DBRS Morningstar Confirms Ratings on 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 has remained in line with DBRS Morningstar’s expectations. 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. To access this report, please click on the link under Related Documents below or contact us at info@dbrsmorningstar.com.

The transaction originally closed in March 2017 with an initial collateral pool of 12 floating-rate mortgages secured by 16 transitional commercial real estate properties, with a total balance of $341.2 million. In March 2019, the collateral pool was upsized to a balance of $557.0 million. The transaction is structured with a Reinvestment Period, which was extended from March 2021 through the March 2024 Payment Date, whereby the Issuer may acquire Funded Companion Participations and introduce new loan collateral into the trust subject to the Reinvestment Criteria as defined at issuance. The transaction has a sequential-pay structure.

As of the May 2022 remittance, the pool comprises 20 loans secured by 25 properties with a cumulative trust balance of $525.0 million. Most loans are in a period of transition with plans to stabilize and improve asset value. Since issuance, 34 loans with a former cumulative trust balance of $1.1 billion have been successfully repaid from the pool. Since the last DBRS Morningstar rating action in June 2021, 14 loans with a current cumulative trust balance of $291.2 million have been contributed to the trust. As of the May 2022 remittance, the Reinvestment Account had a balance of $32.0 million.

In general, borrowers are progressing toward completion of the stated business plans. Only eight of the 20 outstanding loans were structured with future funding components and, according to an update from the collateral manager, it had advanced $48.2 million in loan future funding through May 2022 to five individual borrowers to aid in property stabilization efforts. The largest advances were made to the borrowers of the Caterpillar Aurora ($32.2 million) and Northridge Commons ($10.4 million) loans. The Caterpillar Aurora loan is secured by a 4.0 million square foot industrial property in Montgomery, Illinois, and the Northridge Commons loan is secured by an office property in Sandy Springs, Georgia. The borrowers on both loans have used loan future funding for accretive leasing costs and capital improvements. An additional $40.8 million of unadvanced loan future funding allocated to six individual borrowers remains outstanding with the largest portion ($21.5 million) allocated to the borrower of the 251 Monroe loan. The loan is secured by an industrial property in Kenilworth, New Jersey, with loan future funding available to fund leasing costs and as a performance based earnout.

The transaction consists of four loans (totalling 25.8% of the current trust balance) secured by multifamily properties, two loans (totalling 16.8% of the current trust balance) secured by hotel properties, two loans (totalling 17.8% of the current trust balance) secured by an industrial property, two loans (totalling 13.2% of the current trust balance) secured by office properties, and the remainder of the pool consists of loans secured by mixed use, self-storage, and other properties. In comparison with the transaction close at March 2017, loans secured by multifamily properties have decreased by 10.7% of the trust balance at issuance. In addition, loans secured by industrial, mixed use, and self-storage properties have increased to 17.8%, 12.8%, and 11.3% of the trust balance, respectively, as no loans were secured by these property types at closing. The transaction is also concentrated by loan size, as the largest 10 loans represent 82.7% of the pool.

As of the May 2022 remittance, three loans, representing 27.6% of the current pool balance, are on the servicer’s watchlist. These loans are generally on the servicer’s watchlist because of upcoming loan maturities, debt service coverage ratio (DSCR) and/or occupancy declines. The largest loan on the watchlist, Old Orchard Towers, is secured by two seven-story office buildings in Skokie, Illinois, totalling 10.8% of the current trust balance. The loan is on the servicer’s watchlist for poor performance as the YE2021 DSCR was 1.03 times with an occupancy rate of 65.1% as a result of the expected departure of former the tenant, Lewis University, at lease expiration in July 2021. The loan matures in June 2022 and while there are no performance tests tied to the final remaining one-year extension option. However, when the loan was extended by one year in June 2021, it was modified and required the borrower to contribute $1.0 million into a debt service reserve along with purchasing an interest rate cap agreement. According to the collateral manager, a second loan modification is in progress to extend the final maturity date to June 2023 and the borrower is expected to deposit an additional $2.0 million into the debt service reserve. An additional loan, Lodging Portfolio (Prospectus ID#32; 9.9% of the pool balance), is secured by a portfolio of five hotel properties throughout Oregon and Washington. The loan matured in May 2022 and the collateral manager confirmed that a modification has been finalized, extending the loan maturity by six months and waiving the performance-based extension test in exchange for the borrower installing a full cash sweep.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or Governance factor(s) 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/396929.

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 this transaction.

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 the North American CMBS Surveillance Methodology (March 4, 2022), 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 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.

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577