DBRS Morningstar Finalizes Provisional Ratings on ACREC 2021-FL1, Ltd.

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes issued by ACREC 2021-FL1, 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.

Coronavirus Overview
With regard to the Coronavirus Disease (COVID-19) pandemic, the magnitude and extent of performance stress posed to global structured finance transactions remain highly uncertain. This considers the fiscal and monetary policy measures and statutory law changes that have already been implemented or will be implemented to soften the impact of the crisis on global economies. Some regions, jurisdictions, and asset classes are, however, feeling more immediate effects. Accordingly, DBRS Morningstar may apply additional short-term stresses to its rating analysis. For example, DBRS Morningstar may front-load default expectations and/or assess the liquidity position of a structured finance transaction with more stressful operational risk and/or cash flow timing considerations.

The initial collateral consists of 23 floating-rate mortgage loans secured by 23 transitional multifamily properties. The pool totals $875.6 million (98.0% of the fully funded balance), excluding $18.4 million of remaining future funding commitments. Each collateral interest is secured by a mortgage on a multifamily property or a portfolio of multifamily properties. The transaction is a managed vehicle, which includes an 18-month reinvestment period. During the reinvestment period, so long as the note protection tests are satisfied and no event of default (EOD) has occurred or is continuing, the collateral manager may direct the reinvestment of principal proceeds to acquire reinvestment collateral interests, including funded companion participations, that meet the eligibility criteria. The eligibility criteria, among other things, have minimum debt service coverage ratio (DSCR), loan-to-value ratio (LTV), and loan size limitations. In addition, mortgages exclusively secured by multifamily properties are allowed as collateral interests during the reinvestment period. Lastly, the eligibility criteria stipulate a rating agency confirmation (RAC) on reinvestment loans, and pari passu participation acquisitions above $500,000 if a portion of the underlying loan is already included in the pool, thereby allowing DBRS Morningstar the ability to review the new collateral interest and any potential impacts on the overall ratings. Of the 23 loans, there are three unclosed, delayed-close loans as of September 21, 2021 (Crawford at Grand Morton (Prospectus ID#6), Yardz at West Cheyenne (Prospectus ID#15), and Serene at Woodlake (Prospectus ID#22) (together, the Delayed Close Mortgage Assets), representing a total initial pool balance of 11.3%. The Issuer has 45 days after closing to acquire the Delayed Close Mortgage Assets. If the Delayed Close Mortgage Assets are not acquired within 45 days of the closing date, up to $5.0 million will be deposited into the Reinvestment Account and any amount in excess of $5.0 million will be applied as principal proceeds in accordance with the priority of payments.

The loans are mostly secured by cash flowing assets, many of which are in a period of transition with plans to stabilize and improve the asset value. In total, nine loans, representing 39.6% of the pool, have remaining future funding participations totaling $18.4 million, which the Issuer may acquire in the future.

All loans in the pool are secured by multifamily properties across 13 states. Multifamily properties have historically seen lower probability of default (PODs) and typically see lower Expected Losses within the DBRS Morningstar model. Multifamily properties benefit from staggered lease rollover 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. Additionally, most loans in the pool are secured by traditional multifamily properties, such as garden-style communities or mid-rise/high-rise buildings, with no independent living/assisted-living/memory care facilities or student housing properties included in this pool. Furthermore, during the transaction’s reinvestment period, only multifamily properties (excluding senior housing and student housing properties) are eligible to be brought into the trust.

The loan collateral was generally in very good physical condition as evidenced by two loans, representing 14.0% of the initial pool balance, are secured by properties that DBRS Morningstar deemed to be Above Average in quality. An additional 10 loans, representing 53.1% of the initial pool balance, are secured by properties with Average + quality. Furthermore, no loans in the pool are backed by a property that DBRS Morningstar considered to be of Average – or Below Average quality.

The DBRS Morningstar Business Plan Score (BPS) for the loans DBRS Morningstar analyzed was between 1.3 and 3.3, with an average of 2.02. On a scale of 1 to 5, a higher DBRS Morningstar BPS indicates more risk in the sponsor’s business plan. DBRS Morningstar considers the anticipated lift at the property from current performance, planned property improvements, sponsor experience, projected time horizon, and overall complexity. Compared with similar transactions, this pool has a lower average DBRS Morningstar BPS, which is indicative of lower risk.

The weighted-average (WA) DBRS Morningstar Stabilized LTV is lower than commercial real estate (CRE) collateralized loan obligation (CLO) transactions recently rated by DBRS Morningstar. Nine loans, representing 41.4% of the total trust balance, have a DBRS Morningstar Stabilized LTV less than 70.0%, which decreases refinance risk at maturity. Four of these loans are in the top 10 largest loans in the pool, including City Club Apartments – CBD Cincinnati (Prospectus ID#2), Millenium Hometown (Prospectus ID#3), Tessa at Katy (Prospectus ID#4), and Crawford at Grand Morton (Prospectus ID#6). Additionally, there are no loans in the pool with a DBRS Morningstar Stabilized LTV of 80.0% or greater.

Twenty loans, representing 76.4% of the pool, were originated in 2021, with the earliest loan in the pool having a note date of August 2020. The loan files are recent, including third-party reports that consider impacts from the coronavirus pandemic.

The ongoing coronavirus pandemic continues to pose challenges and risks to the CRE sector and, while DBRS Morningstar expects multifamily (100.0% of the pool) to fare better than most other property types, its long-term effects on the general economy and consumer sentiment are still unclear. All loans in the pool were originated after March 2020, i.e., at the beginning of the pandemic in the U.S. Loans originated after the pandemic include timely property performance reports and recently completed third-party reports, including appraisals.

The Sponsor for the transaction, ACREC REIT, is a new CRE CLO issuer and collateral manager, and the subject transaction is its first securitization. ACREC REIT will purchase and retain the most subordinate portion of the capital structure totaling 17.625%, including Notes F and G; in addition to the Preferred Shares. This provides protection to the Offered Notes, as the Issuer will incur first losses up to 17.625%. DBRS Morningstar met with the Sponsor and evaluated its investment strategy, organization structure, and origination practices. Based on this meeting, DBRS Morningstar found that ACREC REIT met its issuer standards. Furthermore, as of August 4, 2021, Asia Capital Real Estate (ACRE) had $2.9 billion of assets under management with strong institutional support.

The transaction is managed and includes three delayed-close loans and a reinvestment period, which could result in negative credit migration and/or an increased concentration profile over the life of the transaction. Eligibility criteria for reinvestment assets partially offsets the risk of negative credit migration. The criteria outlines DSCR, LTV, 14 HERF minimum, and property type limitations. However, a No Downgrade Confirmation RAC is required from DBRS Morningstar for reinvestment loans and companion participations above $500,000. Before loans are acquired and brought into the pool, DBRS Morningstar will analyze them for any potential ratings impact.

The eligibility criteria allow for a maximum Stabilized LTV of 80.0% and a minimum DSCR of 1.15x. This is considerably more aggressive than the current pool’s Issuer Stabilized WA LTV of 70.6% and DSCR of 1.83x. Furthermore, the stabilized maximum LTV and minimum DSCR allowed for in the eligibility criteria are generally more aggressive than recent CRE CLO transactions. Before the collateral manager can acquire new loans, the loans will be subject to a No Downgrade Confirmation by DBRS Morningstar.

DBRS Morningstar has analyzed the loans to a stabilized cash flow that is, in some instances, above the as-is cash flow. It is possible that the sponsors will not successfully execute their 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. A sponsor’s failure to execute the business plan 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 plan rational and the loan structure sufficient to execute such plans. In addition, DBRS Morningstar analyzed LGD based on the as-is credit metrics, assuming the loan was fully funded with no NCF or value upside.

The pool has seven related borrower groups, which represent 69.1% of the initial pool balance across 14 loans. The largest sponsor concentration is 17.4% and consists of City Club Apartments – CBD Detroit (Prospectus ID#1) and City Club Apartments – CBD Cincinnati (Prospectus ID#2), followed by the second largest concentration of 16.6% (Prospectus ID#4 Tessa at Katy, Prospectus ID#6 Crawford at Grand Morton, and Prospectus ID#9 Verso). The sponsors for these loans are repeat ACRE borrowers that are experienced in multifamily investment in their respective markets and both own more than 2,500 multifamily units worth more than $500.0 million each.

Because of the ongoing coronavirus pandemic, DBRS Morningstar was able to perform site inspections on only two loans in the pool: The Duncan (Prospectus ID#5) and The Otis (Prospectus ID#18). As a result, DBRS Morningstar relied more heavily on third-party reports, online data sources, and information from the Issuer to determine the overall DBRS Morningstar property quality score for each loan. DBRS Morningstar made relatively conservative property quality adjustments with 11 loans, comprising 32.9% of the pool, having Average property quality.

All loans have floating interest rates and are IO during the initial term, which ranges from 24 months to 49 months, creating interest rate risk. The borrowers of all 23 loans have purchased Libor rate caps, ranging between 0.50% and 3.50%, to protect against rising interest rates over the term of the loan.

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.

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/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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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