DBRS Morningstar Confirms Rialto Capital Advisors, LLC’s Commercial Mortgage Special Servicer Ranking

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. DBRS Morningstar also changed the trend on the ranking to Stable from 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 subordinate (B-piece) investment positions.

The confirmed ranking reflects the following considerations:

-- Rialto’s proficiency and overall successful record resolving a growing and now substantial volume of CMBS assets. While the Company’s active portfolio volume has been easing, it remains sizable.

-- Rialto’s effective operating structure, which has specialized teams for loan recovery, real estate owned (REO) assets, surveillance, borrower consents, compliance, and client reporting. A formalized and solid training function, including a rotational analyst program, and shared resources for accounting and technology further support the operation.

-- The Company’s well-experienced senior management team. Loan and REO asset managers’ combined average experience, at nearly 12 years as of June 2022, is solid, although it has decreased somewhat since YE2019. Loan asset managers’ average experience, while solid at more than nine years, is lower relative to many peers. Asset managers’ average tenure is also less than at most other special servicers.

-- Reflecting the tight labor market conditions affecting the entire industry, Rialto continues to face employee hiring and retention challenges. However, as of June 2022, its employee turnover rate remained higher than most of its peers. Easing portfolio volume has likely helped Rialto mitigate some of the impact. Although Rialto has supporting analysts, its workload ratio for loan asset managers, possibly affected by turnover, continues to run higher relative to many peers.

-- Diligent asset analysis and practices for workouts and borrower consent requests. The Company does not convene traditional credit committees for approvals but acceptably deliberates asset resolution decisions through delegations of authority combined with team-level discussions and other review meetings.

-- Rialto’s strong and mostly cloud-based computing environment. Using a proprietary asset management application integrated with workflow and data repository/business analytics tools, Rialto demonstrates extensive data management, reporting, and compliance tracking capabilities. 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 Company’s comprehensive compliance and audit functions. Annual internal control assessments and Regulation AB attestations continue to be free of material exceptions. Policies and procedures for surveillance and asset management are thorough and well programmed into the technology applications. REO oversight includes a property manager audit program.

Rialto should continue to be a highly effective CMBS special servicer. DBRS Morningstar acknowledges the challenges of the current labor market and will continue to monitor Rialto’s employee turnover, which the Company reports has decreased in recent months. DBRS Morningstar also will monitor Rialto’s workload levels for loan asset managers. Additionally, DBRS Morningstar acknowledges the improved quality of Rialto’s CMBS reporting content and will continue to watch that the Company maintains its performance levels.

As of June 30, 2022, Rialto was the named special servicer on 141 CMBS transactions containing 11,268 assets with a total unpaid principal balance (UPB) of $105.51 billion. It also was the special servicer for six commercial real estate collateralized loan obligation transactions containing 260 loans with a total UPB of $4.79 billion. Except for nine CMBS transactions, it was affiliated with the controlling classholders.

As of June 30, 2022, the total active special servicing portfolio contained 362 loan positions and 83 REO assets with a combined UPB of $7.87 billion. The active CMBS special servicing portfolio contained 318 loan positions and 80 REO assets with a total UPB of $7.29 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 8, 2022), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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