Morningstar DBRS Confirms Rialto Capital Advisors, LLC's Commercial Mortgage Special Servicer Ranking, Positive Trend

DBRS, Inc. (Morningstar DBRS) 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 remains Positive.

As one of the largest-volume named special servicers for commercial mortgage-backed securities (CMBS) transactions, Rialto manages one of the biggest active specially serviced portfolios among all CMBS special servicers. 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 third-party special servicer on some transactions.

The confirmed ranking reflects the following factors:
-- Rialto's overall successful and growing record resolving specially serviced CMBS assets. The Company also has an extensive history of liquidating a large volume of other nonperforming loan (NPL) pools.
-- The Company's effective operating structure, which has specialized teams for loan recovery, real estate owned (REO) assets, surveillance, borrower consents, compliance, and reporting. Shared resources for accounting and technology further support the operation.
-- A well-experienced senior management and professional team. Loan asset managers' average experience has also increased. Employee turnover eased in 2023 but increased in the first half of 2024 on an annualized basis. This turnover included some managers; however, the senior management team has remained intact.
-- Rialto's substantially increased personnel in 2024, which addressed its growing portfolio volume. Although Rialto's workload ratio for CMBS loans may still be above that of some peers as of mid-year 2024, it was within industry norms when considering the number of supporting analysts. The ratio was much higher when including a portfolio of other NPLs, although Rialto noted that many of those loans were subsequently liquidated.
-- The Company's diligent asset analysis and deliberation practices. Rialto does not convene traditional credit committees but acceptably controls approvals through delegations of authority combined with team-level and other management review meetings.
-- Rialto's strong technology that centers on a proprietary asset management application integrated with workflow and data repository/analytics tools. Data backup, security, and recovery protocols are effective based on audit results, the testing regimen, and other stated practices.
-- A comprehensive compliance function overseeing CMBS-centric policies that are largely programmed into the technology applications. The Company also has a robust REO property manager audit program.
-- An acceptable audit regimen that centers on annual Regulation AB attestations and comprehensive internal controls assessments performed by an external accounting firm. Although the assessments had been annual, Rialto did not have one in 2023 and the next report is not expected until Q1 2025; however, the Company indicated that it plans to resume an annual cycle for these assessments.

The Positive ranking considers Rialto's operational strengths and extended asset resolution record; however, Morningstar DBRS also considers the time gap between audits, the higher employee turnover earlier this year, and a defensive lawsuit that has not yet been adjudicated.

As of June 30, 2024, Rialto was the named special servicer for 5,728 assets with a total unpaid principal balance (UPB) of $198.92 billion involving 157 securitized transactions, including eight commercial real estate collateralized loan obligation (CRE CLO) transactions.

As of June 30, 2024, the total active special servicing portfolio contained 2,818 loan positions and 77 REO assets with a combined UPB of $26.83 billion. However, this total included a Federal Deposit Insurance Corporation receivership portfolio of 2,271 non-CMBS loans with an aggregate UPB of $14.99 billion, of which 88% (by count) were performing loans. The CMBS/CRE CLO portion of the active portfolio contained 342 loan positions and 74 REO assets with an aggregate UPB of $10.45 billion.

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, 2024), https://dbrs.morningstar.com/research/438283.

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

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