Morningstar DBRS Lowers Torchlight Loan Services' Commercial Mortgage Special Servicer Ranking

DBRS, Inc. (Morningstar DBRS) lowered its commercial mortgage special servicer ranking to MOR CS2 from MOR CS1 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 Stable from Negative.

Torchlight has a lengthy record as an effective special servicer for commercial mortgage-backed securities (CMBS) transactions. Despite becoming a smaller-volume special servicer in recent years, Torchlight has a suitably designed organizational structure and sufficient staffing to cover all essential functions, which include shared resources for legal, accounting, and compliance. The Company has solid professional depth when considering the portfolio managers of Torchlight Investors' debt funds.

The four-person CMBS asset management team acceptably addresses the Company's current portfolio volume and loan-transfer projections for 2025. The team includes a managing partner and another well-experienced senior officer who together guide the asset workout deliberations. In the past few years, employee turnover has been low and no managers of CMBS special servicing have departed. However, Torchlight may have more key-person risk compared with some larger special servicers.

Torchlight has diligent and controlled asset analysis and approval practices. Its technology centers on a well-recognized vendor-hosted CMBS-centric application. The audit function consists of comprehensive biennial operational audits and annual Regulation AB attestations. The most recent audit report, issued in 2023, had no findings. Regulation AB attestations continue to be clear of exceptions. Vendor oversight encompasses rigid vetting and performance monitoring processes that include recurring data security assessments.

The lowered ranking largely reflects the Company's modest volume of active assets and resolution activity during the past three years, which limits the ability to assess recovery performance in both absolute terms and relative to other special servicers that are managing and resolving more portfolio volume. Torchlight's active portfolio is concentrated with large-scale, and mostly office-secured, loans fraught with legal and property-level issues in challenging metropolitan real estate markets that have without doubt contributed to the assets' extended holding periods. Torchlight appears to be engaged in thoughtful and proactive action plans and Morningstar DBRS will continue to monitor the Company's resolution progress. Additionally, while Torchlight's audit cycle is commensurate with its portfolio volume, the highest-ranked special servicers generally undergo more frequent audits, aside from Regulation AB attestations.

As of December 31, 2024, Torchlight was the named special servicer on 234 loan positions with an aggregate remaining unpaid principal balance (UPB) of $9.98 billion involving 18 CMBS securitizations compared with 311 loan positions with an aggregate $8.19 billion UPB involving 19 CMBS securitizations as of YE2023. As of YE2024, the Company was affiliated with the controlling bondholder class in six transactions.

Based on note positions tied to the same collateral or asset relationship, the active special servicing portfolio, as of YE2024, had an aggregate UPB of approximately $2.76 billion and contained seven loans (17 properties) and two real estate owned (REO) assets (eight properties). During 2022-24, Torchlight resolved three loans (one note sale and one modification in 2022 and one modification in 2024) and sold six REO properties (four in 2022 and two in 2023).

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.

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 212 806-3277