DBRS Upgrades Three and Confirms Three Classes of ACRE Commercial Mortgage 2014-FL2 Ltd.

DBRS Limited (DBRS) has today upgraded the ratings of three Floating Rate Notes (the Notes) issued by ACRE Commercial Mortgage 2014-FL2 Ltd. as follows:

-- Class B to AAA (sf) from AA (low) (sf)
-- Class C to AAA (sf) from A (low) (sf)
-- Class D to BBB (sf) from BBB (low) (sf)

In addition, DBRS has confirmed the ratings of the following Notes:

-- Class A-S at AAA (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

All trends are Stable. Classes E and F are non-offered classes.

The rating upgrades to Class B, Class C and Class D reflect the increased credit support to the bonds as a result of successful loan repayment and the improved performance outlook for the remaining loans in the pool. At issuance, the collateral consisted of 15 floating-rate mortgage loans secured by 26 transitional commercial and multifamily properties. As of the July 2016 remittance, five loans remain with a total outstanding trust balance of $150.2 million. Since issuance, ten loans have repaid from the trust, representing approximately $228.6 million in repayments and contributing to a collateral reduction of 60.4%. Four of the remaining five loans are pari passu participations that have future funding components, which are being used for renovations and future leasing costs to aid in property stabilization.

As of July 2016, four loans in the pool, representing 82.4% of the fully funded loan balance, had reached stabilization. The Kansas City Industrial Portfolio loan (Prospectus ID#1, 22.5% of the current pool) is secured by three industrial parks totalling 37 buildings in the Kansas City MSA. The portfolio has maintained a stabilized occupancy rate of 93.0% and reported a YE2015 debt service coverage ratio (DSCR) and debt yield of 1.84 times (x) and 11.6%, respectively. The loan matures in January 2017 and, according to the servicer, will be marketed for sale in Q3 2016. The Great Lakes Industrial Portfolio loan (Prospectus ID#4, 19.7% of the current pool) is secured by eight industrial properties in the Cleveland, Ohio, MSA. The loan had originally been secured by nine assets; however, the sponsor sold one 32,000-square foot (sf) building, reducing the principal balance of the loan by $920,000. The remaining assets are a combined 93.2% occupied, as the sponsor renewed a major tenant that occupied 28.0% of the net rentable area (NRA) for three years through June 2019. The loan reported a YE2015 DSCR and debt yield of 1.86x and 11.9%, respectively. The loan does not initially mature until May 2018, and the borrower’s plan is to continue to maintain the stable occupancy rate with the assistance of $768,000 in available leasing reserves at its disposal if necessary. The Pointe at Lenox Park loan (Prospectus ID#10, 14.1% of the current pool) is secured by a multifamily property in Atlanta, Georgia. As part of the borrower’s stabilization plan, the property underwent a $2.4 million renovation plan that was completed in Q4 2015. As of May 2016, the property was 94.0% occupied, and according to updated financials, the loan reported a DSCR and debt yield of 2.23x and 9.9%, respectively. While the loan does not initially mature until May 2017, the servicer expects the loan to be paid out of the Trust in the near term. As of the July 2016 remittance, there are no loans in special servicing and one loan on the servicer’s watchlist, representing 17.6% of the pool balance. The largest loan in the pool and the loan on the servicer’s watchlist are detailed below.

The One Financial Plaza loan (Prospectus ID#5, 26.1% of the current pool balance) is secured by a Class A office building located in Fort Lauderdale, Florida. The loan is structured with a future funding commitment of $11.3 million for a lobby renovation ($6.3 million) and general TI/LC reserves ($5.0 million). As of August 2016, $2.3 million of future funding had been advanced to the borrower. In the July 2016 update, the sponsor noted plans to start the facade work and lobby renovation by the end of September 2016, with an expected completion date in February 2017. The sponsor had completed the fitness centre and conference facilities on the sixth floor as of January 2016, with a cost to date of $559,539, representing 8.9% of the original $6.3 million capital expenditure budget. As of July 2016, the property was 74.0% occupied and has maintained similar occupancy levels since issuance, when the subject was 75.7% occupied. The largest three tenants collectively represent 18.0% of the NRA with leases that are scheduled to expire between October 2017 and January 2021. The third-largest tenant, R.J. Reynolds Tobacco Company, representing 3.9% of NRA, had an original lease expiration in October 2016 and recently exercised its lease renewal option to extend for an additional 12 months. The tenant will be paying a rental rate that is the greater of $26 psf triple net (NNN) or the market rate, compared with the $25 psf rental rate the tenant was paying prior to the renewal. According to CoStar, the subject’s average rental rate of $20.46 psf as of December 2015 is below the average of comparable Class A office properties within a two-mile radius of the subject, which reported an average rental rate and vacancy rate of $32.95 psf and 18.5%, respectively. In addition, the borrower has gained leasing traction, with negotiations underway for two prospective tenants representing 8.8% of the NRA in total, at rental rates of $26 psf NNN. Both tenants are also being offered tenant improvement (TI) allowances of $55 psf and $60 psf, of which approximately half will be funded via the future funding reserve, with the borrower being responsible for funding the remaining portion. The property reported a YE2015 DSCR and debt yield of 2.57x and 10.3%, respectively, which are inflated figures, as TI/leasing commission and capex costs were excluded. Despite the occupancy rate’s remaining consistent with issuance levels, the loan benefits from a $5.5 million holdback for future capex and a $3.5 million holdback for future leasing costs, which should enable further leasing activity as vacant units are leased up.

The 361 East 50th Street loan (Pros ID#8, 17.6% of the current pool balance) is secured by a 43-unit multifamily apartment with 9,765 sf of retail space located in the Turtle Bay neighbourhood of Manhattan, New York City. The loan is structured with a future funding component of $4.0 million, which the borrower used to renovate free market units and to recapture rent-stabilized units, which it also intended to renovate. As of August 2016, the reserve had a remaining balance of $691,580. The loan was added to the watchlist in February 2015 because of ongoing unit renovations at the property, resulting in a temporary decline in occupancy and performance. As of July 2016, the sponsor was ahead of the physical plan, with renovations now completed for 26 units, 23 of which have been leased at an average of $4,338 per unit, which is 7.5% above the issuer’s underwritten rent targets. The borrower intends to renovate another three to five units. The renovations include installation of granite countertops, stainless steel appliances and lobby and hallway upgrades. As a result of the completed unit renovations, the occupancy rate for the multifamily portion of the collateral improved to 88.0% as of May 2016 compared with the March 2015 occupancy rate of 55.8%. As of the December 2015 rent roll, the average rental rate was $3,504 per unit, which is a considerable improvement compared with the $2,277 per unit average in March 2015 and $2,243 per unit at issuance. In addition, CoStar is reporting average rental rates for one-bedroom and three-bedroom units for the subject at $3,396 per unit and $5,202 per unit, respectively, as of August 2016, which are in line with the DBRS underwritten post-renovation rent projections. The subject’s rental rates for one-bedroom units are above comparable multifamily properties in the New York midtown east submarket, which reported average rental rates of $3,157 per unit, according to CoStar. As of May 2016, occupancy for the retail portion of the collateral has remained unchanged at 72.0% compared with the March 2015 occupancy rate of 71.8%, with tenants generally on longer-term leases. There is an outstanding letter of intent to a restaurant tenant, which, if executed, would increase retail occupancy to 97.0%. As a result of the renovation, the YE2015 DSCR has remained low at 0.62x and relatively unchanged from the YE2014 DSCR of 0.59x. Despite the temporary decline in performance, the loan benefits from an interest reserve holdback totalling $300,000, which to date has never been drawn by the borrower. DBRS anticipates that property performance will stabilize once cash flow growth from the renovated units has been realized, with the property approaching stabilization by YE2016.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are North American CMBS Rating Methodology (March 2016) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.

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