Rationale

S&P Global Ratings' rankings on KeyBank Real Estate Capital (KBREC) are STRONG as a commercial mortgage primary, master, and special servicer. On Sept. 24, 2020, we affirmed the rankings (please see "KeyBank Real Estate Capital STRONG Rankings Affirmed; Outlooks Are Stable," published Sept. 24, 2020). The outlooks for all three rankings are stable.

Our rankings reflect KBREC's:

• Seasoned and tenured senior management team;
• Strong audit, compliance, and control environment;
• Effective technology systems and applications;
• Substantial institutional commitment to the servicing platform as evidenced by its Mortgage Bankers Assn. (MBA) 2019 year-end rankings, including its second-ranked market position as a Freddie Mac capital markets execution (CME) primary servicer and its top-three market position in CMBS primary and master servicing, accompanied by its top-three ranking across the aggregate of all investor types, as measured by unpaid principal balance (UPB);
• Market position per the MBA as the fourth-largest named special servicer as measured by UPB;
• Continued focus on staff development utilizing both internal and external training opportunities; and
• Diverse property types in its primary and master servicing portfolio, accompanied by strong geographic and investor diversity.

Furthermore, we believe KBREC has highly skilled and experienced personnel, a well-designed organizational structure, and effective technology to address its complex reporting requirements. KBREC's procedures and documented practices are robust, and the servicer is highly experienced with CMBS and government-sponsored enterprise (GSE) compliance issues. The internal audit process is a multi-level program with recurring operational risk reviews by the parent bank, KeyCorp, an annual Regulation AB (RegAB) review, an annual service organization controls (SOC 1) audit, and a dedicated compliance unit within the servicing organization that conducts quality control examinations.

Since our prior review (see "Servicer Evaluation: KeyBank Real Estate Capital," published April 16, 2019) the following changes and/or developments have occurred:

• An executive with extensive experience and tenure within the company was appointed as the executive vice president (EVP) to lead loan servicing and asset management after the retirement of the previous EVP in June 2019.
• KBREC enhanced its borrower/investor website to include features such as external document upload payoff quotes, reserve draws, and automated clearing house (ACH) enrollment.
• KBREC enhanced automation in various areas across the platform, including bank reconciliation, as well as operating statement, rent roll and inspection identification, categorization and data input that is aided by robotic process automation.
• KBREC's primary and master servicing portfolio grew nearly 27% to $325.6 billion. At the same time, actively special serviced assets increased exponentially to $4.2 billion from $662 million.
• As of mid-year 2020, KBREC was named the special servicer on 259 transactions (up from 214) aggregating $126.8 billion in UPB (up from $88.4 billion in UPB) across 129 CMBS (down from 142) transactions aggregating $47.2 billion in UPB (up from $36.8 billion in UPB); 129 Freddie Mac CME securitizations (up from 71) aggregating $79.5 billion in UPB (up from $51.5 billion in UPB); and one $82 million in UPB CLO (down from $112 million in UPB).
• In the wake of the COVID-19 pandemic, the special servicing group has onboarded personnel from underwriting and production groups to assist with the increased volume.

KBREC maintains a disaster recovery and business continuity plan, including response procedures to address operational disruption as a result of a pandemic event. KBREC implemented its plan in March 2020 due to the COVID-19 pandemic. Management reported that there were no disruptions to the company's operations or data facilities and that its employees all have the ability to work remotely.

Our outlook for all three rankings are stable. Despite challenges presented by the COVID-19 pandemic, we believe that KBREC will continue to perform as an overall effective commercial mortgage primary, master, and special servicer. KBREC's experienced management team has continued to successfully make the technological, procedural, and personnel adjustments necessary to administer a diverse portfolio.

In addition to conducting a virtual site visit 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.

Profile

KBREC is a business unit of KeyBank N.A., a wholly owned subsidiary of Cleveland-based KeyCorp, a U.S. commercial bank with $171 billion in assets and approximately 17,000 employees as of June 30, 2020. KBREC's servicing operations are primarily based in Overland Park, Kan., through its loan servicing and asset management division (LSAM), although of its 438 staff members, approximately 30 are located in Dallas.

KBREC is a full-service capital provider and mortgage loan servicer with 438 employees across its servicing platform. It provides origination and servicing activities for all commercial real estate (CRE) transactions from construction and bridge financing to permanent loans across the entire capital stack, including mezzanine and equity positions.

As of June 30, 2020, KBREC reported a primary and master servicing portfolio of $325.6 billion, including a master servicing portfolio of $86.5 billion of loans for which it maintained oversight responsibilities of 36 subservicers, including 10 servicers in its institutional portfolio where KBREC's responsibilities are limited in scope. As of June 30 2020, the majority (67.0%) of KBREC's primary and master servicing portfolio is contained within securitized structures, including 33.0% CMBS, 32.4% Freddie Mac CME and 1.6% CRE/CLOs.

As of June 30, 2020, KBREC was named the special servicer on 259 deals totaling $126.9 billion in UPB across 129 CMBS transactions aggregating $47.3 billion, 129 Freddie Mac CME securitizations aggregating $79.5 billion, and one $82 million CLO. Its June 30, 2020, active special servicing portfolio included 207 assets (201 loans and six real estate-owned [REO] assets) aggregating $4.2 billion in UPB. In addition to CMBS special servicing, the special servicing department provides workout support for agency, life insurance and pension funds, fund management, and warehouse groups. The special servicing department also has a dedicated team that provides due diligence services, including underwriting and performing loan surveillance to third-party investors.

Tables 1, 2, 3, and 4 provide further portfolio detail.

Table 1

Table 2

Table 3

Table 4

Management And Organization

The management and organization subrankings are STRONG for primary, master, and special servicing.

Organizational structure, staff, and turnover

KBREC conducts all servicing through LSAM, which is a division within KeyCorp's Key Real Estate and Corporate Banking Services business. As of June 30 2020, KBREC had approximately 440 people working within LSAM. The vast majority of the servicing staff is based in Overland Park, Kan., with the balance of LSAM headcount located in Dallas. KBREC reported that overall primary and master staff during 2020 declined by 15 (i.e., 3.6%); however, 11 of the 15 employees are part of the insurance flood team, which is no longer included in LSAM, as of Jan. 5, 2020, when they began reporting up through the corporate bank.

LSAM is managed by an executive vice president (EVP), who has more than 30 years of industry experience, including 20 years with KBREC. A seasoned and tenured group of six LSAM senior vice presidents (SVPs) report to the EVP. These SVPs oversee the following areas:

• Loan servicing and asset management for CMBS, GSE, Housing and Urban Development/Ginnie Mae investors;
• Loan servicing and asset management for institutional servicing clients, as well as responsibility for the business integration group;
• Accounting and investor reporting, which includes investor reporting and loan accounting; financial reporting; loan operations; risk management; insurance; and audit system maintenance, conversions and surveillance;
• Special servicing and transactions, which includes loan workouts, REO asset management, due diligence services, transaction underwriting, and special servicing business development; and
• Business development, which includes primary and master servicing business development for which two SVPs share responsibility.

KBREC management and staff overall have solid experience in commercial mortgage primary, master and special servicing, as well as tenure within the company (see table 5). However, we note that the retirement of the long-tenured head of LSAM and a senior special servicing executive (each replaced through internal promotions) have resulted in some degradation to the average industry experience of its senior managers since our last review.

Furthermore, special servicing asset managers (AMs) have 13 years of average workout experience and five years of tenure with KBREC, each below the respective levels of 18 and six, respectively, reported as of our last review. As a result, we note that during a period of rapid volume growth attributable to the COVID-19 pandemic, special servicing senior management and asset manager experience and tenure levels are at the lower end compared with those of other STRONG-ranked servicers. Nonetheless, we believe the organizational structure effectively addresses operational needs and staff accountability through a combined portfolio-driven and functional approach depending on the required process.

Table 5

During the first half of 2020 and full-year 2019, KBREC experienced 9.3% and 15.7% turnover, respectively, in primary servicing, which is largely consistent with historical industry turnover, as well as its STRONG-ranked peers. Similarly, KBREC's reported turnover of 16.6% (first-half 2020) and 25.9% (full-year 2019) in special servicing was consistent with industry trends.

Training

KBREC targets 30 hours of training per employee annually and reported 11 hours of average training during the first half of 2020 and 36 hours of average training completed per employee during 2019. We believe a 30-hour training target is adequate but note that during the first half of 2020, KBREC's reported training hours were at the low end of our STRONG-ranked servicers. Other training features include the following:

• The responsibility for administering training lies within KeyBank's Learning Organization (KBLO) in tandem with the managers for each of KBREC's divisions.
• Courses are delivered with participation tracked via KeyBank's web-based learning management system (Keys2Learn), webinars, internal subject-matter experts, KBLO, LSAM managers, and compliance managers.
• Training course types include industry-specific (conferences, continuing education, and professional certifications), managerial/leadership development, compliance, functional management, business acumen, interpersonal effectiveness, and systems.
• Participation in LSAM's training program is a measured component of employees' annual performance review.
• KBREC supports staff obtaining MBA accreditation with 129 employees having obtained Level 1 Commercial Mortgage Servicer (CMS) certification and 39 staff members having obtained Level II CMS certification since the firm's inception. At the time of our review, 67 staff members with Level I CMS certifications and 23 with Level II remain with KBREC.
• It periodically offers a year-long Emerging Leaders Training Program (ELTP). The program is designed to enhance workplace communication, collaboration, and leadership abilities for current managers and individual contributors. However, the latest program, which included 24 participants, concluded in May 2018.

Systems and technology

We believe KBREC has effective technology to meet its primary, master, and special servicing requirements. KBREC continues to focus on technology enhancement projects to further streamline and automate servicing tasks across various loan administration functions. KBREC has well-designed data backup routines and disaster recovery preparedness and has a formal and comprehensive cybersecurity protection. Notable features and highlights of the systems and technology used are described below.

Servicing systems and applications 

• KeyCorp has a dedicated information technology staff of 25 employees (up from 16 as of our last review) to support KBREC's technology needs, including programming, data backups, and application support.
• KBREC uses McCracken Strategy version 19A (Strategy), for its accounting and loan servicing tasks. Strategy is interfaced with the origination and general ledger systems.
• KBREC also uses a proprietary-designed asset management application, RECWeb, which is supported with six scheduled releases per year. RECWeb significantly supports servicing, adding functionality for data aggregation, workflow management, and detailed covenant and compliance triggers not contained in Strategy.
• RECWeb includes property financial statement analysis input and an integrated module for its cash-managed loans.
• RECWeb has an integrated document imaging component, and its workflow processing component uses electronic approvals to manage all pending work requests and compliance with respective servicing and loan agreements.
• KBREC uses RECWeb to track and monitor the status of loans that potentially could move to special servicing. KBREC also manages the progress of specially serviced loans through the RECWeb application, which contains additional loan- and property-level data that cannot be stored in the servicing system.
• Special servicing reports for third-party master servicers' are provided through the data warehouse using a combination of the servicing system and RECWeb modules.
• The servicing system and RECWeb download data daily to a data repository to produce management and operational performance reports.
• KBREC uses Key2CRE, a proprietary system, to provide borrowers and investors website access to loan data and property information. The system receives daily downloads from the data repository. Since our last review, enhancements were rolled out including external document upload payoff quotes, reserve draws, and ACH enrollment.

Business continuity and disaster recovery 

• The Overland Park and Dallas sites serve as reciprocal locations for disaster recovery and business continuity.
• A detailed business resiliency policy is maintained, reviewed annually, and approved by KeyCorp's board of directors' risk committee. As policy, the company performs annual disaster and business recovery tests, and the latest test (February 2020) reported no issues.
• KBREC implemented its plan on March 2020 due to the COVID-19 pandemic. Management reported that there were no disruptions to the company's operations or data facilities and that its employees all have the ability to work remotely.
• Offsite primary data storage is located in Solon, Ohio, and the disaster recovery and backup site is located in Aurora, Ill.
• Backups of the Strategy, Key2CRE, and RECWeb applications and respective data are performed daily, weekly, and monthly. The backup files stored in Aurora that are needed to process and perform loan servicing and accounting functions have a goal to resume critical processing within 24 hours of a disaster at the primary data center. Strategy is a Gold Tier application within the bank, which indicates it is a critical system to KeyBank and receives priority in recovering from a large scale outage.
• KeyCorp has a robust, redundant system in place for backup power to both of the data centers that allows for total loss of utility power without interruption to computer services. There are uninterruptible power supply and generators available to prevent any disruption, fuel on hand to run for hours, and the ability to refuel in order to run continually for days.

Cybersecurity 

• A formal cybersecurity protection plan is maintained, which includes a stand-alone cyber insurance policy. Network penetration testing is performed four times a year, twice internally and twice by an external party, with each external test rotated amongst vendors. The latest external test performed in November 2019 cited no material issues. Cybersecurity training is also provided and phishing emails are randomly sent to employees on a monthly basis.
• Management notes that the company has experienced distributed denial-of-service attacks from technologically sophisticated third parties, which are intended to disrupt or disable online banking services and prevent banking transactions. It also periodically experiences attempted security breaches of its systems and data. Notwithstanding, to date, these cyberattacks have not resulted in any material disruption of operations or material harm to its customers, and has not had a materially adverse effect on its operations.

Internal controls

KBREC maintains strong internal controls that include extensive and well-documented policies and procedures, internal and external audits, and a quality control environment that includes proactive, well-documented compliance. The audit program includes internal staff, external auditor, client, and investor reviews. Features are described below.

Policies and procedures 

We believe KBREC operates with well-written, documented policies and procedures (P&Ps) that address primary, master, and special servicing functions. Revisions to the written manuals are controlled through a centralized review and approval process. Controls include the following:

• The P&P program, which is managed by the LSAM compliance team, includes creating, revising, and testing policies and procedures for operational and investor compliance, and the results are reported to senior management.
• The manuals, which are maintained on the company intranet, include indices, glossaries, and hyperlinks to various forms and exhibits.
• Pooling and servicing agreement (PSA) abstracts, which undergo legal review, are also available online for reference.
• CMBS P&Ps are intended to address real estate mortgage investment conduit and standard PSA requirements; specific or additional PSA requirements can also be accommodated within its systems to alert AMs and investor reporting staff.
• All of the P&Ps we reviewed have been revised or updated since 2018 (with the vast majority having been reviewed and/or revised during 2019 or 2020), and management indicated that a full review and update of P&Ps are generally performed every 12-18 months by the P&P owner.

Compliance and quality control 

• Servicing policies are risk-rated by KBREC's compliance area to determine the frequency of internal compliance sampling, and the reviews for all servicing areas. KeyCorp also requires KBREC to complete a quarterly line-of-business self-assessment known as the governance, risk, and control process.

Internal and external audits 

KBREC's additional operational controls and practices are solid. Highlights include:

• A major public accounting firm performs annual RegAB, and SOC 1 audits.
• The 2019 RegAB audit had no exceptions noted. The 2019 SOC 1 report, which covered the period through Sept. 30, 2019, received a clean opinion in a Dec. 13, 2019 report and the report scope entailed the same scope as the internal audit report noted below.
• KeyCorp's risk review group (i.e., internal audit) performs operational audits on an annual cycle. According to management, the latest audit, dated April 8, 2020, labeled KBREC's controls as "Effective," its highest internal rating, with no reportable findings. Areas tested included loan setup, payment processing, paid-in-full processing, escrow monitoring, servicing fees, investor remittances, change management, information security, computer operations and system backups.

Vendor management

In our view, KBREC engages and monitors outsourced service providers (i.e., systems, tax administration, etc.) and third-party vendors, which include appraisers, property managers, brokers, and environmental engineers, in a controlled manner.

• The vendor management process involves assessing, mitigating, and monitoring risks on an ongoing basis. Generally, the vice president of the department utilizing the outsourced vendor's services is the vendor manager with oversight from KeyCorp's corporate outsourcing and corporate security. Scheduled deadlines exist throughout each year to verify contract compliance, including insurance coverage, security, and quality/timeliness of the work product.
• The vendor manager typically conducts an annual on-site audit. Additionally, all third-party vendors are subject to regular quality review and feedback.
• For real estate service providers, AMs recommend vendors from approved vendor lists, subject to approvals per a delegation of authority (DOA) matrix.
• Standard form contracts are used, which generally require various qualifications, such as state certifications, licensing, and insurance coverage.
• A central department engages and reviews environmental assessments and appraisals. Investment sales brokers and property managers utilized by the special servicing group may be engaged directly using KBREC's standard form of agreement.
• The status of real estate service-provider engagements is centrally tracked through the asset management system to monitor due and receipt dates.

Insurance and legal proceedings

KBREC has represented that its directors and officers (D&O), as well as its errors and omissions (E&O) insurance coverage, is in line with the requirements of its portfolio size. As the date of this report, KBREC reported no material servicing-related pending litigation items.

Loan Administration--Primary Servicing

The loan administration subranking is STRONG for primary servicing.

KBREC's primary loan administration area has individual client relationship managers assigned to each loan based upon investor type. Multifamily remains the emphasis (48.4% of UPB; 48.6% of property count) but the volume of all major property types have risen since our last review. Combined primary and master servicing UPB has increased 26.9% since our last review despite an only 9.5% increase in loan count. Additionally, the portfolio continues to contain a varied geographic mix and all types of collateral properties (see table 3), including those with complex loan structures.

As of June 30, 2020, the $325.6 billion portfolio (including master servicing; see table 4) was concentrated in securitized structures, primarily CMBS (33%) and Freddie Mac CME (32.4%). Other sizeable investor types rounding out the type five include Fannie Mae (8.5% of UPB), other third-party investors (9.7% of UPB), and balance sheet loans (5.8%).

As of June 30, 2020, KBREC's reported delinquency rate of 4.2% (see table 6) has increased substantially from the prior year-end rate of 0.8% (and 1.2% as of our prior review). The impact of the COVID-19 pandemic-related property shutdowns, particularly on lodging and retail loan performance, has impacted the portfolio, similar to other servicers we rank.

Table 6

New loan boarding

In our opinion, KBREC has a well-controlled new loan setup function based on its stated practices and written procedures. The servicer generally addresses new loan setup through a team effort between loan originations and underwriting staff and a transaction-management conversion team within servicing operations. Features of the new loan setup include the following:

• Boarding procedures to Strategy differ depending upon how KBREC obtains the loans. Procedures are manual for new originations, as well as for some servicing transfers. For the most part, loans acquired through servicing transfer are boarded via automation (tape-to-tape) while loans funded internally are uploaded from RECWeb via a loan interface with certain manual updates.
• The interface between its originations and servicing systems, as well as electronic transfers from other servicers' systems, supports data accuracy and efficiency for automated transfers.
• The boarding process includes the input of compliance covenants, trigger events, and other loan and investor-reporting requirements abstracted from the loan documents and the governing servicing agreement.
• The loan setup team reviews system edit reports against loan documentation to ensure the servicing system loan record is properly completed, and a secondary review is performed by a loan conversion specialist for quality-control.
• The originations and servicing staff will conduct transition meetings to review the servicing and documentation requirements of upcoming closings.
• Welcome letters are system-generated and generally issued promptly--within one day of closing or portfolio acquisition.
• KBREC formally tracks loan boarding accuracy and timeliness metrics and targets a maximum of five days to get essential data boarded to process payments and conduct investor reporting.

Payment processing

KBREC's practices and integrated technology tools efficiently address payment processing, cash-managed, and other complex loan structures. Highlights of payment processing include:

• KBREC benefits from KeyBank's wholesale lockbox services in setting up new cash-managed loans associated with springing lockbox provisions. As of June 30, 2020, KBREC serviced more than 1,150 cash-managed loans, approximately 6.7% of its portfolio, up from approximately 900 or 5.6% of its portfolio, as of our last review.
• All funds (checks, wires, and ACH transactions are processed through a payment clearing account, which is balanced daily with appropriate segregation of duties.
• Payment processing is highly automated with 99% of payments received by ACH (49%), wire transfer (44%), or lockbox (6%) as of June 30, 2020.
• The few checks received on-site are well-controlled. These checks are logged, deposited into a KeyBank clearing account, and posted generally within the same business day through KeyBank check imaging deposit software.
• Metrics regarding aged items and funds held in suspense (excluding specially serviced loans) have been consistently reported as zero since our last review.
• Nearly 28% of the portfolio contains adjustable rates, up from approximately 25% as of our prior review. In our view, KBREC maintains clear procedures regarding rate adjustments and the loans are subject to periodic audits.

Investor reporting

KBREC is highly experienced with CMBS, GSE, and third-party reporting requirements. We believe that reporting, remittance, and bank account reconciliations are appropriately segregated and controlled. The investor reporting department is comprised of three investor reporting teams, each with a team manager and approximately five investor reporting analysts. Other highlights include:

• The investor reporting teams are each responsible for the reporting and remittance process for different investors' loan portfolios, based on investor type;
• Customized investor reports are automatically generated and delivered electronically through KBREC's investor website;
• Remittances are all handled by repetitive wire instructions requiring two levels of authorization;
• KBREC reconciles investor accounts daily through a largely automated process; and
• KBREC has not experienced any penalties for late reporting or remitting as a primary servicer since our last review.

Escrow administration

KBREC's loan operations department has separate dedicated groups responsible for tax and insurance. Notable features include the following:

• As of June 30 2020, the servicer had a 12-person tax administration team and a 65-person insurance group. 46% of the portfolio had tax escrows, and 3% had insurance escrows.
• All insurance administration is handled in-house. Dedicated insurance units exist for a single large client, agency investors, as well for other third parties. Separate departments are also devoted to hazard insurance and flood insurance. As previously noted, the flood insurance team began reporting up through the corporate bank in January 2020.
• KBREC uses an electronic review process to identify standard and key coverage deficiencies and generates automated letters for loans with insurance deficiencies.
• Insurance expiration notices are generally issued no less than 30 days prior to the payment due date, with demand letters issued post-expiration. Its force-placed policy has a 365-day look-back provision for force-placed non-flood insurance and 210 days for force-placed flood insurance.
• Loans that are serviced by KBREC (escrowed and non-escrowed) have a life-of-loan tax contract administered by two vendors (depending upon state or portfolio type). The servicing system tracks due dates and payments for all loans and well-documented policies and procedures exist to support tax administration efforts.
• The servicing system automatically generates borrower notices for accounts without tax escrows.
• KBREC reported a minimal amount of non-reimbursable tax penalties paid during the first half of 2020.
• KBREC uses its RECWeb technology application for escrow administration functions, including reserve disbursements (which are handled under DOA limits and require at least two approvals) letters of credit, loss claim and disbursement processing, escrow item advance/recovery, and force-placed insurance.

Asset and portfolio administration

KBREC has effective practices for portfolio management and loan-level surveillance, in our view. Specialized account management teams are organized by investor type. Each borrower relationship is assigned to an account manager, who provides a single point of contact. Other than a Dallas-based group that handles the Federal Housing Administration/Ginnie Mae portfolio, all primary serviced loans are monitored through the Overland Park servicing headquarters.

KBREC has a compliance module to track loan and PSA-related covenant compliance and trigger events. This module includes a preset list to track the corresponding business action related to the trigger event, as well as it identifies how the loan's cash flow waterfall may be affected, flags the loan for automated watchlist inclusion, cites the relevant loan document or PSA passage, and opens a work log screen for the account manager to complete.

Other notable features of KBREC's asset and portfolio administration include the following:

• KBREC uses RECWeb to record and normalize financial statements and track rent rolls and property inspection schedules, as well as issue deferred maintenance and corrective action notices to borrowers.
• Inspections, 3,742 of which were completed during the first half of 2020, are mainly outsourced based on approved vendor lists. They require standard formats and are submitted electronically. Inspections are conducted annually and have no minimum loan size requirement unless specifically dictated within a PSA. Management reported that its inspection vendors proactively request extensions on due dates when they have scheduling issues and that during the pandemic, they have requested more extensions than normal.
• Account managers are responsible for monitoring overall loan performance including watchlist activity, reserve disbursement reviews, and initial early-stage collection efforts. They also coordinate borrower requests in conjunction with the dedicated transactions team.
• KBREC utilizes CREFC watchlist criteria across its portfolio and does not maintain its own unique watchlists. KBREC assigns risk ratings on its non-CMBS portfolio loans based on investor requirements.
• Monthly conference calls regarding watchlist loans are held with third-party master and special servicers, as well as third-party investors.
• KBREC routinely has a high compliance rate for receiving and analyzing property financial statements. As of June 30, 2020, KBREC had received and reviewed 97% and 98% of the previous year's operating statements, respectively, for its CMBS and total portfolio.
• The servicing system tracks Uniform Commercial Code (UCC) filings, and produces six-month review/continuation reports. The servicer handles re-filings through a third-party vendor. During the first half of 2020, KBREC reported one lapsed UCC, for which a filing subsequently occurred and no loss of lien position occurred.

Borrower requests

Overall, we believe KBREC addresses borrower requests in a proactive manner. Highlights include:

• The account management group serves as a single point of borrower contact to process and complete consent requests such as defeasance, repair extensions, and lease reviews across the primary and master servicing portfolios;
• A 20-person dedicated transactions group department headed by a vice president underwrites and closes certain consent requests (i.e., assumptions, partial releases of collateral, maturity extensions) across its primary and master servicing portfolio;
• During periods of peak volume, KBREC utilizes third parties to assist in the consent review process; and
• During the first half of 2020, within its authority as either primary or master servicer, KBREC processed approximately 1,260 consent requests (759 as primary and 501 as master), including 283 forbearance (primarily multifamily (189) and lodging (49) loans), 228 repair extensions, 171 leasing consents, 142 defeasance transactions, 140 assumptions, 102 management changes, and 46 collateral releases with the bulk of the consent activity derived from the CMBS loan portfolio.

Early-stage collections

Account managers are responsible for early collection efforts on delinquent accounts. Noteworthy features include the following:

• System reports are monitored for past-due payments.
• Borrower calls are initiated one day after the payment due date. An initial written notice is also issued one day after the payment due date (or grace period), and a second notice, if necessary, is provided with 10 days of such due date.
• RECWeb tracks collection comments; delinquency reports are produced and reviewed weekly. The account manager reviews the status with the servicing manager, along with any applicable servicing contracts or PSAs. Default letters are sent at 30 days past due. Delinquencies that are not cured according to the servicing agreement may trigger a transfer event to the named special servicer.

Loan Administration--Master Servicing

The loan administration subranking is STRONG for master servicing.

As of June 30, 2020, KBREC served as a CMBS master or combined primary and master servicer on more than 3,450 loans aggregating $92.2 billion in UPB. On loans where it only has master servicing responsibilities, KBREC oversaw 36 subservicers, which handle more than 4,400 loans with a total UPB of $86.5 billion (see table 7). Unlike its primary serviced portfolio, its master servicing (i.e. serviced by others) delinquency level has remained low during 2020 at 0.4%, which is reflective of a more multi-family oriented asset base.

Table 7

KBREC has six dedicated portfolio account managers to monitor subservicer reporting and compliance. The loan operations and investor reporting groups respectively manage monthly remittances from subservicers, as well as pool-to-security data consolidation and reconciliations for trustee-level reporting and remitting.

New loan boarding

KBREC's procedures for boarding subserviced loans are similar to its procedures for primary serviced loans. In our view, KBREC has a well-controlled practice to board loans and integrate the required servicing elements. Highlights include the following:

• Subservicer portfolio report downloads are used to electronically board the loans to the servicing system with system-generated error reports to review data integrity.
• Electronic copies of core loan file documents are integrated with the imaging system.
• Property insurance coverage levels of subserviced loans are reviewed for adequacy and PSA compliance.
• A dedicated administrator reconciles subserviced loan balances and other data elements to loan file documents and respective PSA requirements.

Subservicer accounting and reporting

KBREC has efficient practices and effective controls over subservicer remittances, reporting, and related transactional accounting. Highlights include the following:

• Subservicers provide monthly remittances via wire transfers to KBREC along with electronic loan-level files for updating the servicing system and data warehouse.
• Subservicer loan-level records are matched to the wire transfer remittance, and, if in balance, the shadow loan record is automatically updated on RECWeb through batch posting.
• KBREC requires its subservicers to submit portfolio activity in electronic format, which are consolidated with KBREC's own primary-serviced portfolio for investor reporting.
• The master servicer module within the servicing system is used to post subserviced payments.
• Investor reporting and accounting personnel, respectively, complete investor reports and remittances, and perform pool-to-security reconciliations.
• Cash remittances to investors and trustees are made by repetitive wire transfers, which are performed under dual controls.

Subservicer oversight

Escrow administration 

KBREC receives quarterly exception reports and subservicer compliance certificates related to tax payments, insurance, letters of credit, and ground rents for each subserviced loan. Subservicer downloads are used to shadow track escrow activity. Other highlights include the following:

• KBREC has a dedicated loan administrator that monitors subservicer reports and downloads for escrow exception items.
• The compliance and quality control area also is responsible for monitoring compliance with tax and insurance requirements per subservicing agreements.
• Subservicers are contacted for any items not meeting the reporting requirements or any loan-level items needing to be addressed when observed in the quarterly reports.

Asset and portfolio administration  

KBREC oversees the credit performance of its subserviced portfolio in a similar fashion to loans that it primary services. Overall, procedures for these functions are properly managed with effective automation tools. Features include the following:

• KBREC's systems track property inspection schedules and results, as well as financial statement collections.
• Subservicers' operating statement analysis reports are uploaded to RECWeb for re-analysis.
• KBREC reviews the financial statement spreads on all subserviced loans for errors, general reasonableness, and watchlist issues. As of June 30, 2020, KBREC had received and reviewed 93% of the previous year's CMBS operating statements.
• Electronic copies of original property financial statements are linked to RECWeb, and all subserviced loans are included in its watchlist reporting.
• The company receives and reviews electronic copies of property inspections for deferred maintenance.
• Collection efforts, delinquencies, and watchlist monitoring are rolled up to KBREC's managerial and investor reports.
• KBREC receives quarterly exception reports and subservicer compliance certificates related to UCCs for each subserviced loan.
• The servicer also centrally tracks borrower requests that require master servicer authorization.

Audit and compliance 

KBREC's compliance staff follows a well-designed program to monitor subservicers' loan-level and PSA compliance through a combination of desk reviews and on-site audits. Highlights include the following:

• KBREC oversees 26 combined subservicers across the CMBS and Freddie Mac CME platforms; an additional 10 subservicers, which are related to KBREC's institutional portfolio, are not included in its audit program.
• Subservicer desk and on-site audits of cashiering sub-servicers are conducted on 24-month and 12-18 month minimum cycles, respectively.
• KBREC performed 12 audits during 2019, including five on-site and seven desk audits. During the first half of 2020, only one on-site audit and one desk audit was conducted. Its full year audit plan for 2020 contemplates only desk audits (15) due to the issues presented by the COVID-19 pandemic. However, management noted that two of the desk audits will have an audit scope more similar to the on-site review.
• KBREC prioritizes on-site audits for subservicers based on the number and dollar volume of loans serviced, as well as any noncompliance indications.
• Subservicers are issued a document request letter 60 days in advance, and the audit scope generally includes 10 loan file reviews, though the number of loans selected could be higher for larger portfolios or if issues are discovered during the audit.
• The company issues a letter of findings to the subservicer, including timeframes for responses and corrective actions, if needed, with open items centrally tracked for resolution.
• The company requires officer compliance certificates from each subservicer quarterly. It also requires and reviews corporate financial statements, evidence of D&O and E&O insurance, and adherence to Sarbanes-Oxley and USAP/RegAB audits as part of annual compliance requirements.

Investor reporting, CMBS advancing and special servicer interaction

KBREC has formalized master servicing procedures and what we consider to be conservative thresholds to determine recoverability of CMBS payment advances to the trusts it services. Highlights include the following:

• An investor reporting analyst reviews each delinquent loan relative to its existing appraisal and other valuation information before advancing.
• KBREC tracks appraisal reduction events monthly and maintains reports evidencing the appraisal reduction amount and related appraisal subordinate entitlement reduction.
• A monthly advance monitoring committee reviews the collateral and recoverability status of outstanding advances based on an advance monitoring report and incorporates the opinions of its surveillance and AMs in conjunction with discussions with third-party special servicers as applicable.
• KBREC will generally increase its analytical review and degree of caution once the total exposure and amounts advanced on a loan reach 50% of determined realizable value for most property types, though it uses a 30% threshold for health care and lodging properties. Management reported that since April 2020, additional analysis and scrutiny of assets has commenced within the lodging and retail property types. On a monthly basis, a review of delinquent lodging and regional malls is performed with input from the special servicer and an analysis of the remaining collateral of that trust in which the assets belong to determine if it should cease principal and interest advances.
• KBREC administers advances with a goal of recovering them with the least possible disruption to certificateholders. It considers certificate classes according to corresponding seniority in a transaction's distribution waterfall. When advances are not reasonably determined to be collectible or potentially not recoverable from third parties, KBREC considers the relative interests of all certificateholders and, to the extent possible, stages the advance recapture over a series of months to minimize disruption to the higher-rated bond classes.

Loan Administration--Special Servicing

The loan administration subranking is STRONG for special servicing.

As of June 30, 2020, KBREC was the named special servicer on 259 securitized transactions consisting of over 10,600 loans with a total UPB of $126.8 billion, a 43% increase from the time of our last review. KBREC's named special servicing volume has increased as a part of its strategic plan to increase its presence in the marketplace.

Its special servicing staff has 37 full-time employees, up 10, or 37%, since our last review. Staffing growth was largely internal with the onboarding of personnel from underwriting and production groups to assist with the increased volume of assets, which totaled $4.2 billion, including 201 loans and six REO assets (see table 8) as of June 30, 2020. Within the portfolio, there are 144 CMBS loans and five REO properties, comprising $3.9 billion and $139 million of UPB, respectively. A group of 28 AMs (up from 16 as of our prior review) are responsible for the special servicing portfolio, including one AM who specifically handles the six REO properties, four that are retail ($117 million UPB), and two that are office properties ($23 million of UPB). Based on these levels, the loan AMs handle, on average, 7.4 loans, which we believe demonstrates the team is more than adequately staffed despite the recent spike in volume and the degradation in AM experience levels since our last review.

Table 8

Loan recovery and foreclosure management

Resolution activity during the first half of 2020 totaled 30 loans and included a variety of strategies, which by loan count were primarily full payoffs (nine), discounted payoffs/note sales (nine), and loans returned to master servicer (eight), but also included three issuer buybacks and a foreclosure. At the same time, loans returned to master servicer comprised 95.7% of the UPB with two lodging portfolio loans aggregating $1.35 billion of the $1.4 billion in loan resolutions during the period. Management reported that one of the lodging loans was returned to the master servicer after a forbearance agreement was executed and the other was returned to the master servicer after the borrower elected not to proceed with its original forbearance request. Average resolution periods, which reached a multi-year high of 20.8 months as of our prior review, declined to more historically normalized levels of approximately 13 months.

Table 9

In our view, the company has effective procedures and a reasonably experienced staff to efficiently resolve nonperforming loans across a broad spectrum of asset structures and property types. Highlights include the following:

• Special servicing personnel participate in monthly watchlist reviews and master servicer conference calls to gain familiarity with each asset before potential transfer.
• Team leaders assign loans to AMs, taking into account existing workload, asset relationships, regional/geographic location of the asset/borrower, and a matching of personnel strengths to asset characteristics.
• For newly transferred loans, an AM utilizes a checklist to ensure all necessary information is received by the special servicing group in order to commence servicing of the asset and to guide the AM through meeting deadlines (i.e., inspections, asset status reports, etc.) required in underlying servicing agreements, as well as developing a resolution strategy. AMs conduct site visits for assets with a UPB of $2 million or more, unless there is a reasonable explanation to support that a site visit is not needed to carry out the workout strategy.
• KBREC requires borrowers/guarantors to sign pre-negotiation letters before entering into workout discussions.
• Among the resolution strategies considered are repayment at par, discounted payoff, note sale, loan restructuring (i.e., returned to master), acquiring the property's title through a foreclosure action or deed-in-lieu, or in rare instances, an issuer repurchase (see table 9).
• Loan resolution/business plans are targeted for completion no later than 90 days after the transfer, which is a bit lengthier than other STRONG ranked servicers. In the interim, the AM may prepare an initial foreclosure memo (IFM), which does not replace the business plan. The IFM is a bridge that allows the AM to initiate foreclosure/receivership before completing a business plan.
• Business plans include a recommended strategy accompanied by a review of the borrower/guarantor, collateral, default issues, and cash flow analysis for alternative resolution strategies based on a net present value model that resides on RECWeb.
• Business plans also include a discussion of third-party contracting reports that need to be obtained (inspections, property condition report, appraisal, brokers' opinion of value, environmental, and title). If foreclosure is recommended, the AM will seek approval to engage a property manager.
• KBREC approves action plans and specific resolution cases through a DOA matrix combined with a senior management committee process, depending on the asset's size and nature.
• Business plans are implemented and monitored on an ongoing basis to ensure adherence to plan objectives and the target dates for critical actions. If there is a material change in the circumstances or conditions underlying the original strategy, the business plan is modified accordingly with DOA approval.
• For approved foreclosure cases, the company tracks the loan-to-REO transfer process on RECWeb. Primary responsibility of converting a loan to REO lies with the loan AM in coordination with the REO AM.

REO management and dispositions

The REO portfolio has decreased to six properties from 15 since our last review. As of June 30, 2020, the portfolio contained four retail assets and two office properties. Five of the properties comprising more than 99% of UPB are CMBS loans. The average time in special servicing for its REO assets of 27.9 months has increased from 22.2 months since our last review, but is nonetheless at the low end for similarly ranked CMBS special servicers.

Since our last review, KBREC has disposed of 20 REO assets (see table 10), which were comprised of smaller, less complex properties with an average estimate market value of $3.6 million. We note that average REO hold time for divested properties during the first half of 2020 of 12.7 months compares favorably to its similarly ranked peers. However, average gross proceeds relative to market value of 73.5% (74.1% during the first half of 2020 and 67.7% during 2019) are meaningfully below KBREC's historical levels, which management largely attributes to a handful of deeply distressed retail properties that faced significant tenant challenges.

Table 10

Notable aspects of REO management and disposition procedures include:

• A checklist, which identifies tasks and verifies that important dates are not missed, is completed to enable a smooth transition of the property from loan status to REO.
• REO AMs generally visit each assigned property within 45 days after the REO date and annually thereafter.
• All REO assets must be listed within 90 days of the REO date unless otherwise directed by the investor client. The REO AM reviews broker proposals from its approved list and recommends engaging a sales broker (and leasing agent as applicable) for DOA approval as part of the REO business plan, which must be completed within 90 days of title transfer. In addition to the listing broker, the business plan includes the list price, commission structure, marketing requirements, and engagement terms.
• The REO AM is responsible for daily oversight of the property manager, which includes monthly reviews of operating statements.
• Recommended sales terms are presented by the asset manager via an REO business plan through a DOA approval process. Once an agreement has been executed, the AM will work with outside counsel to ensure all documents are received to facilitate closing.

REO accounting and reporting

In our view, KBREC's controls and procedures for property-level accounting and oversight are sound. The accounting staff controls REO accounting and reporting in conjunction with the assigned asset manager, who monitors property issues and cash flows. Operational issues are discussed by the AM with the engaged property manager. Other features include the following:

• The AM immediately initiates the process to establish and maintain control of property cash when a property is converted to REO. An action plan for monitoring and/or controlling the cash until KBREC opens a bank account is implemented.
• Property managers open a disbursement account for budgeted operating expenses. A receipt account for rental income and miscellaneous cash receipts will be opened by the REO AM so that property managers can deposit rental income for each property. KBREC's accounting department funds any requests for operating cash based on approvals from the AM and senior management according to defined DOA and within authorized REO business plans.
• The property manager completes a detailed operating budget for the current year, which is incorporated into REO business plans within 45 days of engagement. Property managers must provide monthly reporting packages, including bank statement reconciliations, which are reviewed for variances by the accounting staff and AM.
• On-site audits of property managers are detailed within the company's procedures. The audit objective is to ensure compliance with the requirements and guidelines set forth in KBREC's standard property management agreement. During the first half of 2020, two on-site audits were performed (although additional on-site audits are likely to be curtailed during the COVID-19 pandemic). Given the modestly sized REO portfolio, we believe the volume of audits performed represents sound oversight.

Performing loan surveillance

KBREC employs formalized surveillance practices to monitor the deals for which it is named as special servicer. Notable aspects of surveillance include the following:

• Within the special servicing team, a due diligence manager is responsible for the loan surveillance on both CMBS and Freddie Mac CME loans. Each month, the CREFC trustee reports are loaded into KBREC's surveillance reports, which identify issue points and provide a trend analysis. These surveillance reports contain an internal watchlist of loans of concern identified by KBREC and/or the B-piece investor. A question and answer (Q&A) log is compiled based on the issues identified, which is sent to the respective master servicer. The surveillance report and the Q&A log are reviewed by the due diligence manager and then provided to the B-piece investor each month for review.
• For CMBS deals, there is an assigned member of the special servicing staff that is designated as the single point of contact (SPOC) on each pool. This person is responsible for compiling the reports, identifying potential loans of concern, drafting questions for the master servicer on the deal, and fielding questions from the B-piece investor.
• A similar approach is used for Freddie Mac CME loans, with an assigned member of the special servicing staff designated as SPOC for each B-piece investor.

Borrower requests

In addition to the transactions group that handles borrower requests in its primary and master servicing portfolio, a separate team within special servicing processes transaction consent requests when the delegated approval authority resides with KBREC as special servicer. Highlights include the following:

• A vice president oversees a team of three staff members, one of which focuses on agency loans.
• During the first half of 2020, within its authority as special servicer, KBREC processed 22 consent requests of performing loans with an aggregate UPB of $2.2 billion, including 15 leasing consents and four assumptions with the bulk of the consent activity derived from the CMBS loan portfolio.

Legal department

In our opinion, although there is no in-house legal staff dedicated to special servicing, KBREC effectively oversees the legal needs associated with its servicing portfolio by using an outside firm that serves as KBREC's oversight and general counsel. Other highlights include the following:

• The vice president or SVP responsible for special servicing in conjunction with an AM recommendation, approve oversight counsel recommendations for outside third-party counsel before engagement.
• The company uses a legal tracking module in its asset management system for monitoring bankruptcy and foreclosure activity.
• A standard attorney engagement letter is used for outside counsel, and an AM reviews expenses for reasonableness before payment for legal services is authorized.

Financial Position

The financial position is SUFFICIENT.

Related Research

• Select Servicer List, Sept. 25, 2020
• KeyBank Real Estate Capital STRONG Rankings Affirmed; Outlooks Are Stable, Sept. 24, 2020
• U.S. Commercial Mortgage Servicers Preparing For Impact From COVID-19, April 3, 2020
• KeyCorp, Aug. 9, 2019
• Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019