Rationale

S&P Global Ratings' overall ranking on LNR Partners LLC (LNR) is STRONG as a commercial mortgage loan special servicer. On May 30, 2023 we affirmed this ranking (please see LNR Partners LLC STRONG Commercial Mortgage Loan Special Servicer Ranking Affirmed; Ranking Outlook Stable published May 30, 2023"). The ranking outlook is stable.

Our ranking reflects LNR's:

• Experienced and tenured senior managers and asset management staff, as well as its well-defined organizational structure;
• Well-automated technology systems, which include a proprietary asset management system that supports the company's platform and allows 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;
• Highly effective analyst training program;
• Robust surveillance practices; and
• Demonstrated track record and ability to successfully resolve a high volume of defaulted CMBS loans and manage real estate-owned (REO) assets of all levels of complexity.

Since our prior review (see "Servicer Evaluation: LNR Partners LLC," Jan. 5, 2022), the following changes and/or developments have occurred:

• LNR's named special servicing portfolio increased to 182 securitized transactions from 158, and the underlying collateral increased to 7,194 loans with an unpaid principal balance (UPB) of $112.3 billion as of Dec. 31, 2022, compared with 5,501 loans with a UPB of $81.5 billion as of June 30, 2021.
• LNR's active special servicing portfolio, which is among the industry's largest, had an UPB of approximately $5.3 billion as of Dec. 31, 2022--a 41.4% decrease from $9.1 billion as of June 30, 2021.
• Loan volume declined 35.9% to $3.7 billion (126 loans) from $5.8 billion (225 loans), and the REO portfolio shrunk over 50.0% to $1.6 billion (76 properties) from $3.3 billion (158 properties) because loan resolution and REO disposition activity far outpaced new loan transfers, despite the meaningful increase to LNR's special servicing appointments.
• Since mid-2021, LNR resolved 193 loans with an aggregate UPB of $4.2 billion, including 97 loans with a UPB of $2.8 billion that were returned to the master servicer.
• Management reduced its annual training hour requirement to 22 hours from 40 hours and met its lowered target in 2022, with employees averaging 32 hours. The lowered target is an overall average and is mindful of the training hours required for different positions, depending on the role.
• LNR discontinued using the third-party vendor application Financial Industry Computer Systems (FICS) and replaced it with its own proprietary LNR Partners Asset Management System (LPAMS). LPAMS now represents the internal core system LNR uses to reconcile with master servicers and provide posting instructions.
• In January 2022, LNR relocated its Miami Beach, Fla. office to a new 144,430 sq. ft. office building within Miami Beach that also contains SPT's headquarters.

The ranking outlook is stable. LNR's asset manager staffing remains at levels that, in our view, allow for the handling of meaningful incremental volume, which is likely in 2023, given the expected refinancing challenges in the industry. As of Dec. 31, 2022, LNR's loan asset managers handled approximately 5.5 loans on average, and REO asset managers were responsible for an average of 6.3 REO properties on average. Should it need additional staff to handle the expected influx of maturity defaults in 2023 ($9 billion of the portfolio matures during the year), we expect management to initially look elsewhere in the company before recruiting from the outside, much like the successful approach it adopted during the pandemic.

In addition to conducting a site visit with servicing management, our review includes current and historical servicer evaluation analytical methodology data through Dec. 31, 2022, as well as other supporting documentation provided by the company.

Profile

LNR, headquartered in Miami Beach, is a market leader in both CMBS and commercial real estate special servicing and debt investing. The firm is a subsidiary of Greenwich, CT headquartered Starwood Property Trust Inc. (SPT), a diversified finance company operating in four business segments: commercial and residential lending, real estate investing and servicing (REIS), property, and infrastructure lending.

LNR operates within the REIS business segment, and the company and its predecessors have been investing in and managing commercial real estate debt for more than 30 years. LNR's investment management division operates its business separately and apart from the special servicing division, and it has policies to manage the inherent conflicts of interest. This division is involved in purchasing and/or selling CMBS bonds, including B-piece investments (it also teams up with other B-piece investors), which lead to special servicing appointments. LNR also performs third-party special servicing and has successfully obtained meaningful growth from such clients since our last review.

As of Dec. 31, 2022, LNR was appointed on $108.5 billion of securitized special servicing transactions (based on UPB) and managed $5.3 billion of active specially serviced loans (see table 1). As of Dec. 31, 2022, the underlying collateral associated with these transactions was spread across 182 transactions with nearly 7,200 loans. According to management, LNR resolved more than 7,200 non-performing assets with a total UPB of $88 billion since inception.

Table 1

Management And Organization

The management and organization subranking is STRONG.

Organizational structure, staff, and turnover

LNR has a highly experienced and tenured management team, and its staff are also significantly experienced. Its reported industry and company tenure metrics are comparable to other special servicers that we rank as STRONG (see table 2).

Table 2

As of Dec. 31, 2022, LNR reported 176 employees in its special servicing group. The president of REIS, who is also the president of Starwood Mortgage Capital (an SPT affiliate), reports to SPT's president, who in turn reports to SPT's CEO. The managing director, head of special servicing (MD-SS), who has more than 30 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); loan servicing, investor reporting and analytics; and surveillance.

Specifically:

• LAM is headed by a director with more than 30 years of experience. The 22-person-non-performing loan asset management team handles loan workouts as well as some of the more complex consent requirements associated with performing loans. The director oversees three nonperforming loan team leaders; the duties of two are segmented into geographic regions, and one focuses on hotel properties due to the unique nature and specific challenges associated with this asset class.
• A director, who reports to the LAM director, oversees the Borrower Services Group (BSG), a 13-person unit (including five rotational analysts) that is responsible for the review and approval of all leasing and property management requests as well as the review and approval of most assumption/transfer of ownership requests. The LAM director also oversees the seven-person team responsible for the LAM duties of SPT's CLO portfolios. In addition, a senior manager who oversees six staff members that handle special servicing 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 positioned to commence foreclosure.
• REAM, a 16-person unit, is headed by a director who has more than 40 years of experience (27 years with LNR). This group handles REO asset management and disposition functions. The director has four direct reports, including two highly seasoned 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 more than 30 years of experience, including 20 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 22 years of industry experience. This 13-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 totaled a relatively low 10.7% during 2022, less than half the 22.5% rate experienced during 2021. The overall headcount of 176 is identical to that reported at the time of our last review.
• LNR's reported metrics for experience and tenure among its senior, middle and asset managers all increased since our last review with a slight decrease in these metrics at the staff level.
• As of Dec. 31, 2022, LNR's loan asset managers handled approximately 5.5 loans (compared with eight at to our last review) on average, and REO asset managers were responsible for an average of 6.3 REO properties (compared to approximately seven at our last review).

Training

LNR has a highly 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, and help many staff members become successful in their positions, leading to several promotions.

Specifically:

• 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 (which proved effective during the pandemic), and offering a clear career path for entry level hires. Internal promotions of analysts are encouraged, and 68 of the 209 analysts who participated in the program remain with the company, including 17 program graduates currently working in special servicing.
• Department managers are responsible for determining specific training needs within their group.
• 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.
• Training hours are tracked by the director of surveillance in a manual process. Since our last review, management reduced its annual training hour requirement from 40 hours to 22 hours and met its lowered target in 2022, with employees averaging 32 hours. The lowered target is an overall average and is mindful of different training hours required for different positions, depending on the role and level of experience.

Systems and technology

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 29-person department supports 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 and development committees, and in-house liaisons in LNR's special servicing departments for continued improvements and enhancements. Key elements considered in our assessment 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 produces 287 customized loan-, property-, deal-, and portfolio-level reports.
• The LPAMS database is updated frequently and supports the extensive reporting and analysis that is fundamental to REIS's CMBS management requirements.
• Since our last review, the third-party vendor application FICS is no longer in use and has been replaced with LPAMS. LPAMS now represents LNR's internal core system used to reconcile with master servicers and provide posting instructions.
• Used as an underwriting tool, Nexus Dashboard is a proprietary user interface aggregating internal data from LNR's workout history, watch list, and surveillance comments as well as all loans originated by its 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; it 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.
• Microsoft Power BI acts as a report designer, and provides flexibility in pulling data from different sources, dynamic analytics, and visualization tools that work on PCs and mobile devices.
• LNR uses document imaging across the organization to facilitate online access to CMBS pooling and servicing agreements (PSAs) and loan-level documents.
• LNR utilizes Worksmart (Appian), which interfaces with LPAMS, the DataMart and Power BI as an electronic document approval system. Since our last review, Appian had several automation enhancements, including modifying key workflows and creating new ones to increase the efficiency of documentation processing.
• Appian portals facilitate communication with borrowers (Borrower Portal) and controlling class representatives (CCR Portal).

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 are in Miami and Alpharetta, Ga., and offer security and disaster preparedness. Both facilities provide SSAE-18 SOC reports where security and environmental controls are audited annually.
• Servers are fully backed up weekly with incremental backups daily until the next full backup. All critical servers are replicated to the DR site in near real-time.
• The DR plan is extensive and detailed and includes a recovery time objective of 12 hours for specific applications to be recovered from its primary data center. The plan is stored and maintained on the corporate intranet, with hard copies maintained at all IT-staffed sites. Its DR plan is tested and reviewed annually by SPT's chief information officer. LNR concluded its most recent DR testing on August 19, 2022 and experienced no loss of functionality or data.
• Its DR and BC plans include response procedures to address an 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 all company IT resources--as well as desktop and business applications--to resume work from their homes, a workplace recovery site, or another company office.
• In addition, an employee backup location providing recovery services for 32 employees for a 30-day period are in preferred Florida co-working office space 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.

Cybersecurity 

• SPT/LNR has deployed the industry-recognized National Institute of Standards and Technology cybersecurity framework, procedures, and infrastructure to protect against cybersecurity threats. It maintains an extensive information security program 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 semi-annually, and penetration testing is performed by a third party annually. The last test, performed on Dec. 22, 2022, cited no material problems. In addition, monthly scans of perimeter systems and internal hosts are conducted and addressed.
• Access to sensitive data and information via SPT's computer information systems is limited to associates who have a legitimate business reason to access such information. SPT has policies and procedures in place to complement the technical safeguards to provide security to its information systems and data.
• Single sign-on and multi-factor authentication are utilized to provide identity governance.
• In addition, LNR maintains cybersecurity insurance that covers consumer credit monitoring services, remediation services/cost of a cybersecurity event, and specified vendor cybersecurity risk.

Internal controls

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 considered in our assessment 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 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 identify new specific issues affecting 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--have developed a standard review and audit testing program 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 bases, 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, SPT maintains a code of conduct handbook that includes provisions to avoid conflicts of interest; employees are required to acknowledge receipt of the handbook at the start of employment and annually thereafter.

Internal and external audits 

• Audits are conducted by SPT's internal audit department, of whom the 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.
• Since our last review, SPT's internal auditors performed a review of REO assets managed by REAM. The July 2022 audit performed testing for the period between January 2021 and February 2022 to ensure that management implemented agreed upon recommendations from a prior audit. This audit received an overall "satisfactory" rating. The audit scope covered a variety of servicing processes, including policies and procedures, REO bank accounts, REO reports, business plans, leases, licenses and permits, REMIC compliance, appraisals, real estate taxes, subcontractor/vendor contracts, REO takeover and transition and REO disposition.
• SPT's internal auditors performed an additional review of REO assets managed by REAM. The January 2023 audit received a "satisfactory" rating and reviewed processes and performed testing for the period between January 2022 and September 2022. The audit scope covered the following areas: accounts payable; inventory and certificate of occupancy; licenses, permits and insurance; cash receipts; management agreement compliance and revenue and receivables.
• SPT's internal auditors perform an annual review of loan servicing. The December 2022 audit received an overall "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.
• LNR performs an annual, platform-wide Reg AB attestation, which is examined by a major public accounting firm. There were no exceptions in the 2022 Reg AB certification.

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.

Loan Administration

The loan administration subranking is STRONG.

LNR's active special servicing portfolio, which is among the industry's largest, had an UPB of approximately $5.3 billion as of Dec. 31, 2022, a decrease of 41.4% from $9.1 billion as of June 30, 2021 (our last review; see table 3). Loan volume has declined to $3.7 billion from $5.8 billion, a 35.9% drop and the REO portfolio shrunk more than 50% to $1.6 billion from $3.3 billion as loan resolution and REO disposition activity far outpaced new loan transfers, despite the meaningful increase to its special servicing appointments.

LNR has an extensive track record managing and disposing troubled assets nationwide while handling complex assets collateralized by multiple property types. LNR has resolved 678 loans with an UPB of $15.1 billion since 2018 (see table 4), and management also reported that it has resolved more than 7,200 nonperforming assets with a UPB of more than $88 billion since its inception.

LNR manages special servicing operations from its Miami Beach headquarters. As of Dec. 31, 2022, 176 personnel were employed within its servicing platform, including 23 dedicated loan asset managers and 12 REO asset managers. LNR expects servicer staffing to be flat during 2023 and anticipates hiring 15 new rotational analysts. Asset manager staffing remains at levels that, in our view, allow for incremental volume, which is likely in 2023 given anticipated refinancing challenges in the industry. As of Dec. 31, 2022, LNR's loan asset managers handled an average of about 5.5 loans (compared with eight as of our last review), and REO asset managers were responsible for an average of 6.3 REO properties (compared to approximately seven at our last review). While LNR believes there is sufficient capacity to handle the expected influx of maturity defaults in 2023 ($9 billion of the portfolio matures during the year), management noted that should it need additional staff, it would initially look elsewhere in the company before recruiting from the outside, much like the approach taken during the pandemic.

Table 3

Regarding the current portfolio's composition, the percentage of LNR's UPB consisting of REO assets decreased to 29.9% as of Dec. 31, 2022, from 35.8% of active special servicing inventory as of June 30, 2021 (our last review). As a percentage of UPB, property portfolio collateral was heavily weighted toward retail (47.0%) and office (21.2%), though all major property types--including mixed use (10.8%), lodging (9.3%), multifamily (2.8%), and industrial (0.1%)--were represented. The active portfolio remains geographically diverse, as properties are in at least 41 states throughout the U.S. The largest UPB concentrations are in the more populous areas, including New York (25.4%), Illinois (10.6%), California (8.5%), Arizona (6.4%), Texas (5.5%), and Pennsylvania (3.9%).

Loan recovery and foreclosure management

The LAM department is divided into three teams, each headed by a highly experienced (more than 25 years) and well tenured manager. Two of the teams are divided into two geographic regions, the East and West Coasts and Central. In addition, LNR LAM has a separate hospitality team specializing in hotels due to the specific challenges and unique nature of this property type. The hospitality team reports to the director of LAM until property title is acquired, at which time the team reports to the director of REAM.

During 2022, LNR completed 106 loan resolutions aggregating $2.4 billion in UPB and with an average resolution time of 18.3 months. This activity followed a year in which 176 loans aggregating $4.4 billion were resolved. The average time to loan resolution increased meaningfully year over year in 2022 to 18.3 months, which is more in line with pre-pandemic historical levels, from 13.1 months. LNR's recent resolution activity has been diverse, albeit skewed primarily toward workouts with the borrower since the onset of the pandemic. This is generally consistent with what we have observed from other CMBS special servicers, but which represents a bit of a departure from LNR's pre-pandemic more foreclosure-heavy metrics.

Table 4

LNR has well-described, effectively controlled loan file transfer, initial asset review, and system boarding procedures. 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. Recovery practices are based on maximizing net present value (NPV) under varying alternative recovery scenarios.

Specifically:

• Once a loan transfers it is then assigned to an asset manager taking into consideration the geographic location of the property, asset type, sponsor, complexity, and workload.
• 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.
• Within 60 days after a loan has become specially serviced, the asset is discussed at a monthly special servicing inventory meeting, where a standardized system-integrated business plan is presented with recommendations approved through authority delegations. Business plans, which are updated as workout discussion changes, are generated with key loan metrics that are automated from LPAMS. The control process is the same for approving foreclosures and pursuing deficiencies.
• LNR generally obtains two or three brokers' opinions of value (usually within 60 days after transfer and generally refreshed semi-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 uses both in-house and external counsel with bankruptcy expertise to assist loan asset managers through the bankruptcy process when required.
• Analysis procedures include REMIC considerations, advancing/non-recoverability 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.

REO management and dispositions

REAM handles all REO assets and is 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. 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 department 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.

LNR has significant experience handling sales transactions throughout the U.S. for all main income-property types as well as specialized assets, such as golf courses. Since 2018, LNR has sold approximately 480 REO assets for gross proceeds of nearly $3.8 billion (see table 5). It further reported that since inception, it has managed and sold approximately 2,800 CMBS REO properties for aggregate proceeds of $27 billion as a special servicer.

LNR's average hold time for REO sales of 34.4 months during the full year 2022 was slightly lower than the 35.7 months reported in 2021, but a bit longer than each of the prior three years. In addition, average gross sales proceeds have either approximated market or exceeded estimated value during the past several years reaching a multi-year high of 112.8% in 2022. 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 5,100 leases, with total term rent of nearly $3.3 billion during the past nine years, demonstrating its ability to create value.

Table 5

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 in a standard reporting package. 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 an advance watch report designed for master servicers to have updated information to make informed advancing decisions in considering non-recoverability.

Subcontracting management

LNR 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 LPAMS.
• The asset manager and team leader review the selected vendors before engagement. Selection is generally based on property type, location, and the vendor's experience and performance.
• LNR uses standard engagement letters for all service providers, and the servicer tracks active assignments on LPAMS.
• 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 a named special servicer. In addition to monitoring CMBS portfolio performance, the surveillance group interacts with master 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 the loan documents 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 (approximately 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.
• Surveillance evaluates concerns including deteriorating property performance and/or condition, maturity risk, imminent tenant rollover, and making sure built-in loan document protections like cash traps and reserves are maintained in a timely manner.
• 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 it adjusts projected losses based on information from the LAM group.

Borrower requests

LNR has an 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:

• 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 agreements, and property management change requests on performing loans.
• BSG also handles the review, approval, and processing of the less complex assumption/transfer of interest requests.
• The LAM group handles the more complex assumption transactions, as well as collateral and escrow modifications, property releases, etc.
• During 2022, LNR reported that it processed 820 consent requests on loans with an aggregate UPB of $23 billion, including 497 that were related to leasing consent reviews, 81 pertaining to assumptions, 55 management changes, with the balance primarily a combination of forbearance, collateral releases and miscellaneous requests.

Legal department

LNR has a seven-person legal department to advise asset managers, engage counsel from its approved attorney list, and track litigation progress.

Specifically:

• 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 ProLaw, that facilitates case management and invoice reviews within the legal department. However, asset managers review legal bills before payment is authorized.

Financial Position

The financial position is SUFFICIENT.

Related Research

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