DBRS Morningstar Confirms Rialto Capital Advisors’ Commercial Mortgage Special Servicer Ranking; Trend Changed to 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 the private equity firm Stone Point Capital LLC through its investment funds. The trend for the ranking is changed to Positive from Stable.

Over the past few years, the Company has grown to become one of the largest-volume special servicers for commercial mortgage-backed securities (CMBS) transactions. While Rialto predominantly serves on transactions in which funds managed by its affiliate, Rialto Capital Management, LLC generally hold B-piece investments, the Company is a special servicer for some transactions with third-party controlling classholders.

The confirmed ranking reflects the following considerations:

-- Rialto’s proficiency and highly successful record resolving specially serviced CMBS assets. While the active portfolio volume has subsided after surging in 2020 because of the coronavirus pandemic, it nonetheless 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. The formalized training function, which included a rotational analyst program, along with in-house accounting and technology teams further support the operation.

-- The Company’s well-experienced senior management and professional team. Loan asset managers’ average experience also has increased this year.

-- The Company’s decreasing employee turnover that has moved toward historical industry norms. Although Rialto’s workload ratio for loan asset managers may be higher relative to some peers, the Company has a well-staffed team of supporting analysts.

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

-- Rialto’s strong cloud-based computing environment that centers on a proprietary asset management application integrated with workflow and data repository/business analytics tools. 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 audit reports continue to be clear of material exceptions. The CMBS-centric policies and procedures are thorough and well programmed into the technology applications. REO oversight includes a property manager audit program.

The Positive trend considers Rialto’s lower employee turnover rates, increased average experience of asset managers, and DBRS Morningstar’s expectations that the Company will continue a steady pace of achieving successful asset resolutions as it works through its still-substantial portfolio volume.

As of June 30, 2023, Rialto was the named special servicer on 151 securitized transactions containing 6,227 assets with a total unpaid principal balance (UPB) of $104.09 billion. This total included eight commercial real estate collateralized loan obligation (CLO) transactions containing 181 loans with a total UPB of $6.34 billion. Except for eight CMBS transactions, Rialto was affiliated with the controlling classholders.

As of June 30, 2023, the total active special servicing portfolio contained 310 loan positions and 88 REO assets with a combined UPB of $8.78 billion compared with 362 loan positions and 83 REO assets with a combined UPB of $7.87 billion as of June 30, 2022. The active securitized portion contained 273 loan positions (one in a CLO) and 85 REO assets with a combined UPB of $8.32 billion compared with 318 loan positions and 80 REO assets with a total UPB of $7.29 billion as of June 30, 2022.

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 (August 23, 2023; https://www.dbrsmorningstar.com/research/419592).

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

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