|Servicing category||Overall ranking||Management and organization||Loan administration||Outlook|
S&P Global Ratings' overall rankings on Principal Real Estate Investors LLC (PrinREI) are STRONG as a commercial mortgage loan primary and special servicer. On Dec. 9, 2020, we affirmed our overall STRONG ranking on PrinREI as a commercial mortgage loan primary servicer and raised our overall ranking on PrinREI as a commercial mortgage loan special servicer to STRONG from ABOVE AVERAGE (see "Principal Real Estate Investors Commercial Mortgage Primary Ranking Affirmed, Special Ranking Raised; Outlook Stable," published Dec. 9, 2020). The outlook on each ranking is stable.
Our rankings reflect PrinREI's:
- Stable operating platform, with a solid primary and special servicing track record;
- Institutional backing, along with commitment to the real estate market and financial support, from parent company, Principal Financial Group (PFG);
- Experienced senior management and staff, and a high level of tenure across the servicing operations;
- Effective employee training program;
- Efficient use of technology systems, albeit without a dedicated asset management system for special servicing;
- A sound internal control environment including thorough policies and procedures;
- Decentralized special servicing organizational structure that is compatible with the company's portfolio of balance sheet and life insurance company loans; and
- Ability to coordinate and harness various resources within the servicing and real estate equity asset management areas, as well as oversee and facilitate the resolution of nonperforming assets.
Since our prior review (see "Servicer Evaluation: Principal Real Estate Investors LLC," published Dec. 17, 2018), the following changes and/or developments have occurred:
- PrinREI experienced a sudden increase in special servicing transfers due to the COVID-19 pandemic in the first half of 2020 with the active portfolio growing by nearly $1.1 billion in UPB from the end of 2019.
- The closing department was integrated into servicing to create a direct linkage between the closing and servicing of a loan, create a more streamlined process, and enhance the borrower experience.
- The investor accounting/reporting team was integrated into PrinREI accounting from commercial mortgage servicing to align it with other accounting teams.
- The loan setup team was moved to compliance/surveillance from operations to better align loan setup and asset management.
- PrinREI exited the CMBS origination business and ended its joint venture with MUFG Union Bank N.A.
- PrinREI replaced its in-house loan origination system with a third-party cloud-based system that provides enhanced connectivity across systems, including the Enterprise!® loan servicing system.
- PrinREI continued to invest and upgrade its systems and technology by adopting Enterprise! version 2018, a new system for Uniform Commercial Code (UCC) filings, and a new system to monitor, track and report portfolio exposure to natural disasters.
The outlook on each ranking is stable. PrinREI, like most servicers, has been challenged in 2020 by increased workloads associated with relief requests from borrowers facing economic difficulties due to the COVID-19 pandemic, particularly following a prior benign default environment. We note that the company has responded to the challenges by utilizing technology for its employees to work remotely; reallocating resources from other areas of PrinREI to special servicing; and leveraging its servicers, closers, underwriters, legal team, and portfolio managers into an integrated team. As a result, we believe that PrinREI will remain a highly effective servicer based on its long history of real estate investment, asset management, and commercial mortgage servicing experience.
In addition to conducting a remote meeting with servicing management, our review includes current and historical Servicer Evaluation Analytical Methodology data through June 30, 2020, as well as other supporting documentation provided by the company.
|Servicer name||Principal Real Estate Investors LLC|
|Primary servicing location||Des Moines, Iowa|
|Parent holding company||Principal Financial Group|
|Loan servicing system||Enterprise v. 2018|
PrinREI is an indirect subsidiary of Principal Financial Group (PFG), through its wholly owned subsidiary, Principal Global Investors Holding Co (PGI). PFG is a worldwide diversified financial organization founded in 1879, providing life insurance and investment products, with more than 15,000 employees worldwide.
PrinREI is the dedicated real estate investment group within PGI for public and private debt and equity, and portfolio management for PrinREI's own portfolio, its subsidiaries, and third-party clients. As of June 30, 2020, PFG had $486.5 billion in assets under management, of which, $83.9 billion were real estate assets.
PrinREI's commercial mortgage servicing division manages the commercial real estate servicing activities of its parent, other PFG-related organizations, and non-affiliated clients. PrinREI also engages in portfolio management, debt and equity investments, and advisory and development services for third parties. PrinREI has over six decades of real estate investment experience and covers more than 45 U.S. metropolitan real estate markets. Its commercial mortgage servicing operations are based in Des Moines, Iowa.
|Total Servicing Portfolio|
|UPB (mil. $)||YOY change (%)(i)||No. of assets||YOY change (%)(i)||No. of staff (ii)||YOY change (%)(i)|
|June 30, 2020||24,180.0||1.2||1,388||(1.7)||37||0.0|
|Dec. 31, 2019||23,884.0||7.7||1,412||(5.2)||37||0.0|
|Dec. 31, 2018||22,168.1||8.0||1,490||(4.8)||37||(11.9)|
|Dec. 31, 2017||20,532.4||(6.6)||1,565||(18.3)||42||0.0|
|Dec. 31, 2016||21,983.3||--||1,916||--||42||--|
|June 30, 2020||1,124.6||2,890.0||68||1,033.3||103||3.0|
|Dec. 31, 2019||37.6||24.7||6||20.0||100||3.1|
|Dec. 31, 2018||30.2||(46.1)||5||(64.3)||97||(1.0)|
|Dec. 31, 2017||55.9||(64.4)||14||(36.4)||98||2.1|
|Dec. 31, 2016||157.0||--||22||--||96||--|
|(i)June 30, 2020 YOY change based on the prior year end. (ii)Includes three dedicated special servicing employees (all responsible for loan asset management), and 100 equity asset management employees. YOY--Year-over-year. UPB--Unpaid principal balance.|
|June 30, 2020||Dec. 31, 2019||Dec. 31, 2018||Dec. 31, 2017||Dec. 31, 2016|
|UPB (mil. $)||No.||UPB (mil. $)||No.||UPB (mil. $)||No.||UPB (mil. $)||No.||UPB (mil. $)||No.|
|Average loan size||17.4||--||16.9||--||14.9||--||13.1||--||11.5||--|
|Total special servicing||1,124.6||68||37.6||6||30.2||5||55.9||14||157.0||22|
|Investment real estate(ii)||30,450.8||498||31,166.7||508||28,547.9||473||34,797.8||829||33,637.9||829|
|(i)Totals may not add due to rounding. (ii)Comprises real estate assets held for investment purposes. SBO--Serviced by others. REO--Real estate-owned. UPB--Unpaid principal balance.|
Management And Organization
The management and organization subrankings are STRONG for primary and special servicing.
Organizational structure, staff, and turnover
PrinREI's average years of industry experience for primary and special servicing senior managers, middle managers, and staff are indicative of a seasoned team and generally higher than levels reported by peers. Similar to other life insurance companies that we rank, PrinREI's employees have a high level of company tenure.
A managing director with over 30 years of industry experience and 16 years of company tenure leads PrinREI's commercial mortgage servicing and closing operations, with direct reports responsible for the areas of closing, and loan operations and administration; special servicing; portfolio management; asset management; and setup, compliance, and surveillance.
As previously noted, investment accounting and reporting, consisting of nine team members, was realigned with investment accounting via a reorganization of the commercial mortgage servicing (CMS) group in 2019.
Closing, loan operations and administration is led by a senior director with 35 years of industry experience and company tenure. This team consists of 27 people who are responsible for loan closing; tax, insurance and UCC administration; and collateral management.
Special servicing is led by a director with 32 years of industry experience and company tenure. Two direct reports having 14 years and five years, respectively, of industry experience and company tenure, are responsible for the resolution of non-performing loans and perform active surveillance on loans that have been identified as potential defaults. Special servicing also has access to and the assistance of 100 PrinREI real estate equity asset management employees, who are responsible for the company's investment real estate assets and would be directly involved in the REO process.
Portfolio management is comprised of two senior portfolio managers having 35 years of industry experience and company tenure, and 32 years of industry experience and 24 years of company tenure, respectively, who are responsible for the overall administration of client portfolios.
Asset management is led by a director with 32 years of industry experience and company tenure. Nine direct reports are responsible for analyzing and recommending borrower requests to portfolio managers; monitoring collateral covenants and property reserves; monitoring trigger events; drafting and negotiating documentation, including loan modification documents, escrow agreements and non-disturbance agreements with appropriate oversight from portfolio managers; and actively managing loans with hard lockboxes, among other things.
Setup, compliance, and surveillance is led by a manager with 14 years of industry experience and company tenure. Five direct reports are responsible for new loan set-up; cash management waterfalls; loan trigger calculations; loan payoffs; responding to inquiries related to property surveillance from master servicers, special servicers, and clients; financial statement processing; vendor management; and various audit and compliance activities.
We believe the primary servicing operation has an effective organizational structure to manage the size of the portfolio and investor types. PrinREI's structure adequately segments transaction-based activity (e.g., payment processing, taxes, and insurance) and loan-level, credit-based functions (e.g., financial statement analysis, loan compliance, and portfolio compliance).
We believe the decentralized organizational structure of the special servicing operation is effective for managing its life insurance company/portfolio mortgage assets. The special servicing staff includes three employees dedicated 100% to special servicing, with assistance from 100 employees in the PrinREI real estate equity investment area.
PrinREI's corporate divisions provide additional resources and support to the core servicing area, such as human resources, legal, technology, finance, internal audit, and supplier management, which assists with vendor oversight. The servicing group also benefits from PrinREI's expansive coverage of the commercial real estate debt and equity markets, including close coordination with PrinREI's underwriting, real estate equity, engineering and appraisal, legal, and research teams.
|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 June 30, 2020. N/A--Not applicable.|
Recent turnover levels have been low. In the first half of 2020, PrinREI experienced no turnover in primary servicing and a 4.0% rate in special servicing. We note that the special servicing departures were employees who were assigned to special servicing on an interim basis to work through COVID-19 relief requests during the period and returned to their prior duties before the end of June. For the full-year 2019, PrinREI experienced approximately 14.0% turnover in primary servicing with no turnover in special servicing. PrinREI's historically low-to-moderate annual employee turnover rates are reflected in its high levels of company tenure.
PrinREI provides its management and staff with a diversified array of ongoing, formal, internal and external training programs, which is typical of similarly sized peers. The company targets 30 to 40 hours per employee annually, depending on position. We believe this is adequate and note that the actual number of average training hours per employee in the first half of 2020 were 34 for primary servicing and 15 for special servicing. In 2019, these figures were 41 and 49, respectively, exceeding PrinREI's annual target.
Key aspects of the training program include the following:
- A dedicated training and development group monitors training programs and tracks training hours.
- A training and development intranet site provides access to pertinent research publications, a web-based training application, and links to corporate training and development sites.
- The corporate training department provides core training for basic managerial development skills and generic computer applications.
- Internal and external subject matter experts provide training on commercial real estate-related subjects.
- Dedicated individuals in the information technology (IT) group provide systems, risk mitigation, and data protection training.
- PrinREI participates in the Midwest Servicing Forum, an annual training event organized by PrinREI and three other servicing companies located in the Midwest, which is designed to meet the training and educational needs of the four servicers. The 2020 event was canceled and a scaled down virtual forum in the first quarter of 2021 is being considered.
- PrinREI actively participates in the mortgage servicing industry through associations, such as the Mortgage Bankers Assn. and Commercial Real Estate Finance Council.
Systems and technology
We believe PrinREI has effective technology to meet its primary and special servicing requirements. The company continues to focus on technology enhancement projects to further streamline and automate servicing tasks across various loan administration functions. The company has well-designed data backup routines and disaster recovery preparedness. Key elements of its systems, applications, technology, and security environment are discussed below.
Systems and applications
For primary servicing:
- Enterprise! version 2018 is the loan servicing system, which provides centralized loan administration, data management, and investor reporting functionality.
- nCino, a third-party, cloud-based platform that replaced PrinREI's in-house loan origination system since our last review, provides enhanced connectivity across systems including Enterprise!
- An internally developed data warehouse is used to capture data needed for reporting and analysis.
- An OnBase web-based imaging system is used for document storage and retrieval.
- The internally developed Loan Connection-Borrower website provides access to loan data, payment information, balance history, escrow accounts, amortization schedules, and contact information.
- The internally developed web-based Client Reporting website provides third-party investors and clients access to information on their loan portfolios.
- A Microsoft SharePoint site auto-generates daily accounting tasks, stores servicing desktop procedures, and tracks insurance reviews, financial statement collection, and review dates, among other tasks.
- JIRA is a third-party task management/workflow tool that is used to monitor loan covenants and trigger events, as well as assign tasks with associated due dates.
- My Access, an access management system, grants and controls access to various systems.
- CSC Lien Perfect is a third-party system for filing and tracking UCC's.
- EigenPrism is a third-party platform utilized to monitor, report and track exposure to disasters.
For special servicing:
- Enterprise! is used as the system of record for all relevant loan servicing information, including special servicing. However, a dedicated asset management system for special servicing is not utilized. We note that most STRONG ranked special servicers utilize a dedicated system, which we consider a best practice.
- Yardi's real estate investment and property management application is used for asset administration, property management, and property accounting.
- The Argus enterprise-valuation software is utilized for forecasting.
- In addition to document storage and retrieval, the OnBase interface tracks data and workflow related to events affecting asset values, such as signed leases, new sales comps, capital expenditures, etc.
- The internally developed Equities Debt database is utilized for the storage and reporting on third-party loans.
- Externally facing websites provide access to client and fund reports, and key data.
Business continuity and disaster recovery
PrinREI employs a comprehensive business continuity plan, which includes the following:
- An annual alternate worksite/remote access exercise is performed to practice the staffs' ability to relocate and continue/resume critical functions.
- Critical disbursements and remittances are done by wire transfers and can be done completely remote.
- The business continuity plan is reviewed and updated yearly based on table-top exercise scenario results.
PrinREI employs a comprehensive disaster recovery (DR) plan. DR efforts include the following:
- PrinREI maintains and manages its own business recovery and data storage locations.
- Nightly backups are created of all data and subsequently stored offsite.
- PrinREI reviews its DR plan semiannually and maintains a remote offsite data center in Chicago where all critical applications are replicated.
- It owns two primary hot site and business recovery locations, with appropriate building support (separate power grids, system emergency power, and building generators) and office space to accommodate necessary staff.
- Target recovery times for all applications and operations are under 24 hours.
- Call-tree exercises are conducted periodically, but no less than annually, to ensure communications can be established in the event of a disaster.
- Full DR testing is completed each year. The last full DR test was completed in October 2020 with no issues being reported.
Management believes that PrinREI has proper protocols in place to protect borrower data and prevent cyberattacks. Cybersecurity efforts include the following:
- PrinREI has a comprehensive written information security program that safeguards information against unauthorized or accidental modification, disclosure, fraud, and destruction.
- All employees are required to complete privacy, security, ethics, and compliance training annually.
- The information security program includes antivirus protection, data encryption, update and patch management, and cyber security insurance.
- Employees are sent simulated phishing test emails monthly to test awareness. However, employees who fail a test will be tested more frequently.
- PFG hires a third party to perform network penetration testing on an annual basis. The most recent test in April 2020 noted no material problems.
PrinREI maintains a sound internal control environment that includes well-documented policies and procedures (P&P) manuals, quality control reports, and ongoing risk and process reviews and assessments. The PGI risk management process encompasses risk identification, assessment, mitigation, and monitoring. The audit program includes periodic internal and external audits, as well as master servicer and investor reviews. Elements of internal controls are described in the below sections.
Policies and procedures
PrinREI has well-documented P&P manuals and updates are handled with proper frequency and controls. The manuals are available online and have interactive features for references, sample documents, system displays, and data requirements for individual activities. Additionally, the following are also part of PrinREI's protocol:
- A senior manager from each functional area reviews and approves any material changes to the P&Ps for his or her respective area.
- Subject matter experts must certify that they have reviewed all relevant P&Ps annually and are responsible for making any minor P&P changes.
- PrinREI uses its manuals for training programs, which provide guidelines on various issues and topics, along with applicable procedures, required forms, and authorizations.
- P&P manuals include documentation of what has changed, when it was last reviewed and last updated, and a list of in-house subject matter experts for easy reference and contact by all employees.
Compliance and quality control
PrinREI has established a strong control environment to effectively manage the risks inherent in servicing. Features include the following:
- The company maintains a quality control/self-audit program that involves issuing and monitoring management reports that cover key servicing processes, such as new loan setup, insurance and tax monitoring, delinquencies, and financial statement and rent roll collection and analysis.
- An internal compliance department from PGI handles Regulation AB (Reg AB) compliance testing of the entire servicing platform (both CMBS and non-CMBS) throughout the year. The reviews are similar in scope to external Reg AB reviews and cover risk areas related to procedures, systems, and accounting for both primary and special servicing. Reg AB test report memos are submitted to the PrinREI Reg AB committee on a semiannual basis.
Internal and external audits
PrinREI has established a strong internal and external audit environment. Features include the following:
- Internal audits performed by parent company PFG occur on a three-year cycle, which is generally longer than other STRONG-ranked servicers.
- The last full internal audit of primary servicing operations was performed in June 2017, and there were no material findings. PrinREI management indicates that the next full internal audit of primary servicing operations will be in 2021. The audit was originally planned for 2020 but was rescheduled due to the COVID-19 pandemic.
- For special servicing, the last audit was completed in the first quarter of 2016. There was only one low-risk finding involving the proper documentation of updates to and proper version control of special servicing P&Ps. PrinREI resolved the issue by the end of 2016. PrinREI management indicates that a full internal audit of special servicing operations commenced in September 2020.
- A nationally recognized independent accounting firm performs PrinREI's annual Reg AB certification. The 2019 examination had no material exceptions noted.
- PrinREI also undergoes an annual SOC1 audit, in which there were only minor exceptions noted for the 12-month period ending Sept. 30, 2019. PrinREI management indicates a SOC1 audit is in process for the 12-months ending Sept. 30, 2020, and will be issued in December 2020.
- Additional external audits of PrinREI's servicing operations include audits performed by master servicers and investors.
Although the PFG internal audit group conducts its audits on servicing on a three-year internal cycle, we believe that the comprehensive semiannual Reg AB reviews conducted by PGI's internal audit group mitigate the lengthier cycle of audits conducted by the parent company. Additionally, PrinREI management indicates that if the risks were higher due to concerns or issues, the internal audit team would increase the frequency of the cycle accordingly. Overall, we believe PrinREI maintains a sound audit and compliance environment.
We believe that PrinREI has well-controlled and sound procedures governing vendor management. Factors considered in the decision to use a vendor include complexity of work, technology needed, vendor expertise, and level of oversight that will be required by internal staff. Features include:
- PrinREI engages third-party vendors to provide financial statement and rent roll processing; lease reviews; new loan audits (comparing loan documents to the servicing system); insurance reviews; background credit checks; UCC services; collateral inspections; property tax services; and flood zone determination.
- PrinREI's surveillance team is responsible for oversight of vendors used in its servicing operations. The PGI global sourcing group assists with contract negotiations, licensing, certifications, vendor risk management, and other regulatory requirements as needed, along with competitive market pricing.
- Vendor performance is monitored through the completion of a supplier impact risk assessment (SIRA). The SIRA measures data security, financial stability, and regulatory risk, among other factors. Depending on the SIRA score, PrinREI may need to develop monitoring plans, scorecards, and contingency plans for its different vendor relationships.
- PrinREI maintains approved lists for property managers, brokers, attorneys, appraisers, and engineers. In general, third-party vendors are assigned by section/asset managers from approved vendor lists based on property type and location and the vendor's past experience and performance.
- Asset managers monitor third-party compliance according to performance/timeline guidelines and input asset updates into the servicing system. The asset managers use in-house support staff (appraisal, legal, and engineering) for second-level reviews and to approve the vendor work product. Various tracking reports are produced to assist in weekly and monthly management reviews.
Insurance and legal proceedings
PrinREI 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 for primary servicing.
As of June 30, 2020, primary serviced loan volume totaled approximately $24.2 billion of unpaid principal balance (UPB; up 14.2% since the last review and 1.2% since Dec. 31, 2019) with 1,388 loans (down 8.6% since the last review and 1.7% since Dec. 31, 2019). At the same time, the average loan size rose to $17.4 million, which is an increase from $13.9 million at the last review and $16.9 million as of Dec. 31, 2019 (see table 4). The portfolio is geographically dispersed and contains good representation from all major collateral property types (see table 5).
Delinquencies remained negligible from 2016 through 2019 (i.e., no more than 0.01%) because the loan portfolio benefited from strong underwriting and favorable market conditions (see table 4). However, as of June 30, 2020, delinquencies increased to 1.2% of the portfolio, which consisted of eight loans (five secured by lodging properties, two secured by retail properties, and one secured by a mixed-use property). This increase is driven by the economic weakness resulting from shelter-in-place orders associated with the COVID-19 virus outbreak. PrinREI's delinquency rates are in line with other ranked servicers having a sizeable portion of life insurance company mortgages. CMBS delinquencies are relatively low at 0.5% of the total portfolio and 5.1% of the CMBS portfolio as of June 30, 2020.
While PrinREI maintains an active role as a subservicer for 40 CMBS transactions consisting of 157 loans with a UPB of $2.2 billion as of June. 30, 2020, we note that this portfolio has been decreasing (from 51 transactions consisting of 220 loans with a UPB of $2.3 billion at our prior review), while the balance sheet, life insurance company and pension fund portfolios have been increasing. PrinREI predominantly services loans on its own balance sheet, with a portfolio of $15.4 billion representing 63.8% of UPB of the total portfolio as of June 30, 2020, compared to $13.6 billion representing 64.8% of UPB of the total portfolio at our prior review (as of June 30, 2018). The company's life insurance company and pension fund portfolios increased in UPB by 26.0% and 86.0%, respectively, since our prior review (see table 6). PrinREI services these portfolios, along with the other third-party investor and bank/financial institution portfolios, for non-affiliated clients, which increased to a total of 23 from 21 at the time of our prior review, and is a continued area of focus.
|Primary Servicing Portfolio(i)|
|Jun. 30, 2020||Dec. 31, 2019||Dec. 31, 2018||Dec. 31, 2017||Dec. 31, 2016|
|UPB (mil. $)||No.||UPB (mil. $)||No.||UPB (mil. $)||No.||UPB (mil. $)||No.||UPB (mil. $)||No.|
|Average loan size||17.4||--||16.9||--||14.9||--||13.1||--||11.5||--|
|(i)Totals may not add due to rounding. UPB--Unpaid principal balance.|
|Primary Portfolio Breakdown By Property Type And State(i)|
|UPB (mil. $)||UPB (%)||No. of properties||Properties (%)|
|(i)As of June 30, 2020. (ii)Totals may not add due to rounding. UPB--Unpaid principal balance.|
|Primary Portfolio By Investor Product Type(i)|
|Loan Type||UPB (mil. $)||Loan count||UPB (%)||Loan (%)|
|On own or parent's balance sheet (exclude issued CRE CDO/CRE CLO)||15,432.3||822||63.8||59.2|
|Life insurance companies||4,512.2||349||18.7||25.1|
|Other third-party investors (REITs, investment funds, etc.)||1,138.9||34||4.7||2.4|
|Warehouse/held for sale||40.0||1||0.2||0.1|
|(i)As of June 30, 2020. (ii)Totals may not add due to rounding. UPB--Unpaid principal balance. REIT--Real estate investment trust. CRE--Commercial real estate. CDO--Collateralized debt obligation. CLO--Collateralized loan obligation. CMBS--Commercial mortgage-backed securities. ABS--Asset-backed securities.|
New loan boarding
PrinREI has superior controls in place for initial loan boarding. Since our previous review, new loan set-up was moved from the operations team to the compliance and surveillance group and the team consists of two dedicated employees. According to management, the surveillance teams' broader experience provides a deeper understanding of loan structure and asset management processes to provide a better loan boarding experience. The team also handles the custodial document process, as well as processing data changes associated with loan modifications and daily operations. Other aspects of new loan setup operations include the following:
- Prior to loan funding, an audit of the loan agreement and related loan documents is conducted to confirm that material loan terms are consistent with committee approval of the loan, and to ensure compliance with Sarbanes-Oxley.
- For complex loans, a transfer of information meeting is held in person within approximately seven business days of the closing date, in which the loan documents are reviewed for critical information that is needed to complete the loan boarding process and effectively service the loan.
- The majority of the loan data boarding process is automated from either data in the origination system or data feeds received from a prior servicer.
- PrinREI's origination system is interfaced with the servicing system, allowing for automated data transfer for selected key fields; for fields that require more details, such as tax and insurance items, the tax and insurance teams within loan operations input the information.
- Upon completion of loan boarding, loan documents and other related information are indexed and imaged with original documents being stored based on the requirements of the given portfolio.
- The loan setup area is responsible for initiating the proper audits for all new loans and loan modifications. Audits are conducted to confirm that loan level data built in Enterprise! is consistent with source documents and to identify discrepancies and potential issues that could impair the future servicing of the loan. Audit tracking is coordinated via the use of a SharePoint site.
- The loan set-up team, in conjunction with the closing team, tracks post-closing documents and follows up on a monthly basis. As of June 30, 2020, a minimal amount (1.0%) of new loan documents for loans boarded more than six months ago were outstanding.
- The company sends borrowers welcome letters within eight days of loan closing, indicating the servicing manager as the point of contact for the borrower.
- There were 162 new loans boarded to the system in 2019 and 47 loans boarded in the first half of 2020.
The payment processing operation is efficient with two employees dedicated to the function. PrinREI has a series of electronic uploads from its servicing and online banking systems to efficiently handle fund transfers between clearing and custodial accounts. Other aspects of PrinREI's payment processing operations include:
- The reporting and cash management area handles payment posting. Separate individuals handle payment processing and reconciliations, maintaining a well-controlled segregation of duties.
- The company has a high level of automation in payment processing, with 98.0% of payments posted electronically as of June 30, 2020.
- Multiple payment clearing accounts are used because of the diverse investor base.
- The payment processing division has access to online banking and transfers money between the payment clearing accounts and investor custodial accounts along with appropriate general ledger entries.
- Daily reconciliations are performed between the servicing system and clearing accounts.
- A small number of checks are received through an internal lock box. These checks are tightly controlled and remain secure in the cash management area. A dedicated PC that has been setup with a bank authorized scanner allows the checks received to be scanned and then deposited through a bank web portal. Only employees with the correct rights have access to use the portal for deposits.
- To physically handle checks during the pandemic, the company indicated that mail services is on-site and routes the checks to a secure pick-up location. The accounting staff picks up the checks and deposits them electronically.
The cash management and investor reporting team, consisting of seven dedicated employees, handles investor reporting and remitting based on individual investor requirements, which cover daily, weekly, monthly, and quarterly reporting and remitting cycles. Other highlights include the following:
- Enterprise! supports National Association of Insurance Commissioners reporting, which the insurance industry requires, along with standard reporting for government-sponsored entity securities and CMBS transactions.
- Enterprise! supports standard watchlist reporting based on automated (CREFC reporting) triggers, and it provides an internal review report based on company-directed triggers.
- Cash is verified before remittance, at which time the bank balance is verified to the remittance amount and the system report. Bank accounts are reconciled monthly to the general ledger.
- Separate personnel handle the reporting, remitting, and bank reconciliation functions.
- A second-level management review occurs before releasing reports and funds.
- Funds are remitted by wire through the online bank system under dual approval.
PrinREI has well-controlled procedures for escrow and loan administration (taxes, insurance, and loan-level credit compliance reserves). Highlights include:
- Separate groups within loan operations handle tax (three dedicated employees) and insurance (five dedicated employees), as well as overall escrow testing and analysis. Approximately 30.0% and 12.0% of loans were escrowed for taxes and insurance, respectively, as of June 30, 2020.
- Assigned servicing managers handle loan-level credit compliance reserves (tenant improvement and replacement reserves) within the portfolio and CMBS servicing areas.
- The company uses a third-party tax service for all loans (escrowed and non-escrowed).
- The servicing system tracks tax compliance for escrowed loans and vendor tax-due reports are reconciled to the servicing system records.
- The tax vendor tracks non-escrowed loans for payment due dates and notifies loan operations of tax delinquencies.
- Tax escrows are analyzed no less than annually in Enterprise!.
- In addition to the five dedicated insurance staff members, PrinREI outsources part of the insurance review process, including document imaging and maintaining and filing insurance certificates, to a third party.
- Insurance information tracking and compliance are maintained in Enterprise!, with notice of policy renewal reminder notices sent to the borrower 21 days before expiration.
- Carrier ratings are reviewed annually at renewal.
- Required insurance coverage is provided via the company's broker, and PrinREI force places insurance for loans no later than 120 days after a policy expires (the policy has 120-day retroactive coverage).
Asset and portfolio administration
PrinREI has efficient, well-controlled processes for asset management and surveillance. Notable features include the following:
- The servicing asset management area is responsible for borrower customer service, mortgagee consent requests, reserve disbursements, loan covenant tracking and actions, watchlist loans (CMBS only), monitoring letters of credit, early-stage collections, cash controlled lockbox accounts, transferring loans to special servicing, and re-boarding modified loans that are returned from special servicing.
- A three-person surveillance team processes financial statements and coordinates periodic property inspections. PrinREI utilizes Berkadia Commercial Mortgage LLC, an S&P Global STRONG ranked primary servicer, to image the operating statements and rent rolls, and perform the data entry and initial analysis in Enterprise!.
- Over the past three and one-half years, PrinREI has consistently collected and reviewed year-end financials for 100% of its CMBS loans. Collection and review rates for non-CMBS loans has been lower at 86.0% and 84.0%, respectively, as of June 30, 2020. Management indicates that this is due to financial statements not being required for several smaller loans that the company services for third parties.
- PrinREI outsources property inspections to two vendors. Letters are sent to borrowers to inform them of any deferred maintenance items, and PrinREI tracks deferred maintenance items in Enterprise!. This process is managed by the loan operations team.
- UCC renewals are performed using a combination of in-house personnel from a dedicated team and a third-party vendor system, based on tickler information within Enterprise!. Continuations are filed with the assistance of the vendor. During 2019 and the first half of 2020, PrinREI reported no lapsed UCC filings.
- Since our last review, the number of CREFC watchlist loans has increased by 25.0% while the number of "active" watchlist loans has increased 6.5 times, reflecting a COVID-19 pandemic-influenced deteriorating and unstabilized credit environment. PrinREI defines an "active" watchlist loan as one that special servicing is working on in some capacity in addition to surveillance.
PrinREI addresses borrower requests in a well-controlled manner with seven dedicated employees. Highlights of the process include the following:
- PrinREI handled 92 requests in the first half of 2020, of which approximately 83.0% were leasing consents, 5.0% were for assumptions, 5.0% were partial releases and/or substitutions of collateral, 4.0% were for maturity extensions (one COVID-19 pandemic related), and 1.0% were defeasance consent requests. PrinREI handled 169 requests in 2019, of which approximately 69.0% were leasing consents, 15.0% were partial releases of collateral, 7.0% were for assumptions, 6.0% were for maturity extensions, and 3.0% were defeasance consent requests.
- For CMBS loans, PrinREI works with the deal parties in processing all requests and obtaining their approval if required.
- For non-CMBS loans, PrinREI contractually has the responsibility to process all requests for the borrowers. Servicing asset managers review and process immaterial requests. For assumptions and other requests that would materially affect the collateral, the servicing asset manager and servicing portfolio manager would present their recommendation to the material servicing committee for review and approval, and obtain lender client approval as necessary.
From 2016 through 2019, PrinREI's servicing portfolio maintained low delinquency rates consistent with industry and peer averages. During the first half of 2020, delinquencies have risen in the structured debt and CMBS portfolios resulting from the COVID-19 pandemic. Two servicing managers handle early-stage collections. Noteworthy features include the following:
- The servicing system generates automated email notices that are sent to the assigned servicing managers based on due dates or grace period days as defined at new loan setup.
- Servicing managers contact borrowers by phone two days after the grace period expires and input collection notes in the servicing system or into the imaging system. The company assesses the situation and sends default notices in compliance with servicing agreements, which could be up to 30 days past due. This is a lengthier time frame than those of peers.
- Management reviews system-generated delinquency reports in weekly and monthly discussions for watchlist/credit review inclusion and potential transfer to special servicing.
- Transfers to special servicing are monitored for compliance with pooling and servicing agreements and investor agreements.
Loan Administration – Special Servicing
The loan administration subranking is STRONG for special servicing.
PrinREI has built a track record of successfully managing and disposing of troubled assets nationwide through multiple economic cycles, while handling complex assets collateralized by diverse property types. From January 2009 through June 30, 2020, the company resolved 500 loans with a UPB of over $4.9 billion
The special servicing group handles nonperforming loans and real estate-owned (REO) assets. Most of the active special servicing volume has historically involved non-CMBS life insurance company assets and structured debt assets, which also holds true as of June 30, 2020, because no CMBS loans were being actively special serviced.
Like our other ranked special servicers, PrinREI experienced a sudden increase in special servicing transfers due to the COVID-19 pandemic in the first half of 2020, with the active portfolio growing by nearly $1.1 billion in UPB from the end of 2019 (see table 7). Consistent with observed industry trends, the vast majority (54.0%) of PrinREI's 63 first-half 2020 transfers were retail assets. During the same timeframe, nine loans secured by lodging properties were also transferred, and it should be noted that the company has a very modest exposure to the lodging property segment. As of June 30, 2020, there were 68 active non-CMBS loans (63 performing and five nonperforming) and one REO asset in special servicing, with aggregate UPB of $1.1 billion. PrinREI's active special servicing portfolio includes both affiliated and nonaffiliated clients. Each client has different strategic goals, driven by tax implications, liquidity, and investment criteria, which greatly influence loan workout strategies and REO hold times. As of June 30, 2020, the investment real estate portfolio comprises 498 assets with a value of $30.5 billion, (see table 7) and has averaged $32 billion in value and 627 properties from Dec. 31, 2016 to June 30, 2020.
PrinREI's recent loan resolution volume included 59 loans with a UPB of $670.9 million in the first half of 2020, five loans with a UPB of $18.5 million during 2019, and 15 loans with a UPB of $48.7 million during 2018 (see table 8). All but one resolution was "returned to master" for the first half of 2020, with an average resolution time of 1.9 months.
The average resolution time during the first half of 2020 is more rapid than industry norms; however, it was largely driven by loans being considered for COVID-19 pandemic-related forbearance/relief requests. Loan resolution times averaged 6.0 months during 2019 with four out of the five resolutions reported as full payoffs. During 2018, PrinREI reported more diverse resolution activity among its 15 loan resolutions (nine "returned to master", five full payoffs, and one foreclosure) and a longer average resolution time of 14.1 months, skewed by nine loans that involved protracted workout scenarios (see table 8). The sample workout plans we reviewed indicate a thorough current status, analytical review, and course of action.
PrinREI reported a total of 103 employees/resources in its special servicing operations as of June 30, 2020, that are allocated as follows:
- Three employees are dedicated full-time to special servicing, and all responsible for loan asset management. This team is led by the director of special servicing, with 32 years of industry experience and company tenure, and includes two asset managers with 14 years and five years, respectively, of industry experience and company tenure.
- As many as 100 real estate equity asset management employees, who are responsible for the company's investment real estate assets, would be directly involved in the REO process, overseeing foreclosed properties. The equity asset management area is led by a senior managing director with 35 years of industry experience and company tenure.
- Asset managers are distributed in teams that are aligned across three regions in the U.S. (western, central, and eastern), enhancing direct knowledge of local market conditions. These 18 asset managers responsibilities include developing and executing business plans, budgeting, selecting and overseeing third-party leasing teams, and hiring property managers.
Within the PrinREI equity asset management group is an acquisitions/disposition team that develops hold/sell analysis and provides input to asset management on positioning an asset for marketing. Its employees are distributed across two regions (western and eastern) and have a deep network of long-standing relationships with buyers, developers, joint venture partners, borrowers and brokers. From 2001 through 2019, the group has stabilized/sold 345 projects in the U.S. valued at $16.5 billion, on behalf of PrinREI clients.
PrinREI also utilizes the efforts of commercial mortgage servicing, private debt origination, in-house counsel, appraisal services, engineering services, and external counsel, to support the efforts of its dedicated special servicing personnel.
|Special Servicing Portfolio|
|Jun. 30, 2020||Dec. 31, 2019||Dec. 31, 2018||Dec. 31, 2017||Dec. 31, 2016|
|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)|
|Total special servicing||1,124.6||68||5.1||37.6||6||26.4||30.2||5||28.3||55.9||14||26.2||157.0||22||19.1|
|Investment real estate||30,450.8||498||--||31,166.7||508||--||28,547.9||473||--||34,797.8||829||--||33,637.9||829||--|
|Note: Totals may not add due to rounding.(i)Avg. age reflects the time in months from the date the loan first became specially serviced to the reporting date.|
Loan recovery and foreclosure management
PrinREI displays effective and proactive, loan recovery and foreclosure management protocols to efficiently resolve nonperforming loans across a broad spectrum of property types. Highlights include the following:
- The special servicing team formalizes an asset recovery plan within 30 days of transfer, well within industry norms, which must be approved by the portfolio asset management committee. This committee comprises the CEO of PrinREI, senior managing director-–portfolio management, assigned client portfolio manager, managing director-–commercial mortgage servicing, senior managing director-–private debt origination, the special servicing asset manager not assigned to the transaction, and for Principal Life Insurance Co. loans only, the chief investment officer or portfolio manager.
- Special servicing updates recovery plans upon any significant change in restructure negotiations, foreclosure, or bankruptcy filing.
- Foreclosure recommendations result in ordering third-party fee appraisals, engaging outside counsel, and assessing environmental issues. The team initiates the appointment of a receiver when applicable.
- The special servicing team holds regular meetings during the foreclosure process and notifies the accounting/financial management, operations management, and real estate equity groups of pending foreclosures.
- An online database application tracks timeline milestones during the recovery and foreclosure process.
- Upon taking title, same-day emails notify all parties, including corporate accounting, that a loan has been transferred to REO, at which time all systems are updated.
|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||666.5||58||1.7||1.0||1||4.7||38.3||9||10.0||87.3||12||8.4||35.7||9||3.4|
|DPO or note sale||0||0||N/A||0||0||N/A||0||0||N/A||2.9||2||20.3||9.5||1||20.0|
|Note: Totals may not add due to rounding. (i)Avg. age reflects the time in months from the date the loan first became specially serviced to the reporting date. (ii)Data only includes the first six months of the year. UPB--Unpaid principal balance. DPO--Discounted payoff.|
REO management and dispositions
PrinREI demonstrates proactive REO management and sales oversight. Notable aspects include the following:
- PrinREI's equity operations staff is responsible for overall coordination and selection of property management companies, leasing activities, capital improvements, and dispositions.
- PrinREI selects all third-party service providers, including property management companies, and leasing and sales brokers, based on approved vendor lists compiled by each functional area. The lists are based on credentials, experience, reputation, performance, and fees. The approved vendor list is reviewed annually.
- Property management companies are engaged before foreclosure and are supplied with PrinREI's property management manual and accounting software. The manual is comprehensive and includes detailed standardized procedures, as well as specifics on operating and reporting requirements.
- Within 30 days of taking title, asset managers perform site inspections and develop business plans including an operating budget and capital expenditures.
- The real estate investment committee approves REO plans, and PrinREI updates them during the fourth quarter of each year to establish budget information and refine the asset strategy for the coming year.
- The property management company electronically provides standardized monthly financial and property status reports, which are uploaded to OnBase and the REO accounting system.
- All sale offers are approved by the real estate investment committee, and, upon acceptance, the equities investment management team facilitates the closing with accounting and local counsel.
PrinREI has completed 12 REO property sales since 2016 (see table 9). The company's strategy is internal rate of return driven in determining whether to execute a quick REO sale or invest in the property. In general, over the past five years, PrinREI achieved favorable gross sales-to-market value ratios for its REO dispositions. Additionally, from 2016 through the first half of 2020, PrinREI sold 624 investment real estate assets for a total of $20.2 billion, demonstrating its substantial disposition experience (see table 9). The outsized 2018 volume of $11.5 billion included the real estate assets of a PFG subsidiary that PrinREI sold during that year.
|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||0.0||0||N/A||0.0||0||N/A||13.9||2||3.5||76.8||2||45.2||41.7||8||30.9|
|Gross sales proceeds||0.0||0||N/A||0.0||0||N/A||13.9||--||--||76.8||--||--||46.9||--||--|
|Net sales proceeds||0.0||0||N/A||0.0||0||N/A||7.7||--||--||75.7||--||--||44.6||--||--|
|Gross sales proceeds/market value (%)||0.0||0||N/A||0.0||0||N/A||100.0||--||--||100.0||--||--||112.4||--||--|
|Net sales proceeds/market value (%)||0.0||0||N/A||0.0||0||N/A||55.4||--||--||98.6||--||--||106.9||--||--|
|Sale of investment real estate||1,399.2||33||N/A||2,438.2||43||N/A||11,488.0||425||N/A||3,294.2||74||N/A||1,612.1||49||N/A|
|(i) Data only includes the first six months of the year. REO-- Real Estate Owned.|
REO accounting and reporting
PrinREI's controls and procedures for property-level accounting and oversight are sound. REO accounting and reporting activities are effectively handled by the equities accounting group. Highlights include the following:
- Accounting handles all property accounting, including hard lockboxes, and performs monthly reviews and reconciliations of property manager reports and bank statement reconciliations.
- Tenant rent payments go into property-specific depository accounts, and a weekly automated clearing house process sweeps the funds to the appropriate client account.
- A zero-balance disbursement account is used for paying operating expenses, with property management companies receiving payment via wire transfers.
- Accounting also tracks and records all taxes and insurance on REO properties and works with asset management to ensure appropriate insurance coverage and tax appeals.
- Bank checking accounts are downloaded and reconciled weekly, and property managers submit weekly listings of checks issued.
- The accounting group reconciles deposit and disbursement activity with the monthly property manager's accounting packages via downloads to the REO accounting system.
- Property management companies are subject to random audits under a program by PrinREI's external auditor according to investor criteria and the PrinREI controller's area. Asset managers review the audit results, and any findings are reviewed and corrected.
Due to the COVID-19 pandemic, no on-site property management company audits were performed in the first six months of 2020. PrinREI performed 10 property management company audits in 2019.
PrinREI handles the management and oversight of subcontractors in a controlled and effective manner. It has appraisal and engineering professionals on staff that manage external consultants. The company has a formal performance review process for all vendors, and applies the following guidelines:
- Property managers and real estate brokers are selected per an approved vendor management list and standard agreements are used.
- Appraisal reports for problem loans are completed by an independent pre-approved consultant with a Member Appraisal Institute (MAI) designation, state license, or certified appraiser using a standardized engagement letter, depending upon the factors involved with the problem loan. The in-house MAI is responsible for reviewing the report.
- Environmental and property condition assessment reports are completed by pre-approved consultants in accordance with guidance documents. The in-house environmental engineer is responsible for requesting, reviewing, and providing recommendations to special servicing based on the findings in the Phase I report. The problem loan team collectively determines if a Phase II report is necessary.
Performing loan surveillance
PrinREI's special servicing group performs active surveillance on loans that have been identified as potential problem, which have imminent default risk or a short-term monetary default. Resources are coordinated and implemented based on each client's specific desired financial result. Notable aspects include the following:
- The special servicing team is assembled once a loan is considered a watchlist loan.
- Loans are included on the company's active watchlist based on one or more of the following: imminent default, 30-day delinquencies, nonpayment of taxes or insurance, tenant bankruptcy, or breach of legal or technical requirements.
- The team holds a fact-gathering meeting once an asset is included on the watchlist, at which time the team develops preliminary strategies. If, based on the review, the team deems it appropriate to transfer the loan to special servicing, the team updates applicable systems.
- PrinREI uses support teams (appraisal and engineering) for updated appraisals, inspections, and environmental analysis.
- Special servicing meets semi-annually with private debt origination and portfolio management to decide whether to add loans to the watchlist, according to criteria that varies by client.
- Special servicing provides monitoring and quarterly surveillance reporting for each client's watchlist loans.
PrinREI maintains a well-controlled legal function. Currently, two in-house attorneys support the servicing operation; however, the number of attorneys assigned to the servicing operation has historically varied in correlation with the volume of problem assets.
Other notable aspects of the legal function include the following:
- The legal division engages external counsel based on approved vendor lists. External counsel handles litigation, bankruptcies, foreclosures, and loan restructures.
- In-house attorneys oversee outside counsel and approve the payment of all legal bills.
- Servicing will also leverage in-house counsel for complex transactions, document interpretation issues, and complex borrower requests.
The financial position is SUFFICIENT.
- Select Servicer List, Dec. 1, 2020
- Principal Financial Group Inc., June 23, 2020
- Research Update: Principal Financial Group Outlook Revised To Negative On Weaker Capital Adequacy; Ratings Affirmed, April 27, 2020
- U.S. Commercial Mortgage Servicers Preparing For Impact From COVID-19, April 3, 2020
- Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019
- Servicer Evaluation: Principal Real Estate Investors LLC, Dec. 17, 2018
This report does not constitute a rating action.
|Servicer Analyst:||Geoffrey C Danek, Centennial + 1 (303) 721 4689;|
|Secondary Contact:||Steven Altman, New York + 1 (212) 438 5042;|
|Analytical Manager, Servicer Evaluations:||Robert J Radziul, New York + 1 (212) 438 1051;|
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