DBRS Confirms All Classes of ACRE Commercial Mortgage 2014-FL2 Ltd.

DBRS Limited (DBRS) has today confirmed the Floating Rate Notes (the Notes) issued by ACRE Commercial Mortgage 2014-FL2 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 (low) (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 confirmations reflect the increased credit enhancement to the transaction as a result of the unexpected full prepayment of two loans, the partial prepayment of one loan, the increased concentration of the pool and the performance of the outstanding loans remaining in line with expectations since issuance. At issuance in August 2014, the collateral consisted of 15 floating-rate mortgage loans secured by 47 transitional commercial and multifamily properties. As of the July 2015 remittance, 13 loans remain in the pool with an aggregate outstanding principal balance of $317.0 million, resulting in total collateral reduction of 13.8% since issuance. In June 2015, the Iowa and Palmyrita loan experienced a collateral release, reducing the current balance from $19.6 million at issuance to $10.5 million. The remaining asset remains fully occupied.

Twelve of the remaining loans are pari passu participations with future funding components. The future funding components are to be used for property renovations and future leasing costs to aid in property stabilization, with certain individual borrowers having already executed on their business plans to increase net cash flow. According to transaction documents, after August 2015, any future funding dollars can no longer be added into the pool to upsize the transaction. As of the July 2015 remittance, there are no loans in special servicing and one loan on the servicer’s watchlist, representing 8.5% of the current pool balance, which is highlighted below.

The 361 East 50th Street loan (Pros ID#8, 8.5% of the current pool balance) is secured by a 43-unit multifamily apartment with 9,765 square feet of retail space located in Manhattan, New York City. The loan was added to the watchlist in February 2015 due to 15 units being renovated at the time, resulting in a temporary decline in performance. As of July 2015, the sponsor is ahead of its plan to renovate 35 units at a cost of $60,000 per unit, with renovations in progress for six units and 13 units being fully complete. Nine of the completed units have been leased on average 6% above the issuer’s underwritten rent targets. Renovations include installation of granite countertops, stainless steel appliances and lobby and hallway upgrades. As a result of the ongoing renovations, the occupancy for the multifamily portion of the collateral declined to 55.8% from 84.7% at issuance, according to the March 2015 rent roll. In addition, the occupancy for the retail portion of the collateral was 71.8% with tenants generally on longer-term leases. Despite the temporary decline in performance, the loan benefits from experienced sponsorship and an interest reserve holdback totaling $300,000. The loan has total remaining future funding commitments of $2.6 million, as of July 2015.

The transaction is concentrated, as the largest loan represents 12.6% of the current pool balance based on the fully funded loan amount. The largest five and ten loans represent 53.0% and 89.1% of the current pool balance based on their fully funded loan amounts, respectively. None of the loans in the pool has an initial maturity date prior to January 1, 2017, and one loan, representing 11.1% of the current pool balance, did not receive a future funding component with its financing. As part of its analysis, DBRS took into account the increased concentration of the transaction.

The ratings assigned by DBRS contemplate timely payments of distributable interest and, in the case of the Offered Notes other than the Class A Notes, ultimate recovery of Deferred Collateralized Note Interest Amounts (inclusive of interest payable thereon at the applicable rate, to the extent permitted by law). The transaction is a standard sequential pay waterfall.

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 (June 2015) and CMBS North American Surveillance (January 2015), which can be found on our website under Methodologies.

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