Morningstar DBRS Confirms Torchlight Loan Services’ Commercial Mortgage Special Servicer Ranking, Changes Trend to Negative

DBRS, Inc. (Morningstar DBRS) confirmed its MOR CS1 commercial mortgage special servicer ranking for Torchlight Loan Services, LLC (Torchlight or the Company), a wholly owned subsidiary of Torchlight Investors, LLC (Torchlight Investors). Morningstar DBRS also changed the ranking trend to Negative from Stable.

The confirmed ranking considers Torchlight’s lengthy track record as an adept special servicer for complex debt and real estate owned (REO) assets in commercial mortgage-backed securities (CMBS) transactions. Torchlight is a smaller-scale special servicer and may have some key-person risk compared with some higher-volume special servicers. However, it has a highly experienced executive team, and its professional depth includes Torchlight Investors’ investment fund portfolio managers, who have handled some large-scale loan workouts. The cohesive organizational structure includes shared resources for compliance, reporting and accounting, portfolio surveillance, and legal oversight. Employee turnover in the past few years has been negligible, and no managers involved in CMBS special servicing have departed Torchlight.

The Company’s strengths include thorough, controlled analytics and asset deliberation procedures as well as effective controls for investor reporting and portfolio accounting. The technology platform centers on the CMBS.com Backshop asset management system, which has robust data management functionality. Through vendor agreements and a mostly cloud-based computing environment, Torchlight has sound protocols for data security, data backup, and testing. The audit regimen centers on biennial operational audits, annual Regulation AB attestations, and property manager audits for selected REO assets. The most recent operations audit report, issued in 2023, was overall satisfactory. Regulation AB attestations have been clear of exceptions year over year. Vendor oversight encompasses a rigid vetting process, initial and annual risk ratings, and recurring data security assessments.

The trend change for the ranking considers that Torchlight has resolved only a few assets since mid-2022, while receiving some new loan transfers in recent months. Torchlight also has a few assets that have been in special servicing for an extended period. The Company’s relatively moderate portfolio volume by asset count and lack of loan transfers in 2022 are no doubt contributing factors to the reduced asset resolution activity. The portfolio also has a concentration of large-scale office and retail properties fraught with legal impediments and other problematic issues in troubled major metropolitan real estate markets. Although Torchlight appears to be well engaged with proactive action plans for every asset, Morningstar DBRS will monitor the Company’s progress and ability to successfully resolve assets, especially for its longest-held loans. Additionally, highly ranked special servicers typically undergo more frequent internal audits, aside from their Regulation AB attestations. To the extent that Torchlight’s special servicing activity continues to increase this year, Morningstar DBRS will assess if the Company’s audit cycle remains commensurate with its portfolio volume.

As of December 31, 2023, Torchlight was the named special servicer on 311 loans (including some note positions on the same collateral) with an aggregate remaining unpaid principal balance (UPB) of $8.19 billion involving 20 CMBS securitizations. It was affiliated with the controlling bondholder class in seven of these transactions. By comparison, as of December 31, 2022, Torchlight was the named special servicer for 302 loans with an aggregate remaining UPB of $6.68 billion involving 17 CMBS securitizations.

As of December 31, 2023, the active special servicing portfolio contained 30 loans (13 properties) and nine REO assets with a combined UPB of approximately $2.51 billion. However, the active portfolio only contained seven loans and three REO assets based on note positions tied to the same collateral.

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

Morningstar DBRS 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://dbrs.morningstar.com/research/419592).

For more information on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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