|Servicing category||Overall ranking||Management and organization||Loan administration||Outlook|
S&P Global Ratings' overall ranking on LNR Partners LLC (LNR) is STRONG as a commercial mortgage loan special servicer. On June 18, 2020, we affirmed this ranking (please see "LNR Partners LLC STRONG Special Servicer Ranking Affirmed; Outlook Is Stable, published June 18, 2020"). The outlook is stable.
Our ranking reflects LNR's:
- Experienced and tenured senior managers and asset management staff, accompanied by a well-defined organizational structure;
- Well-automated technology systems that include a proprietary asset management system supporting its platform, allowing for efficient leveraging of its operations;
- Effective internal controls, including well-detailed policies and procedures for special servicing operations and a high degree of workflow and process automation for asset management activities;
- A highly effective and well-regarded analyst training program; and
- Demonstrated ability to successfully resolve a high volume of defaulted CMBS loans and manage real estate-owned (REO) assets of all levels of complexity, albeit with lengthier REO hold periods than those of its peers.
Since our prior review (see "Servicer Evaluation: LNR Partners LLC," published Feb. 14, 2019), the following changes and/or developments have occurred:
- Loan resolution activity reduced LNR's active specially serviced loan portfolio to $1.7 billion and 104 loans as of Dec. 31, 2019, from $4.0 billion and 190 loans as of June 30, 2018.
- REO liquidation activity reduced the unpaid principal balance (UPB) of active REO inventory to $3.3 billion (205 REO loans with 270 collateral properties) from $4.9 billion 313 REO loans with 445 collateral properties).
- The average age of the REO inventory since original transfer to special servicing, rose to 44.6 months from 37.9 months; this average hold period is the longest amongst the CMBS special servicers we rank.
- LNR increased its named special servicing portfolio to 185 CMBS/Freddie Mac K-series securitized transactions from 167, and the underlying collateral increased to 6,425 loans with a UPB of $93.8 billion as of Dec. 31, 2019, from 5,804 loans with a UPB of $76 billion as of June 30, 2018.
- The director of the borrower services group (BSG) departed, replaced by an internal candidate with 22 years' of industry experience.
- LNR completed a number of information technology (IT) upgrades, including implementing a new electronic document approval system.
- LNR transitioned portions of its third-party loan servicing system, Financial Industry Computer Systems Inc. (FICS), to its proprietary asset management system, LNR Partners Asset Management System (LPAMS), to track property taxes and insurance and replace email with a workflow process.
We note that as of the date of this report that LNR's REO portfolio includes 11 properties that must be sold prior to yea-rend pursuant to real estate mortgage investment conduit (REMIC) requirements. While several of the properties are currently under contract for sale and the balance are being actively marketed, economic conditions have deteriorated due to the COVID-19 pandemic. We will monitor the disposition of these assets during 2020 but believe that recent events highlight the risks associated with pursuing resolution strategies that require lengthy REO hold periods.
LNR maintains a disaster recovery and business continuity plan, including response procedures to address operational disruption. The company implemented its plan companywide on March 17, 2020, due to COVID-19. Management reported that there were no disruptions to the company's operations or data facilities and that all of its employees began working from home at that time. As of the beginning of June, management noted that while it had reopened its Miami office, the vast majority of its staff has continued to work from home, an option they have been provided.
The outlook for the ranking is stable. Despite challenges presented by the COVID-19 pandemic, we believe LNR has a deep bench of experienced workout personnel that it can redeploy across the servicing platform to maintain adequate staffing to mitigate the anticipated increase in special servicing volume during 2020.
In addition to conducting a virtual site visit with servicing management, our review includes current and historical Servicer Evaluation Analytical Methodology data through Dec. 31, 2019, as well as other supporting documentation provided by the company.
|Servicer name||LNR Partners LLC|
|Primary servicing location||Miami Beach, Fla.|
|Parent holding company||Starwood Property Trust Inc.|
|Servicer affiliates||Starwood Capital Group and Starwood Mortgage Capital|
|Loan servicing system||LNR Partners Asset Management System (LPAMS)|
LNR, headquartered in Miami Beach, Fla., is a market leader in both CMBS and commercial real estate special servicing and debt investing. The firm is a subsidiary of Starwood Property Trust Inc. (SPT), a publicly traded commercial mortgage REIT that focuses on originating and investing in commercial mortgage loans and other commercial real estate-related debt investments.
LNR operates as a part of SPT's Real Estate Investing and Servicing (REIS) business segment, and the company and its predecessors have been investing in and managing commercial real estate debt for nearly 30 years. LNR's investment management division operates its business separate and apart from the special servicing division. This division is involved in purchasing and/or selling CMBS bonds, including B-piece investments (including teaming up with other B-piece investors), which lead to special servicing appointments.
As of Dec. 31, 2019, LNR was appointed on $93.8 billion of CMBS/Freddie Mac K-series special servicing transactions (based on UPB), and managed the largest portfolio of active specially serviced loans (see table 1). As of Dec. 31, 2019, the underlying collateral associated with the above transactions was spread across 185 transactions with 6,425 loans. In addition, LNR is the special servicer for 11 commercial real estate/collateralized debt and/ or loan obligation (CRE/CDO/CLO) transactions (UPB of $3.9 billion).
In addition to obtaining servicing assignments from its investment management division, LNR has been actively seeking third-party special servicing contracts and attempting to secure strategic partners to build its portfolio and servicing book. We do note that in May 2020, LNR was replaced as special servicer on approximately $13.7 billion of UPB associated with 17 CMBS transactions, by a former client who established its own special servicer capabilities by forming an affiliate to handle its CMBS and CRE-CLO special servicing assignments.
|Total Servicing Portfolio|
|UPB (mil. $)||YOY change (%)||No. of assets||YOY change (%)||No. of staff||YOY change (%)|
|Dec. 31, 2019||5,023.6||(26.1)||309||(25.5)||174||5.5|
|Dec. 31, 2018||6,793.7||(30.9)||415||(29.4)||165||(17.9)|
|Dec. 31, 2017||9,837.5||(10.7)||588||(5.9)||201||(11.1)|
|Dec. 31, 2016||11,018.9||2.8||625||(11.2)||226||(6.6)|
|Dec. 31, 2015||10,714.4||--||704||--||242||--|
|YOY--Year-over-year. UPB--Unpaid principal balance.|
Management And Organization
The management and organization subranking is STRONG.
Organizational structure, staff, and turnover
LNR has an experienced management team and staff; its average industry experience and company tenure levels are lengthy and largely similar to other special servicers that we rank as STRONG (see table 2).
|Years of Industry Experience/Company Tenure(i)|
|Senior managers||Middle managers||Asset managers||Staff|
|Industry experience||Company tenure||Industry experience||Company tenure||Industry experience||Company tenure||Industry experience||Company tenure|
|(i)As of Dec. 31, 2019.|
LNR operates its special servicing platform through SPT's REIS business segment. As of Dec. 31, 2019, it reported 174 employees in its special servicing group. The president of REIS reports to SPT's president, who in turn reports to SPT's CEO. The managing director, head of special servicing (MD-SS), who has 27 years of experience, reports to REIS' president. The MD-SS has four director-level direct reports, who respectively oversee loan asset management (LAM); real estate asset management (REAM); commercial loan servicing, investor reporting and analytics; and surveillance.
- LAM is headed by a director with 29 years of experience. A 19-person asset management team handles workouts associated with nonperforming loans, as well as some of the more complex consent requirements associated with performing loans. The director oversees three nonperforming loan team leaders: two, whose duties are segmented into geographic regions and one, whose unit focuses on hotel properties, including managing foreclosed hotel properties under the direction of the REAM department. A SVP, who reports to the LAM director, oversees the BSG, a 13-person unit, which is responsible for the review and approval of all leasing and property management requests, as well as the review and approval of the majority of assumption/transfer of ownership requests. The LAM director also oversees the nine-person team responsible for the LAM duties of SPT's CLO portfolios. In addition, a senior manager who oversees administrative matters reports to the LAM director. This unit is also supported by a foreclosure department, which, under the in-house counsel's supervision, tracks down documents and assignments to ensure the special servicer is in a position to commence foreclosure.
- REAM, an 18-person unit, is headed by a director with 37 years of experience (25 years with LNR). REO asset management and disposition functions are handled by this group. The director has four direct reports, including two regional team leaders (East and West Coast), a senior manager of operations, and a real estate transition manager, who oversees the loan-to-REO process.
- The commercial loan servicing, investor reporting, and analytics group is headed by a director with 27 years of experience, including 18 years with LNR. This 23-person unit handles investor reporting, shadows primary servicers' loan administration work, and provides administrative support on loans for which LNR is the named special servicer.
- The surveillance group is managed by a director who has over 20 years of industry experience. This 11-member group, which includes five rotational analysts, monitors LNR's CMBS portfolio performance, interacts with primary servicers, and handles investor and rating agency relations.
- SPT departments that support the LNR platform include finance, human resources, legal, IT, and internal audit and compliance.
We also note the following:
- LNR's overall turnover rate was lower than peers, totaling 8.9% during 2019. Overall headcount is up slightly to 174 total full-time employees from 168 at the time of our last review.
- During 2019, LNR's reported staffing metrics for experience and tenure remained largely consistent with our last review and suffered no degradation.
- As of Dec. 31, 2019, LNR's loan asset managers handle approximately seven loans (lower than our last review) on average, and REO asset managers were responsible for an average of approximately 21 REO properties. While the loan-to-asset manager ratio is comparable to similar peers, the REO asset manager ratio is relatively high.
Discussion was held at length regarding LNR's current and expected response to the ongoing COVID-19 pandemic. LNR indicated that as of June 1, it has redeployed 30 associates--many with previous loan workout and/or hospitality experience--to special servicing from investing and/or origination functions in response to the increase in borrower requests (many from hospitality assets) for relief. Management further noted that it will have the support of as many as 20 summer interns across the platform this year; these internships have been historically utilized as feeders into the analyst rotational program.
In our view, LNR has an effective internal training program, especially for integrating and educating new junior associates. Junior associate orientations and an education program have been in place for some time, have helped many staff members become successful in their positions, and have led to several promotions.
- Department managers are responsible for determining specific training needs within their group, and quarterly reports are generated for managers to assist in planning.
- The legal department coordinates with external law firms to provide additional industry training on legal matters.
- Ongoing training includes internal and external class sessions covering industry and job-specific subjects, conferences, and mentoring from senior staff.
- Since its 2004 establishment, LNR has utilized a 30-month formal analyst rotational program across eight departments, allowing for cross-training and reallocation of staff when needed in its special servicing operations, and offering a clear career path for entry level hires. Internal promotions of analysts are encouraged, and 63 of the 174 analysts that have participated in the program remain with the company.
- The training schedule is aligned with job descriptions and includes components for new hires and continuous training.
- Training hours are tracked by the director of surveillance in a manual process; LNR targets 40 hours per person annually, which it matched during 2019.
Systems and technology
In our view, LNR has an effective technology environment and well-integrated applications to support special servicing and asset management. SPT maintains overall information technology administration, and its 24-person department supports all of LNR's automation needs, while also supporting the disaster recovery (DR) efforts for its critical business systems. It also works with LNR through direct assignment of personnel, steering/development committees, and in-house liaisons in LNR's special servicing departments for continued improvements and enhancements. Key elements of its systems and applications, business continuity (BC) and DR programs, and security environment are discussed below.
Servicing system applications
- LPAMS, a proprietary asset management application, is the central tool for asset surveillance and special servicer data management and reporting for loans and REO assets. The application currently has the flexibility to produce nearly 300 customized loan-, property-, deal-, and portfolio-level reports.
- LPAMS is interfaced with FICS v 7.8 for shadow servicing of loans that are serviced by others, primary servicing of whole loans, overall monitoring of borrower consents, and data downloads from Trepp LLC for CMBS transactions to aid in workout plans.
- Since our last review, LNR transitioned portions of FICS to LPAMS to track property taxes and insurance and replace email with a workflow process. LPAMS is scheduled to replace all FICS functions by 2021.
- Used as an underwriting tool, Nexus Dashboard is a proprietary user interface that aggregates internal data from LNR's workout history, watch list, and surveillance comments, as well as all loans originated by its Starwood affiliates, along with various external sources. It provides searching capability across all the sources of data, along with the ability to visually display it on a map for detailed analysis.
- ProLaw, a purchased software application, interfaces with LPAMS to support legal management requirements and track outside counsel assignments.
- PeopleSoft, a purchased real estate accounting application, works with the asset management system to address REO accounting and track monthly property financial performance, and is interfaced to LPAMS.
- LPAMS uploads to a data warehouse, DataMart, for data query and reporting needs. DataMart, which contains data on more than 105,000 commercial real estate loans, pulls information from numerous third-party sources to generate reports and aid in analysis.
- LNR uses document imaging across the organization to facilitate online access to CMBS pooling and servicing agreements (PSAs) and loan-level documents.
- LNR utilizes a public website to aid in the marketing of REO properties and offers a secure site for disseminating information to qualified investors. LNR further uses technology to increase transparency via its LNR transparency website, Window into Our Workouts, which provides a centralized repository where registered users can access detailed information on all assets that are currently specially serviced by LNR or were resolved in the prior two years.
- Since our last review, LNR implemented Worksmart (Appian), which interfaces with LPAMS as an electronic document approval system.
Business continuity and disaster recovery
- SPT's IT department is responsible for directing, coordinating, and supporting the DR efforts for its critical business systems. Data centers managed by third parties reside in Miami and Alpharetta, Ga. and offer security and disaster preparedness.
- Appropriate backup procedures exist. Its DR plan is extensive and detailed, requires annual testing, and includes a recovery time objective of 12 hours for specific applications to be recovered from its primary data center. Its DR plan is reviewed and approved annually by SPT's chief information officer. LNR concluded its most recent DR testing on June 19, 2019, and experienced no loss of functionality or data.
- An employee backup location that provides recovery services for 20 employees for a 30-day period are located in preferred co-working office space Florida locations in Miami Beach, West Palm Beach, and Maitland, as well as in Fayetteville, Ga. Once the 30-day agreement has concluded, an alternate arrangement to extend the use of the facility is possible, in the event of a long-term interruption.
- LNR also has satellite offices in Atlanta and Boston, where core servicing functions can be performed by remote team members in the event of a worst-case scenario, until the Miami Beach team is mobilized and is able to resume standard operations from a remote location.
- LNR maintains a DR and BC plan, including response procedures to address operational disruption as a result of a pandemic event. Critical associates are issued company laptops to continue operations should the headquarters in Miami Beach become inaccessible. LNR also has a remote desktop Citrix platform that would allow all employees to access to all company IT resources, as well as desktop and business applications to resume work from their homes.
- In March 2020, LNR implemented its plan due to the COVID-19 virus. Management reported that there were no disruptions to the company's operations or data facilities and that all of its employees began working from home at that time. As of the beginning of June 2020, management noted that while it had reopened its Miami office, the vast majority of its staff has continued to work from home, which is an option they have been provided.
- LNR has an extensive security process and controls for protecting private information and preventing cyber-attacks that include security procedures for personal information and vendor information security management.
- Internal phishing campaigns are conducted quarterly and penetration testing is performed by a third party on an annual basis. The last test, performed on Oct. 30, 2019, cited no material problems.
- Additionally, LNR maintains cybersecurity insurance that covers consumer credit monitoring services, remediation services/cost of a cybersecurity event, and specified vendor cybersecurity risk.
LNR has a solid control environment designed to mitigate operational risk. The control environment includes detailed policies and procedures and an annual internal audit of loan servicing, as well as an annual external audit of management's attestation of compliance with Regulation AB (Reg AB). Other notable aspects of internal controls are discussed in the policies and procedures (P&Ps), compliance and quality control, and internal and external audit sections below:
Policies and procedures
- LNR's P&Ps manuals are comprehensive and well-documented. P&Ps cover each department and their related functions, including procedures for required approvals depending on the nature of the asset and contemplated resolution strategies.
- LNR reviews, documents, and approves changes to its operational P&Ps as servicing staff identifies new specific issues that affect servicing activities and as new processes are developed to address any such issues.
- Each department manager is responsible for coordinating the process of updating P&Ps for their respective areas on an as-needed basis, but no less than annually. Once reviewed and deemed final by the department manager, the P&Ps are forwarded to the legal department for review.
- Following the legal department's review, updated P&Ps are circulated to the employees to acknowledge receipt and confirm compliance.
- P&Ps are available electronically on the company's internal network.
- Pursuant to its P&Ps, LNR maintains an informational and technological wall between the special servicer and the investment division that prevents material non-public information in the possession of the special servicer from coming into the possession of the investment division.
- In the office environment, there is also physical separation between personnel involved in investment operations and personnel involved in the special servicer activities. The firewall in place between the investment management group (public) and the surveillance/servicing group (private) allows both groups to enter information into LPAMS without exchanging material non-public information.
Compliance and quality control
- The legal department abstracts all new deal PSAs into the asset management system to facilitate compliance. Each proposed asset resolution then triggers a pre-closing compliance department review of a compliance summary report and checklist prepared by asset managers through the asset management system.
- The compliance group also conducts post-closing audits of loan resolutions.
- Internal audit staff, in conjunction with the legal department and external auditors, has developed a standard review and audit testing program that is based on the Reg AB servicing criteria. These activities are part of a continuous review of LNR's servicing platform as it relates to Reg AB. The vendor, which works under the compliance manager's supervision, completes test steps on a monthly, quarterly, and annual basis depending on volume and risk.
- LNR recognizes that its corporate structure and business interests make it impossible to avoid all relationships that could involve conflicts of interest. Accordingly, potential conflicts of interest are approved by, or at the direction of, the board of directors or the governance committee, and monitored by the compliance department and general counsel. Further, the company maintains a code of conduct handbook that includes provisions to avoid conflicts of interest; employees are required to provide written acknowledgement that they have read the handbook.
Internal and external audits
- Audits are conducted by the internal audit department, whose chief audit executive reports independently to an audit committee of SPT's board of directors.
- The internal audit department develops an annual audit plan, based on an annual risk assessment, which the audit committee reviews and approves. The internal audit department's focus is to identify any control weakness in a process, non-adherence to stated policies, or a policy that is absent regarding a practice. Procedures require monitoring any exception items and implementing recommendations, which are tested within six months.
- LNR performs an annual, platform-wide Reg AB attestation, which is examined by a third party.
- There were no exceptions in the 2019 Reg AB certification, and no material issues were noted in the 2019 internal audit of asset services, which received a "satisfactory" rating. The audit scope covered a variety of servicing processes, including loan boarding, property inspections, document storage, invoice processing, loan payments and payoffs, cash management, insurance, licensure and investor reporting.
- SPT's internal auditors, in conjunction with an external accounting firm, performed an audit of REO property management firms' 2019 compliance with the P&Ps in the underlying property management agreements. The audit received a satisfactory rating. The minor issues noted have been addressed by management via a process change to provide enhanced oversight.
- SPT's internal auditors tested the payment of lease commissions and construction management fees paid to property managers in 2018 for compliance with the underlying property management agreements. An unsatisfactory operational rating was provided due to the identification of a lack of compliance in three instances. Management subsequently enhanced its controls and the 2019 follow-up fee audit received a satisfactory rating.
Insurance and legal proceedings
LNR has represented that its directors and officers, as well as its errors and omissions insurance coverage is in line with the requirements of its portfolio size. As of the date of this report, it reported no material servicing-related pending litigation items.
The loan administration subranking is STRONG.
LNR has an extensive track record managing and disposing troubled assets nationwide while handling complex assets collateralized by multiple property types. LNR has resolved approximately 1,200 assets with a UPB of $16.4 billion since 2015 (see table 4), and management further reported that it has resolved more than 6,700 nonperforming assets with a UPB of $78 billion since its inception. LNR's process for negotiating modifications is stringent, generally requiring borrowers to bring significant equity to the table.
LNR manages the majority of its special servicing operations from its headquarters in Miami Beach. As of Dec. 31, 2019, LNR employed 174 personnel, including 15 dedicated loan asset managers and 13 REO asset managers.
LNR's active special servicing portfolio had a UPB of approximately $5.0 billion as of Dec. 31, 2019, a decline of 43% from $8.8 billion as of June 30, 2018 (our last review). Sizable volume declines in LNR's active portfolio during this period are consistent with trends reported by other major special servicers we rank. Nonetheless, based upon trends observed since March 2020 resulting from borrower relief requests, we expect LNR's portfolio will experience sizable growth during 2020.
|Special Servicing Portfolio|
|Dec. 31, 2019||Dec. 31, 2018||Dec. 31, 2017||Dec. 31, 2016||Dec. 31, 2015|
|UPB (mil. $)||No.||Avg. age(i)||UPB (mil. $)||No.||Avg. age(i)||UPB (mil. $)||No.||Avg. age(i)||UPB (mil. $)||No.||Avg. age(i)||UPB (mil. $)||No.||Avg. age(i)|
|(i)Avg. age reflects the time in months from the date the loan first became specially serviced to the reporting date. (ii)Totals may not add due to rounding.|
Regarding the current portfolio's composition, the percentage of LNR's UPB consisting of REO assets increased to 66.4% as of Dec. 31, 2019, from 55% of active special servicing inventory as of June 30, 2018 (our last review). As a percentage of UPB, property portfolio collateral was heavily weighted toward retail (52.0%) and office (24.5%), though all major property types, including lodging (8.0%), multifamily (3.2%), mixed-use (3.4%), and industrial (3.0%), were represented. The portfolio remains geographically diverse (even with substantial resolution activity), as properties are located in at least 42 states throughout the U.S., with the largest UPB concentrations in New York (11.5%), Texas (8.4%), Florida (6.9%), Pennsylvania (6.0%) and Ohio (5.6%).
Loan recovery and foreclosure management
LNR has well-described, effectively controlled loan file transfer, initial asset review, and system boarding procedures. Recovery practices are based on maximizing net present value (NPV) under varying alternative recovery scenarios.
- Loan recovery practices include the requirement of executed borrower pre-negotiation letters and generally follow a tri-track of foreclosure/note sale evaluation in parallel to workout discussions to maintain maximum borrower pressure.
- LNR has proactive measures to capture available property cashflows through the pursuit of receiverships and activating lockbox triggers.
- LNR generally obtains two-to-three brokers' opinions of value (usually within 60 days after transfer and refreshed no less than annually), and it orders a new appraisal pursuant to PSA requirements. These valuations are reconciled and used as the foundation of determining the workout strategy.
- LNR has effective controls for analyzing and documenting recovery actions; it also maintains effective controls for monitoring its progress through required and detailed asset business plans, asset status review meetings, and credit resolution cases.
- LNR uses both in-house and external counsel with bankruptcy expertise to assist loan asset managers through the bankruptcy process when required.
- Asset managers' recommendations are standardized on system-integrated business plan case formats and presented at periodic asset management meetings, with recommendations approved through authority delegations. The control process is the same for approving foreclosures and pursuing deficiencies.
- Analysis procedures include REMIC considerations, advancing/nonrecoverability discussions with master servicers, and a summary checklist generated through LPAMS that the compliance group reviews and approves.
- A foreclosure management unit coordinates title, single-purpose entity creation and assignment work, and oversees the progress of all active foreclosures in coordination with the asset manager.
- The company takes a proactive approach to workouts and strives to minimize the likelihood of re-defaults by requiring borrowers' to invest fresh new equity as a condition of a modification and to evidence a renewed commitment to the property. It further seeks to include additional lender-friendly terms in modification agreements should a re-default occur or a capital event occur that would otherwise solely benefit the borrower.
|Total Special Servicing Portfolio--Loan Resolutions|
|UPB (mil. $)||No.||Avg. age(i)||UPB (mil. $)||No.||Avg. age(i)||UPB (mil. $)||No.||Avg. age(i)||UPB (mil. $)||No.||Avg. age(i)||UPB (mil. $)||No.||Avg. age(i)|
|Returned to master||377.9||12||29.0||535.9||9||44.1||498.3||14||23.9||205.4||17||20.6||654.6||35||21.0|
|DPO or note sale||428.8||24||27.0||807.0||32||22.8||191.8||13||26.3||208.2||22||28.1||425.1||109||30.6|
|(i)Avg. age reflects the time in months from the date the loan first became specially serviced to the reporting date. (ii)Totals may not add due to rounding. UPB--Unpaid principal balance. DPO--Discounted payoff.|
REO management and dispositions
REAM handles all REO assets, organized into two geographic regional teams: East and West. It further subdivides the country into 12 smaller territories to obtain operating efficiencies with brokers and property managers in the respective regions. In addition, a hospitality team specializes solely on hotel collateral (both at the loan- and REO-level) due to the unique nature and specific challenges associated with this asset class. Each team leader manages several REO managers and associates responsible for asset management and property oversight.
REO management and liquidation processes are well-designed. Once the asset status changes to REO, there is a disciplined monitoring program of the REO business plan and subsequent sale. We view the REAM organizational structure favorably because it enhances asset managers' market and property knowledge, which should lead to better execution. Other notable features associated with REAM practices include:
- An REO asset manager is assigned at an early stage in the foreclosure process to assist the transition team with due diligence and vendor selection (property managers, brokers, and appraisers).
- The transition manager coordinates the loan-to-REO process with the asset manager, including various due diligence tasks, such as legal documentation and REO/property manager bank accounts.
- LNR chooses property managers from an approved vendor list, which is continuously updated and refined; all are third-party companies with no LNR affiliation.
- The REO asset manager is responsible for developing, within delegation of authority and committee approvals, the property budget and marketing plan. The asset manager also monitors third-party property management companies, negotiates leases and sales offers, and analyzes budget variances to plan.
- A decision is made at the front-end of the process, based upon NPV considerations, as to whether an REO asset is to be held for a value-add leasing opportunity or should be considered for near-term sale. Initial value-add/hold decisions are revisited periodically and formally evaluated no less than annually to determine if the asset is adhering to the original strategic plan.
- REO operating budget plans are completed within 60 days of title, and exit strategy plans are completed within 90 days of title. LNR incorporates input from the property management company in the budgets.
- Property managers and brokers submit monthly reporting packages that the REO asset manager and accounting areas review.
- LNR reviews proposed sales at periodic asset management meetings.
- A transition manager, who is dedicated to the closing of the sale of REO properties, completes closing pro-rations, which are ultimately reviewed and approved by the REAM director. REO asset managers are not involved in the preparation of closing pro-rations, which we believe is a proper segregation of duties.
LNR has handled sales transactions throughout the U.S. for all main income-property types and specialized assets, such as golf courses. Since 2015, LNR has sold approximately 775 REO assets for gross proceeds of approximately $7.5 billion (see table 5). It further reported that, since inception, it has managed nearly 3,000 CMBS REO properties and sold more than 2,300 properties for aggregate proceeds of $22 billion as a special servicer.
LNR's average hold time for REO sales of 27.6 months during 2019, similar to the 28 months reported as of our last review. We have observed that LNR reports longer hold times than its similarly ranked CMBS special servicing peers, which we generally view unfavorably. However, LNR has proven to be effective at leasing and stabilizing REO properties. It reported that the REO team signed more than 4,300 leases, with total term rent of more than $2.7 billion from 2012-2018, demonstrating its ability to create value. Additionally, average gross sales proceeds have approximated market value during the past two years. Nonetheless, we note that as of the date of this report that LNR's REO portfolio includes 11 properties that must be sold prior to year-end pursuant to REMIC requirements. While several of the properties are currently under contract for sale and the balance are being actively marketed, economic conditions have deteriorated due to the COVID-19 pandemic. We will monitor the disposition of these assets during 2020 but believe that recent events highlight the risks associated with pursuing resolution strategies that require lengthy REO hold periods.
|Total Special Servicing Portfolio--Real Estate-Owned Sales|
|Amount (mil. $)||No.||Avg. REO hold period (mos.)||Amount (mil. $)||No.||Avg. REO hold period (mos.)||Amount (mil. $)||No.||Avg. REO hold period (mos.)||Amount (mil. $)||No.||Avg. REO hold period (mos.)||Amount (mil. $)||No.||Avg. REO hold period (mos.)|
|Estimated market value||854.2||119||27.6||906.3||152||32.0||1,973.8||130||30.0||1,063.8||170||26.5||2,285.5||205||20.5|
|Gross sales proceeds||834.1||--||--||933.3||--||--||1,823.9||--||--||1,184.2||--||--||2,763.7||--||--|
|Net sales proceeds||773.3||--||--||868.7||--||--||1,742.1||--||--||1,129.7||--||--||2,620.0||--||--|
|Gross sales proceeds/market value (%)||97.6||--||--||103.0||--||--||92.4||--||--||111.3||--||--||120.9||--||--|
|Net sales proceeds/market value (%)||90.5||--||--||95.8||--||--||88.3||--||--||106.2||--||--||114.6||--||--|
REO accounting and reporting
LNR has well-delineated procedures for REO accounting and reporting property incomes and expenses. Written procedures, sample notices, and stated practices indicate an effective tracking of advances against collateral values and dialogue with master servicers on non-recoverability concerns. In addition:
- Property managers are required to send monthly electronic reports and financials to LNR. These reports are uploaded to PeopleSoft, which is interfaced with LPAMS and DataMart for budget tracking, trend analysis, and consolidated reporting.
- The accounting department, which works under the funds controller in the finance department, reconciles property managers' reports and bank account activity to the REO system and uploads that information to the DataMart.
- The accounting and REO departments conduct independent financial reviews on selected properties and property management companies.
- LNR maintains a monthly process to review advances relative to estimated collateral values and maintains a report designed for master servicers' to have updated information to make informed advancing decisions.
We believe the company has well-controlled and sound procedures governing subcontracting oversight. LNR maintains approved vendor lists by service category and monitors vendors for compliance with licensing, certifications, and other regulatory requirements as needed and maintains information about competitive market pricing. Additional highlights include:
- Vendors must be prequalified for inclusion on the approved lists.
- Asset managers submit work-order requests through the asset management system.
- The asset manager and team leader review the selected vendors before engagement. Selection is generally based on property type, location, and the vendor's past experience and performance.
- LNR uses standard engagement letters for all service providers, and the servicer tracks active assignments on the asset management system.
- An outside consultant handles the bidding and engagement of appraisers. Management then chooses one of the appraisal bids, and the outside consultant reviews the final appraisal reports along with the asset managers.
- Environmental and engineering reports are managed by the REO department. Loan asset managers engage the REO department to bid out individual projects using the approved vendor list.
- Management reviews of service providers produce various tracking reports. Brokerage and property management engagements have standard 30-day termination clauses, which can be exercised if LNR's standards are not met. Further, vendors deemed ineffective are removed from the approved vendors list.
Performing loan surveillance
LNR employs comprehensive and robust surveillance practices to monitor the deals for which it is named as special servicer. In addition to monitoring CMBS portfolio performance, the surveillance group interacts with primary servicers, and handles investor and rating agency relations. Notable aspects of surveillance include:
- Surveillance begins at underwriting, with an analyst assigned to a deal and sitting in on all deal-related discussions, taking note of potential credit issues, and making sure those issues are included in the initial surveillance comment for the respective loan.
- When a new deal closes, surveillance goes through every loan document and abstracts the loan triggers. Those triggers are then entered into a custom-built LPAMS module that will alert the deal analyst when a trigger is met.
- Each surveillance analyst is assigned approximately 10 deals a month (approx. 500 loans) to do an in-depth review of the deal performance. All deals are reviewed no less than quarterly. LNR has an internal watchlist separate from the CREFC watchlist that is maintained in LPAMS.
- Deal- and portfolio-level reports are generated and archived each month, available for senior management.
- Surveillance undertakes an annual project to review all loan inspections across its named portfolio for potential credit or condition issues that might otherwise be missed by the master servicers.
- The surveillance department reviews performing loan consent matters (discussed below) handled in-house to determine whether new credit issues have arisen or if known issues have been mitigated, and adjusts projected losses based on information from the LAM group.
We believe LNR has a particularly effective and controlled approach for analyzing borrower consent matters. Management believes performing loan requests provide an opportunity to confirm that borrowers and master servicers are abiding by the loan documents. The BSG is largely responsible for these reviews. Highlights include:
- Unlike most special servicers, LNR generally includes the right to review performing loan consents, typically a master servicer function, into the PSA.
- If a potential future issue is discovered during the review process, BSG communicates with the surveillance team so the loan can be added to the internal watch list.
- BSG is responsible for the review and approval of all lease, subordination and non-disturbance agreement, and property management change requests on performing loans.
- BSG also handles the review, approval, and processing of a large percentage of assumption/transfer of interest requests.
- BSG shares performing consent responsibilities with the LAM group, which handles the more complex assumption transactions, as well as collateral and escrow modifications, property releases, etc.
- During 2019, LNR reported that it processed nearly 700 consent requests, including 389 that were related to leasing consent reviews, 95 pertaining to collateral releases, 91 loan assumptions, with the primarily a combination of property management changes and miscellaneous requests.
LNR has a six-person legal department to advise asset managers, engage counsel from its approved attorney list, and track litigation progress.
- Responsibilities include reviewing deal documents, negotiating servicing agreements, reviewing/approving legal fees, and maintaining the approved attorney list along with per-engagement performance monitoring of law firms.
- Legal also oversees certain compliance training and participates in asset management-related training events.
- The asset management system tracks the status of legal engagements and legal expenses, along with purchased software that facilitates case management and invoice reviews within the legal department.
The financial position is SUFFICIENT.
- LNR Partners LLC STRONG Special Servicer Ranking Affirmed; Outlook Is Stable, June 18, 2020
- Select Servicer List, May 1, 2020
- U.S. Commercial Mortgage Servicers Preparing For Impact From COVID-19, April 3, 2020
- Starwood Property Trust Downgraded To 'BB-' As Margin Call Risk Increases From The Impact Of COVID-19; Outlook Negative, March 26, 2020
- Starwood Property Trust Inc., Aug 22, 2019
- Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019
|Servicer Analyst:||Steven Altman, New York (1) 212-438-5042;|
|Secondary Contact:||Benjamin Griffis, Centennial (1) 303-721-4672;|
|Analytical Manager, Servicer Evaluations:||Robert J Radziul, New York (1) 212-438-1051;|
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