Rationale

S&P Global Ratings' overall ranking on Brookfield Real Estate Financial Partners LLC (BREF) is AVERAGE as a commercial mortgage loan special servicer. On Dec. 19, 2019, we affirmed the ranking (see "Brookfield Real Estate Financial Partners LLC AVERAGE Ranking Affirmed; Outlook Stable", published Dec. 19, 2019). The outlook is stable.

BREF has not managed any special servicing assignments for several years now and was not formally appointed as a special servicer on any transactions or loans as of June 30, 2019. Nonetheless, given the breadth and depth of the industry experience of the personnel available to manage distressed assets and the company's documented policies and procedures, we believe that BREF has significant capability to handle a small portfolio of specially serviced loans, including large and complex assets.

Our ranking reflects BREF's:

• Capacity to operate as an effective special servicer, particularly for larger, complex commercial mortgage loans;
• Institutional backing and infrastructure support from its parent company, Brookfield Asset Management Inc. (BAM), a global alternative asset manager;
• Highly experienced and tenured senior management and asset management staff;
• An internal control environment that includes thorough policies and procedures, but lacks a regular internal audit to test their effectiveness;
• Sound technology systems to manage its investment funds, but lack of a dedicated special servicing system;
• Limited training program, which is not unusual given the small role that special servicing plays in the organization's business plan and the high experience levels of designated special servicing personnel; and
• No active special servicing appointments nor loan resolutions for several years.

Since our prior review (see "Servicer Evaluation: Brookfield Real Estate Financial Partners LLC," published May 15, 2018), the following changes and/or developments have occurred:

• In September 2019, BAM acquired 62% of Oaktree Capital Group LLC, a global alternative investment manager with $120 billion in assets under management (AUM) as of June 30, 2019.
• BREF's fourth closed-end real estate fund, BREF IV, has largely paid off, and its first open-ended senior mezzanine debt fund, launched in December 2017, has grown to $814 million in AUM with a year-end target of $1 billion. BREF plans to launch a sixth closed-end fund after concluding the investment of BREF V.
• BAM has implemented improvements to its systems and technology environment, including the deployment of Microsoft Exchange Online, SharePoint, and Office 365, and the implementation of information security improvements such as next generation firewalls, privileged access management, and multi-factor authentication.

Outlook

The outlook is stable. We expect that BREF will maintain the people, processes, and technology systems required to administer a small portfolio of specially serviced loans in accordance with generally accepted servicing practices. Its experienced management team and strong real estate platform should enable it to be an effective special servicer when necessary.

In addition to conducting an on-site meeting with servicing management, our review included current and historical Servicer Evaluation Analytical Methodology (SEAM) data through June 30, 2019, as well as other supporting documentation provided by the company.

Profile

BREF manages subordinate debt funds for sovereign entity and large institutional investors including BAM, its parent holding company. BAM is a large global alternative asset manager of real estate, renewable power, private equity, and infrastructure sector assets with over $500 billion in AUM as of Sept. 30, 2019. Headquartered in Toronto, BAM has offices across North America, South America, Europe, Asia, and Australia. Brookfield Property Partners, BAM's most significant investment platform, is a substantial investor in commercial real estate equity portfolios containing office, retail, multifamily, hospitality, and self-storage properties. As of Sept. 30, 2019, BAM managed approximately $200 billion in real estate assets.

BREF was formed in 2002 to make high-yield commercial real estate loans within the U.S and has deployed $6.6 billion of capital in real estate finance transactions since 2004. Since inception, BREF has raised and invested five closed-end debt funds (two of which it's still actively managing), one open-ended senior mezzanine debt fund, and one separate account for an institutional investor. It primarily originates whole loans on high quality real estate assets, sells the first mortgage, and retains and manages the senior mezzanine position.

While BREF is not currently the named special servicer on any transactions or loans, the company has successfully resolved large specially serviced loans in the past. Furthermore, it has asset management responsibilities (including distressed asset workouts) for the loans in BREF's funds and has recently been active in foreclosure and real estate-owned (REO) asset management in its position in the capital stack as a mezzanine lender. Although this activity demonstrates some of the capabilities that BREF would use as an appointed special servicer, it is out of the scope of the assets covered by this review, which focuses on BREF's abilities and track record as an appointed commercial mortgage loan special servicer.

Table 1

Management And Organization

The subranking for management and organization is AVERAGE.

Organizational structure, staff, and turnover

BREF's senior and middle managers, and other staff members have experience levels that are greater than the average experience levels reported by ranked peers. Management and staff also have a high level of company tenure when compared to peers (see table 2 for BREF's experience and tenure levels).

Table 2

BREF maintains a relatively flat organizational structure with senior managers, and in some cases, an investment committee providing oversight and authorization on key asset management and special servicing decisions. BREF benefits from the institutional resources provided by its parent, including BAM's operations, design and construction, development, leasing, legal, and accounting and tax teams. Special servicing personnel also have access to BAM's larger roster of knowledgeable and seasoned commercial real estate and finance experts who can, if needed, assist with analysis and provide local market insights. We note that BREF's 22 reported full-time employees have significant responsibilities outside of special servicing, including origination, underwriting, closing, and asset management of performing loans.

BREF has historically reported low employee turnover rates, including in the first-half of 2019 and during the full-year 2018, when it reported 5% employee turnover during each period. However, we note that BREF did report a higher turnover rate of the accounting personnel that supports the funds than at the time of our last review (these employees are not included in BREF's 22 reported full-time employees, and thus are not included in the 5% turnover calculations).

Training

Training at BREF primarily occurs on-the-job and employee training hours are not comprehensively tracked. BREF's limited formal training program includes mandatory training for all investment personnel on topics including cybersecurity awareness and anti-money laundering. Additional training includes seminars, webinars, and conferences sponsored by the CRE Finance Council, Mortgage Banking Assn., and other industry organizations. Further, all employees, including attorneys and accountants, are encouraged to take the required training necessary to maintain professional certifications.

BREF targets six hours of formal training annually for its employees, which is a low target for a ranked servicer. Furthermore, BREF employees fell short of management's target during 2018, averaging just four hours. However, we note that BREF only tracks time spent on mandatory training offerings and not conferences and professional certifications. In our opinion, the company's lower number of completed and targeted training hours is consistent with its AVERAGE overall ranking and the much smaller role that special servicing plays in the organization's business plan.

Systems and technology

We believe BREF has acceptable technology to meet the special servicing requirements for a small portfolio of loans since it does not a have a dedicated asset management/special servicing system, and relies more heavily on Excel spreadsheets than many of our higher ranked special servicers. At the same time, BREF has well-designed data backup routines and disaster recovery preparedness.

Since our last review, BREF made the following enhancements to its systems and technology environment:

• Implementation of a global mobile device management solution;
• Deployment of Microsoft Exchange Online, SharePoint, and Office 365;
• Improvements and enhancements related to information security including next generation firewalls, privileged access management, multi-factor authentication; and
• Improvements and updates to voice and video network services.

Servicing system applications 

BREF uses a variety of system applications to support its operations. Key systems at BREF include:

• MS Dynamics 365, which is used for enterprise resource and customer relationship management;
• Hyperion Financial Management version 11.1.2.4, which is used for financial reporting;
• eFront version 9.1, which generates custom reports; and
• Argus Valuation DCF software, which assists in real estate modeling and analysis.

Business continuity and disaster recovery 

A third party maintains production and disaster recovery (DR) data centers that host BAM's system data. The DR data center is located more than 25 miles from the primary data center and is on a separate power grid. Other aspects of business continuity and DR at BREF and BAM include the following:

• All BAM managed systems are backed up at least daily, while critical systems are backed up six times a day in an encrypted format.
• In the event of a disaster, BREF indicated that it could recover key systems and data within 24 hours.
• A full-time BAM employee works with a third party to perform an annual disaster recovery test. The last test conducted in December 2018 identified no material issues.
• BREF employees can access core systems remotely through company provided laptops if they are unable to go to the office due to a natural disaster or other unforeseen event. BAM also owns significant commercial office space in each of its primary office locations that could serve as back-up workspaces.

Cybersecurity 

BAM maintains a formal cybersecurity program to protect confidential data and prevent cyberattacks that follows the National Institute of Standards and Technology framework. Key aspects of the program include the following:

• BAM maintains network firewalls, spam and web filters, switches, routers, and anti-malware software with regularly updated virus definitions.
• System patches are reviewed and implemented when released and updated as necessary.
• Third parties perform monthly network vulnerability testing and quarterly penetration testing.
• BAM sends semi-annual phishing emails to train its employees to increase awareness on these attacks.
• Since our last review, BAM implemented a number of security enhancements, including next generation firewalls, privileged access management, and multi-factor authentication.

Internal controls

As an SEC-registered investment advisor and part of a public company, BREF's internal control environment includes several internal and external reviews. Though BREF maintains thorough special servicing policies and procedures (P&Ps), they have not been updated for some time now and BAM's corporate audit services department conducts an internal audit of BREF on a less frequent basis than higher ranked servicers.

Policies and procedures 

BREF has thorough P&Ps that cover the handling of specially serviced loans from onboarding through resolution and are available to all employees on a shared network drive. Due to BREF's low special servicing volume, it has not updated its P&Ps for several years now. However, BREF did indicate that it does perform an informal review of the special servicing P&Ps on an annual basis.

Compliance and quality control 

BAM's compliance department maintains compliance and code of business ethics manuals that each affiliate SEC-registered investment advisor, including BREF, must adhere to. BAM compliance reviewed BREF in 2018 to examine its adherence to the in-place compliance program. No issues were raised from the review.

Internal and external audits 

According to BREF's management, BAM's corporate audit services department conducts internal audit reviews based on risk assessments associated with each specific business unit. Because BREF is deemed to be low-risk, the corporate audit services department has not performed a review of BREF since September 2013.

External audits of BAM, BREF, and other affiliated entities include an annual SSAE 16 and CSAE review of the Technology Services Group by an external audit firm. Additionally, as a publicly listed company, BAM must comply with the Sarbanes Oxley Act of 2012. Accordingly, an independent audit firm evaluates the effectiveness of BAM's internal controls over financial reporting. All of BAM's funds and public entities also have an annual external audit of their financial statements.

Notwithstanding the above, given the lack of special servicing activity, BREF's adherence to its P&Ps has not been tested in a manner that affords S&P Global Ratings the ability to examine its internal controls to the same degree that we are able to examine the internal controls of higher-ranked servicers. Further, Regulation AB and Uniform Single Attestation Program audits are not required nor are they performed.

Insurance and legal proceedings

BREF has represented that its directors and officers, as well as its errors and omissions insurance coverage, are in line with the requirements of its portfolio size as of June 30, 2019. As of the date of this report, BREF reported that it is not currently facing any servicing-related litigation matters, and it is not subject to any defensive claims that, individually or in the aggregate, are expected to have a material impact on the company's financial status.

Loan Administration

The loan administration subranking for commercial mortgage special servicing is AVERAGE.

BREF has asset management responsibilities for the loans in its funds, including distressed asset workouts. However, it has not acted as an appointed special servicer nor has it completed a loan resolution as an appointed special servicer on a transaction during the last several years. Therefore, the subranking considers BREF's track record of handling select large, complex, special-servicing loans in the past and our review of BREF's special servicing P&Ps, which demonstrate a reliable and methodical approach to handling specially serviced assets.

Loan recovery and foreclosure management

BREF's P&Ps describe properly controlled loan workout and foreclosure management processes. Features include the following:

• The assigned asset manager reviews the existing loan file--including insurance policies, cash management features, appraisals, and site assessments--and, with the assistance of outside counsel, prepares applicable notices to interested parties, including the borrower, regarding the default.
• A site inspection of the property is conducted within 60 days of transfer to special servicing.
• Pre-negotiation agreements prepared by outside counsel before commencing workout discussions with borrowers are used.
• A case memorandum/business plan for each specially serviced loan is prepared within 30-60 days from the date of transfer, which is updated at least quarterly.
• The business plan includes a narrative describing the asset, its strengths and weaknesses, an evaluation of alternative strategies, a recommended disposition strategy, and a budget for the asset's projected life through disposition.
• Business plans must be approved by senior BREF management. Additional approval from the investment committee is required for discounted payoffs, REO and loan sales, and prior to a BREF foreclosure bid.
• The company's recovery process follows a dual path of borrower negotiations and the pursuit of legal remedies.
• If foreclosure is anticipated, the business plan would include recommendations for the appropriate outside counsel and property manager.
• Just prior to foreclosure, the asset manager obtains new appraisals, an updated environmental report, a property condition survey, and a title UCC search.

REO management and dispositions

BREF maintains thorough REO management and recovery procedures that include the following:

• Senior BREF management approves REO business plans within 45-60 days of taking title, including engaging the recommended property manager.
• BREF places the property on the company's REO insurance policy as required.
• Asset managers prepare an updated REO plan annually for each assigned REO, including a detailed 12-month budget based on information received from the property manager. The budget, and any subsequent budget revisions, must be approved by senior BREF management.
• Asset managers also monitor sales efforts through monthly broker activity reports.
• Upon disposition, in conjunction with the final realized loss calculation, asset managers prepare a disposition memorandum notifying all interested parties, including the master servicer, of the terms of the disposition, as well as a summary of the asset from transfer to special servicing through resolution.

REO accounting and reporting

BREF requires a single account structure for the deposit of rent collections and the disbursement of operating expenses (the operating account). Its property-level accounting procedures are as follows:

• The asset manager and property managers establish the operating account per instructions from BREF, which is a co-signatory on the account, immediately after assuming title. Asset managers work with BAM's accounting personnel and BREF's controller to set up these accounts.
• BREF's asset managers will also collaborate with the accounting department to set up an REO account at its corporate bank. On a monthly basis, asset managers instruct property managers to transfer the net cash flow produced from the property from the operating account to the REO account. Asset managers must obtain approval from BREF senior management to retain net cash flow in the operating account for pending non-budgeted operating or capital expenditures.
• Property managers use the operating account according to the approved budget, and asset managers submit requests for approval to BREF senior management for budget shortfalls or unforeseen operating costs.
• Monthly property manager reports include collections, property financial statements, and bank account reconciliations.

Subcontracting management

BREF has acceptable procedures for selecting subcontractors (property managers, brokers, appraisers, engineering, and environmental firms), for monitoring completion of the assignments, and for reviewing vendor work. The company has approved vendor lists that it uses as the starting point for selecting potential subcontractors. Generally, BREF seeks three bids for property management, real estate brokerage, and other services. Other control features include the following:

• Asset managers obtain the proposals and make vendor recommendations that must be approved by a senior BREF manager.
• While BREF does not use standard engagement letters, asset managers work closely with in-house and external counsel to ensure that all engagements conform to guidelines in the applicable controlling documents.
• Asset managers are responsible for informally supervising vendor performance according to the underlying agreement terms.
• Workout managers review all vendor invoices.

Performing loan surveillance

BREF's employees have asset management responsibilities for all of the loans in its funds including performing loans. Performing loan surveillance responsibilities include, as applicable:

• A monthly review of CMBS trust remittance reports to ensure regular payments, as well as monitor reserves, escrows, future funding requirements, and budgets;
• A review of the borrower reporting package, as required by the loan documents, for completeness; and
• A quarterly collateral performance review that includes an update on the asset performance as compared to the underwriting, an updated calculation of the debt service coverage ratio, and an updated loan covenant compliance sheet.

Legal department

BREF has two in-house attorneys that are available for consultation, including outside counsel engagement. We believe that BREF's legal function is well-controlled. Procedural highlights include the following:

• BREF primarily chooses its outside counsel from a select group of highly seasoned workout, foreclosure, and bankruptcy attorneys at well-known law firms.
• Upon engagement, the asset manager handling the workout and the vice president of closing will review the legal budget and ensure that the estimated fees are reasonable.
• Asset managers and the vice president of closing review invoices to ensure they are consistent with the budget, provide services related to the subject matter, and are reasonably rendered.
• All legal invoices must be approved by both in-house counsel and the asset manager.

Financial Position

The financial position is SUFFICIENT.

Related Research

• Brookfield Real Estate Financial Partners LLC AVERAGE Ranking Affirmed; Outlook Stable, Dec. 19, 2019
• Select Servicer List, Dec. 11, 2019
• Brookfield Asset Management Inc., Aug. 12, 2019
• Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019