loans were in a period of transition with plans to stabilize performance and improve the asset value. The transaction was a managed vehicle with an 18-month reinvestment period that was scheduled to expire with the April 2023 Payment Date. The reinvestment period was extended through July 2023 as the issuer identified an additional loan that was added to the transaction, according to July 2023 reporting. The Replenishment Account now has a zero balance and the transaction will pay down sequentially with all subsequent successful loan repayments.

As of the July 2023 remittance, the pool comprises 21 loans secured by 21 properties with a cumulative trust balance of $862.7 million, as there has been collateral reduction of 1.5%. Since issuance, eight loans with a former cumulative trust balance of $275.0 million have been successfully repaid from the pool. Of the original 23 loans, 15 loans, representing 69.5% of the current trust balance, remain in the transaction as of July 2023 reporting. Since the previous DBRS Morningstar rating action in November 2022, four loans with a current trust balance of 21.1% have been added to the trust.

The transaction is concentrated by property type, as all loans are secured by multifamily properties. The loans are primarily secured by properties in suburban markets. Fourteen loans, representing 65.9% of the pool, are secured by properties in suburban markets, as defined by DBRS Morningstar, with a DBRS Morningstar Market Rank of 3, 4, or 5. An additional six loans, representing 28.7% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 6 or 7, denoting an urban market, while one loan, representing 5.4% of the pool, is secured by property with a DBRS Morningstar Market Rank of 2, denoting a tertiary market. In comparison, in July 2022, properties in suburban markets represented 71.9% of the collateral and properties in urban markets represented 28.1% of the collateral.

Leverage across the pool has also remained consistent from the pool as of July 2022 reporting as the current weighted-average (WA) as-is appraised value loan-to-value (LTV) ratio is 73.1%, with a current WA stabilized LTV ratio of 67.9%. In comparison, these figures were 74.5% and 69.8%, respectively, as of July 2022. DBRS Morningstar recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2021 and 2022 and may not reflect the current rising interest rate or widening capitalization rate environments.

Through June 2023, the lender had advanced cumulative loan future funding of $10.5 million to seven of the 21 remaining individual borrowers to aid in property stabilization efforts. The largest advance, $2.6 million, has been made to the borrower of the Belmont Apartments loan, which is secured by a multifamily property in Grand Prarie, Texas. Funds were advanced to the borrower to complete its capital improvement project across the property. An additional $11.9 million of loan future funding allocated to seven of the remaining individual borrowers remains available. The largest portion of available funds, $3.0 million, is allocated to the borrower of the City Club Apartments – CBD Detroit loan, which is secured by a multifamily property in Detroit. The loan future funding is available to the borrower as a performance based earnout out. According to the collateral manager, the property remains in lease up as the borrower has encountered challenges in increasing the occupancy rate.

An additional remaining $2.1 million of future funding is allocated to the borrower of the Lakewood Greens loan, which is secured by a multifamily property in Dallas. The available funds are to continue the borrower’s capital improvement plan as the lender has already advanced $2.5 million in funding since loan closing. Notably, the loan is sponsored by Tides Equities. In a June 2023 The Real Deal article, the principals of the firm noted it would likely need to conduct a capital call from its investors in order to fund debt service shortfalls across its portfolio given the rise in floating interest rate debt. The loan benefits from an interest rate cap agreement with a pay rate of 5.61%; however, according to YE2022 servicer reporting, the debt service coverage ratio was 0.59x. Of the remaining loans, 11 loans, representing 52.2% of the current pool balance, were not structured with future funding components as the individual business plans generally revolved around completing initial lease-up phases and stabilizing operations on recently delivered properties.

As of the May 2023 remittance, there are no delinquent loans or loans in special servicing, and there are three loans on the servicer’s watchlist, representing 12.2% of the current trust balance. The loans have been flagged for upcoming maturity dates. According to the collateral manager, the properties are being marketed for sale; however, if a sale does not close prior to loan maturity, each loan has a remaining extension option. An additional five loans, representing 31.4% of the current trust balance, have been modified. In most instances, the modifications were executed to extend loan maturity dates with borrowers required to purchase new interest rate cap agreements or deposit additional cash equity into operating and debt service carry reserves.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/416784 (July 4, 2023).

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

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

The principal methodology is the North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 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.

DBRS Morningstar 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.

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://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model Version 1.1.0.0 https://www.dbrsmorningstar.com/research/410913

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022) https://www.dbrsmorningstar.com/research/402646/dbrs-morningstar-north-american-commercial-real-estate-property-analysis-criteria

North American Commercial Mortgage Servicer Rankings (September 8, 2022)
https://www.dbrsmorningstar.com/research/402499/north-american-commercial-mortgage-servicer-rankings

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023)
https://www.dbrsmorningstar.com/research/415687

Legal Criteria for U.S. Structured Finance (December 7, 2022)
https://www.dbrsmorningstar.com/research/407008/legal-criteria-for-us-structured-finance

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