DBRS Morningstar Confirms Rialto Capital Advisors’ Commercial Mortgage Special Servicer Ranking; Trend Remains Positive

DBRS, Inc. (DBRS Morningstar) confirmed its MOR CS2 commercial mortgage special servicer ranking for Rialto Capital Advisors, LLC (Rialto or the Company). Rialto is the wholly owned asset management subsidiary of Rialto Capital Group Holdings, Inc., which is majority owned by private equity firm Stone Point Capital LLC through its investment funds. The trend for the ranking remains Positive.

Rialto is the named special servicer for a large volume of commercial mortgage-backed securities (CMBS) transactions in which funds managed by its affiliate, Rialto Capital Management, LLC, generally hold B-piece investments. The Company demonstrates a growing and overall successful achievement record resolving CMBS assets, and its cumulative volume has approached a substantial level. During the Coronavirus Disease (COVID-19) pandemic, it also has worked out many loans as nontransfer consents through forbearances and other forms of granted relief.

Aside from its expanding CMBS work, Rialto has an accomplished history liquidating a high volume of other distressed, and mostly smaller-balance, assets for its affiliated investment funds and its concluded Federal Deposit Insurance Corporation transactions, nonperforming loan securitizations, and other structured transactions.

Rialto has experienced senior managers and thorough procedures governing surveillance and asset management. It also has a robust training function. The Company has comprehensive compliance and audit functions, both of which it has expanded over the past two years. Annual audit reports continue to be free of material exceptions. Real estate owned (REO) property oversight includes an effective property manager audit program.

During 2020, the Company staffed up in response to the surge in relief requests and loan transfers caused by the pandemic. The workload ratio for loan asset managers, while higher than at some other special servicers as of June 2021, is reasonable overall when including support analysts. Employee turnover moderated over 2019–20, although it increased in the first half of this year; Rialto noted that most of these departures involved junior-level analysts hired during the pandemic.

Rialto’s technology suite has extensive reporting and compliance tracking capabilities and provides thorough data management. The mostly cloud-based platform includes updated and integrated applications installed over the past 18 months for treasury management, financial accounting, information security, and automated vendor invoice processing. Through application programming interfaces, Rialto receives loan surveillance and payment data feeds from master servicers as well. The Company’s data-backup, security, and recovery protocols are sound based on audit results; the testing regimen, which includes ongoing cyber-protection assessments; and other stated practices.

The extended Positive ranking trend recognizes the Company’s strong technology and ongoing enhancements, expanded compliance and audit functions, and growing achievement record resolving CMBS assets. Rialto’s pace of resolutions has been increasing while its inflow of loans has eased from peak 2020 levels. DBRS Morningstar expects that Rialto will continue to meet the challenges posed by its still sizable portfolio but will monitor the Company’s resource allocations, employee retention, and further success resolving assets as the pandemic persists.

As of June 30, 2021, Rialto was the named special servicer on 135 CMBS transactions containing 11,870 assets with a total unpaid principal balance (UPB) of $109.24 billion. It was also special servicer for two commercial real estate collateralized loan obligation transactions containing 86 loans with a total UPB of $1.12 billion. Except for 10 transactions, Rialto was affiliated with the controlling classholder.

The total active special servicing portfolio contained 510 loan positions (approximately 488 based on loans related to the same collateral) and 114 REO assets (65 on a consolidated basis) with a combined UPB of $10.17 billion. The active CMBS special servicing portfolio contained 480 loan positions and 80 REO assets (nonconsolidated basis) with a total UPB of $9.88 billion.

Since the start of 2015 and through June 2021, Rialto received 891 CMBS loan transfers, including 385 received in H1 2020 and 179 received in H2 2020. Since the beginning of 2020, Rialto has resolved 251 CMBS assets, including 169 modified loans and 30 REO sales. Cumulatively, it has resolved 357 CMBS assets with a total UPB of $5.68 billion.

All rankings are subject to surveillance, which could result in rankings being raised, lowered, placed under review, confirmed, or discontinued by DBRS Morningstar.

DBRS Morningstar North American commercial mortgage servicer rankings are not credit ratings. Instead, they are designed to evaluate the quality of the parties that service commercial mortgage loans. Although the servicer’s financial condition contributes to the applicable ranking, its relative importance is such that a servicer’s ranking should never be considered as a proxy of its creditworthiness.

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

The principal methodology is North American Commercial Mortgage Servicer Rankings (September 3, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

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

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