Rationale

S&P Global Ratings' overall rankings on Principal Real Estate Investors LLC (PrinREI) are STRONG as a commercial mortgage loan primary and special servicer. On July 18, 2022, we affirmed the rankings (see "Principal Real Estate Investors LLC STRONG Commercial Mortgage Loan Primary And Special Servicer Rankings Affirmed" published July 18, 2022). The ranking outlook is stable for each ranking.

Our rankings reflect PrinREI's:

• Stable operating platform, with a solid primary and special servicing track record;
• Institutional backing, along with commitment to the real estate market and financial support, from parent company, Principal Financial Group (PFG);
• Experienced senior management and staff, and a high level of tenure across the servicing operations;
• Effective employee training program;
• Efficient use of technology systems, albeit without a dedicated asset management system for special servicing;
• A sound internal control environment including thorough policies and procedures (P&P);
• Decentralized special servicing organizational structure that is compatible with the company's portfolio of balance sheet and life insurance company loans; and
• Ability to coordinate and harness various resources within the servicing and real estate equity asset management areas, as well as oversee and facilitate the resolution of nonperforming assets.

Since our prior review (see "Servicer Evaluation: Principal Real Estate Investors LLC," published Jan. 12, 2021), the following changes and/or developments have occurred:

• PrinREI's chief operating officer of private real estate, with 36 years of industry experience and company tenure, retired at the end of 2021.
• The chief financial officer of private real estate, with 32 years of industry experience and company tenure, was promoted to chief operating officer.
• PrinREI's director of primary servicing asset management, with 34 years of industry experience and company tenure, retired in March of 2021.
• The manager of compliance and surveillance, with 16 years of industry experience and company tenure, was promoted to director of asset management and compliance.
• The primary servicing asset management, compliance and surveillance functions were merged under the above noted director of asset management and compliance, which management indicated provides staffing flexibility and additional growth and development opportunities.
• Primary servicing asset management and surveillance responsibilities were expanded to include annual financial and lease reviews for the private debt origination team.
• Due to the COVID-19 pandemic, PrinREI entered into 42 agreements to defer principal or principal and interest payments, and one loan restructure that was part of a maturity extension. As of July 6, 2022, 11 loans remain in the deferral period and are performing under the terms of the agreement.
• In the first quarter of 2022, a portfolio of 280 loans with a UPB of approximately $800 million was acquired and boarded as part of a larger corporate acquisition.
• PrinREI was awarded a mandate from a new client to provide $750 million of private debt loan originations.
• PrinREI continued to invest and upgrade its systems and technology by implementing Enterprise! version 20210.1.61.12 in July 2021, and a new tax vendor system in November 2021.
• A new vendor scorecard that involves a more simplified rating process and the ability to provide enhanced feedback was implemented in the first quarter of 2022.
• A new team was formed in the third quarter of 2021, which integrated data intelligence and analytics and is responsible for data governance, data analytics, and business empowerment.

Our stable ranking outlook for the primary servicer ranking reflects PrinREI's highly experienced and well-tenured staff, steady growth, and successful track record in servicing a substantial loan portfolio through multiple economic cycles. We believe the company's experienced leadership team will continue to invest in personnel and technology, and maintain the internal control environment necessary to manage a portfolio commensurate with a STRONG ranking.

Our stable ranking outlook for the special servicer ranking reflects PrinREI's resolution track record of specially serviced loans and real estate-owned (REO) assets, including during multiple economic cycles. We believe the company has experienced and tenured senior management and asset management staff in place, as well as the ability to coordinate and harness various resources within servicing and real estate equity asset management to manage its portfolio consistent with a STRONG ranking.

In addition to conducting a remote meeting with servicing management, our review includes current and historical Servicer Evaluation Analytical Methodology data through Dec. 31, 2021, as well as other supporting documentation provided by the company.

Profile

PrinREI is an indirect subsidiary of PFG, through its wholly owned subsidiary, Principal Global Investors Holding Co (PGI). PFG is a worldwide, diversified financial organization founded in 1879, providing life insurance and investment products, with more than 18,500 employees worldwide and more than 10,500 employees in the U.S.

PrinREI is the dedicated real estate investment group within PGI for public and private debt and equity, and portfolio management for PrinREI's own portfolio, its subsidiaries, and third-party clients. As of Dec. 31, 2021, PFG had $590.6 billion in assets under management, of which $106.6 billion were real estate assets.

PrinREI's commercial mortgage servicing division manages the commercial real estate servicing activities of its parent, other PFG-related organizations, and non-affiliated clients. PrinREI also engages in portfolio management, debt and equity investments, and advisory and development services for third parties. PrinREI has more than six decades of real estate investment experience and is diversified across many U.S. metropolitan real estate markets. Its commercial mortgage servicing operations are based in Des Moines, Iowa.

Table 1

Table 2

Management And Organization

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

Organizational structure, staff, and turnover

PrinREI's average years of industry experience for primary and special servicing senior managers, middle managers, and staff are indicative of a seasoned team and generally consistent with the levels reported by peers. Similar to other life insurance companies that we rank, PrinREI's employees have a high level of company tenure.

A managing director with over 30 years of industry experience and 18 years of company tenure leads PrinREI's commercial mortgage servicing and closing operations, with eight direct reports responsible for the following areas:

• Loan operations;
• Closing loan operations and administration;
• Portfolio management;
• Asset management and compliance; and
• Special servicing.

Loan operations is led by an assistant director with 26 years of industry experience and company tenure. This team is responsible for the administration of taxes, insurance, and Uniform Commercial Codes (UCCs), as well as property inspections, release processing, and disaster reporting.

Closing loan operations and administration is led by a senior director with 37 years of industry experience and company tenure. This team is responsible for loan closings and collateral management.

Portfolio management is comprised of four senior portfolio managers having an average of over 26 years of industry experience and 23 years of company tenure, who are responsible for the overall administration of client portfolios.

Asset management and compliance is led by a director with 16 years of industry experience and company tenure. This team is responsible for analyzing and recommending borrower requests to portfolio managers; monitoring collateral covenants and property reserves; financial statement collection; property and loan analysis; new loan set-up; cash management waterfalls, loan trigger calculations; and compliance with servicing mandates.

Special servicing is led by a managing director with 33 years of industry experience and company tenure. The special servicing team also includes two asset managers, one who has 11 years of asset management experience and 14 years of company tenure, and another who has seven years of asset management experience and 17 years of company tenure. This team is responsible for the resolution of non-performing loans and performing active surveillance on loans that have been identified as potential defaults. Special servicing also has access to and the assistance of as many as 112 PrinREI real estate equity asset management employees, who are responsible for the company's investment real estate assets and would be directly involved in the REO process.

Within the PrinREI debt accounting group and not reporting directly to the managing director is a cash management and investor reporting team consisting of nine accounting professionals, who have an average of 16 years commercial mortgage accounting experience, that supports the servicing operation. This area is the control point for cash management responsibilities including payment application, daily balancing and cash movement, remittances, bank statement reconciliation, general ledger reconciliation, investor reporting and analysis, and internal management reporting.

We believe the primary servicing operation has an effective organizational structure to manage the size of the portfolio and investor types. PrinREI's structure adequately segments transaction-based activity (e.g., payment processing, taxes, and insurance) and loan-level, credit-based functions (e.g., financial statement analysis, loan compliance, and portfolio compliance).

We believe the decentralized organizational structure of the special servicing operation effectively manages its life insurance company/portfolio mortgage assets, which have historically maintained low delinquency rates. As previously noted, the special servicing staff includes three employees dedicated to special servicing, with assistance from 112 employees in the PrinREI real estate equity investment area.

PrinREI's corporate divisions provide additional resources and support to the core servicing area, such as human resources, legal, technology, finance, internal audit, and supplier management, which assists with vendor oversight. The servicing group also benefits from PrinREI's expansive coverage of the commercial real estate debt and equity markets, including close coordination with PrinREI's underwriting, real estate equity, engineering and appraisal, legal, and research teams.

Table 3

Recent, as well as historical, turnover levels have been low-to-moderate and well-below peers. In 2021, PrinREI experienced turnover of 8.3% in primary servicing, and 8.9% in the special servicing/real estate equity investment areas. In 2020, PrinREI experienced no turnover in primary servicing, and 7.0% in the special servicing/real estate equity investment areas. We note that three of the seven special servicing departures in 2020 were employees who were assigned to special servicing on an interim basis to work through COVID-19 pandemic relief requests during the period and returned to their prior duties before the end of June.

Training

PrinREI provides its management and staff with a diversified array of ongoing, formal, internal, and external training programs, which is typical of similarly sized peers. The company targets 30 to 40 hours per employee annually, depending on position. We believe this is adequate and note that the actual number of average training hours per employee in 2021 were 41 for primary servicing and 32 for special servicing. In 2020, these figures were 57 hours for primary servicing employees and 28 hours for special servicing employees.

Key aspects of the training program include the following:

• A dedicated training and development group monitors the programs and tracks hours.
• An intranet site provides access to pertinent research publications, a web-based training application, and links to corporate training and development sites.
• The corporate training department provides instruction on basic managerial development skills and generic computer applications.
• Internal and external subject matter experts provide training on commercial real estate-related subjects.
• Dedicated individuals in the information technology (IT) group educate staff in systems, risk mitigation, and data protection.
• PrinREI actively participates in the mortgage servicing industry through associations, such as the Mortgage Bankers Assn. and the Commercial Real Estate Finance Council (CREFC).

Systems and technology

PrinREI has effective technology to meet its primary and special servicing requirements. The company focuses on technology enhancement projects to further streamline and automate servicing tasks across various loan administration functions. Data backup routines and disaster recovery (DR) preparedness are well-designed. Key elements of company systems, applications, technology, and security environment are discussed below.

Systems and applications 

For primary servicing:

• Enterprise! version 20210.1.61.12 is the loan servicing system, which provides centralized loan administration, data management, and investor reporting functionality.
• nCino, a third-party, cloud-based loan origination system, provides enhanced connectivity across systems including Enterprise!.
• An internally developed data warehouse captures data needed for reporting and analysis.
• An OnBase web-based imaging system documents storage and retrieval.
• The internally developed loan connection-borrower website provides access to loan data, payment information, balance history, escrow accounts, amortization schedules, and contact information.
• The internally developed client reporting website provides third-party investors and clients access to information on their loan portfolios.
• A Microsoft SharePoint site auto-generates daily accounting tasks, stores servicing desktop procedures, and tracks insurance reviews, financial statement collection, and review dates, among other tasks.
• JIRA, a third-party task management and workflow tool, monitors loan covenants and trigger events, as well as assigns tasks with associated due dates.
• My Access, an access management system, grants and controls access to various systems.
• TaxQ, a third-party system, monitors and pays taxes.
• CSC Lien Perfect, a third-party system, files and tracks UCCs.
• EigenPrism, a third-party platform, monitors, reports, and tracks investment exposure to disasters.

For special servicing:

• Enterprise! is the system of record for all relevant loan servicing information, including special servicing. A dedicated asset management application for special servicing is not utilized, unlike most STRONG ranked special servicers, which is mitigated by its relatively low levels of special servicing activity.
• Yardi's real estate investment and property management application handles asset administration, property management, and property accounting.
• The Argus enterprise-valuation software conducts forecasting.
• In addition to document storage and retrieval, the OnBase interface tracks data and workflow related to events affecting asset values, such as signed leases, new sales comps, capital expenditures, etc.
• The internally developed Equities Debt database stores and reports on third-party loans.
• Externally facing websites provide access to client and fund reports, and key data.

Business continuity and DR 

PrinREI employs a comprehensive business continuity plan, which includes the following:

• An annual alternate worksite/remote access exercise is performed to practice the staffs' ability to relocate and continue/resume critical functions.
• Critical disbursements and remittances are done by wire transfers and can be accomplished completely remote.
• The business continuity plan is reviewed and updated yearly based on table-top exercise scenario results.

PrinREI employs a comprehensive DR plan. DR efforts include the following:

• PrinREI reviews its DR plan semiannually and maintains a remote offsite data center in Chicago where all critical applications are replicated.
• Nightly backups are created of all data and subsequently stored offsite.
• PrinREI owns two primary hot site and business recovery locations, with appropriate building support (separate power grids, system emergency power, and building generators) and office space to accommodate necessary staff.
• Target recovery times for all applications and operations are less than 24 hours.
• Call-tree exercises are conducted periodically, but no less than annually, to ensure communications can be established in the event of a disaster.
• Full DR testing is completed each year. The last full DR test was completed in November 2021 with no issues reported.

Cybersecurity 

PrinREI has proper protocols in place to protect borrower data and prevent cyberattacks. Cybersecurity efforts include the following:

• PrinREI has a comprehensive written information security program that safeguards information against unauthorized or accidental modification, disclosure, fraud, and destruction.
• All employees are required to complete privacy, security, ethics, and compliance training annually.
• The information security program includes antivirus protection, data encryption, update and patch management, and cyber security insurance.
• Employees are sent simulated phishing test emails monthly to test awareness. However, employees who fail a test will be tested more frequently.
• PFG hires a third party to perform network penetration testing annually. Management indicates testing is underway for 2022 and should be completed in July. The test completed in June 2021 noted no material problems.

Internal controls

PrinREI maintains a sound internal control environment including well-documented P&P, quality control reports, and ongoing risk and process reviews and assessments. The PGI risk management process encompasses risk identification, assessment, mitigation, and monitoring. The audit program includes periodic internal and external audits, as well as master servicer and investor reviews. Elements of internal controls are described in the below sections.

Policies and procedures 

PrinREI has well-documented P&P manuals and updates are handled with proper frequency and controls. The manuals are available online and have interactive features for references, sample documents, system displays, and data requirements for individual activities. Additionally, the following are also part of PrinREI's protocol:

• A senior manager from each functional area reviews and approves any material changes to the P&Ps for his or her respective area.
• Subject matter experts must certify that they have reviewed all relevant P&Ps annually and are responsible for making any minor P&P changes.
• PrinREI uses its manuals for training programs, which provide guidelines on various issues and topics, along with applicable procedures, required forms, and authorizations.
• P&P manuals include documentation of what has changed, when it was last reviewed and updated, and a list of in-house subject matter experts for easy reference and contact by all employees.

Compliance and quality control 

PrinREI has established a strong control environment to effectively manage the risks inherent in servicing. Features include the following:

• The company maintains a quality control/self-audit program that involves issuing and monitoring management reports that cover key servicing processes, such as new loan setup, insurance and tax monitoring, delinquencies, and financial statement and rent roll collection and analysis.
• An internal compliance department from PGI handles Regulation AB (Reg AB) compliance testing of the entire servicing platform (both CMBS and non-CMBS) throughout the year. The reviews are similar in scope to external Reg AB reviews and cover risk areas related to procedures, systems, and accounting for both primary and special servicing. Reg AB test report memos are submitted to the PrinREI Reg AB committee on a semiannual basis.

Internal and external audits 

PrinREI has a strong audit environment, albeit with generally lengthier internal audit cycles than other STRONG-ranked servicers. Features include the following:

• Internal audits performed by the parent company, PFG, occur on a four-year cycle for primary servicing and a three-year cycle for special servicing.
• The last full internal audit of primary servicing, covering accounting, servicing operations, asset management and surveillance, management oversight, and IT, was performed in August 2021 with no issues noted.
• The last full internal audit of special servicing, covering watchlist activities, borrower requests, and business plans, was performed in February 2021 with no issues noted.
• A nationally recognized independent accounting firm performs PrinREI's annual Reg AB certification. The 2021 examination had no material exceptions noted.
• PrinREI also undergoes an annual Statement on Standards for Attestation Engagements (SSAE) 18 System and Organization Control 1 audit. There were no exceptions noted for the 12-month period ending Sept. 30, 2021, or the bridge period ending Dec. 31, 2021.
• Additional external audits of PrinREI's servicing operations include audits performed by master servicers and investors.

Although the PFG internal audit group conducts its audits on servicing on a four-year cycle for primary servicing and a three-year cycle for special servicing, we believe that the comprehensive semiannual Reg AB reviews conducted by PGI's internal audit group mitigate the lengthier cycle of audits conducted by the parent company. Additionally, PrinREI management indicates that if concerns or issues were identified that increased the servicing area's risk profile, the internal audit team would increase the frequency of the cycle accordingly.

Vendor management

PrinREI has well-controlled and sound procedures governing vendor management. Factors considered in the decision to use a vendor include complexity of work, technology needed, vendor expertise, and the level of oversight required by internal staff. Features include the following:

• PrinREI engages third-party vendors to provide financial statement and rent roll processing; lease reviews; new loan audits (comparing loan documents to the servicing system); insurance reviews; background credit checks; UCC services; collateral inspections; property tax services; and flood zone determination.
• PrinREI's surveillance team is responsible for oversight of vendors used in its servicing operations. The PGI global sourcing group assists with contract negotiations, licensing, certifications, vendor risk management, and other regulatory requirements as needed, along with competitive market pricing.
• Vendor performance is monitored through the completion of a supplier impact risk assessment (SIRA). The SIRA measures data security, financial stability, and regulatory risk, among other factors. Depending on the SIRA score, PrinREI may need to develop monitoring and contingency plans for its different vendor relationships.
• As noted earlier, a new vendor scorecard involving a more simplified rating process and the ability to provide enhanced feedback was implemented in the first quarter of 2022.
• PrinREI maintains approved lists for property managers, brokers, attorneys, appraisers, and engineers. In general, third-party vendors are assigned by section/asset managers from approved vendor lists based on property type and location and the vendor's past performance.
• Asset managers monitor vendor compliance according to performance and timeline guidelines and input asset updates into the servicing system. The asset managers use in-house support staff (appraisal, legal, and engineering) for second-level reviews and to approve the vendor work product. Various tracking reports are produced to assist in weekly and monthly management reviews.

Insurance and legal proceedings

PrinREI has represented that its directors and officers, as well as its errors and omissions insurance coverage is in line with the requirements of its portfolio size. As of the date of this report, PrinREI's management says it is not subject to, or knowledgeable of, any material lawsuits that could affect the servicing operations.

Loan Administration--Primary Servicing

The loan administration subranking is STRONG for primary servicing.

As of Dec. 31, 2021, primary serviced loan volume totaled $26.6 billion of unpaid principal balance (UPB; up 10.1% since the prior review and 7.1% since Dec. 31, 2020) with 1,339 loans (down 3.5% since the prior review and 2.0% since Dec. 31, 2020). At the same time, the average loan size rose to $19.9 million, which is an increase from $17.4 million at the last review and $18.2 million as of Dec. 31, 2020 (see table 4). The portfolio is geographically dispersed and contains good representation from all major collateral property types (see table 5).

According to PrinREI management, the above trend is a result of a strategic change after the Great Financial Crisis to increase the average loan size. The increase didn't materially show in the portfolio's average loan size until 2015 when a significant portion of the CMBS portfolio started to pay off, which continued through 2018. The CMBS production was replaced with larger portfolio loans averaging $30 million-$35 million. Management further indicated that as the older vintage loans matured and paid off, they were, by number, being replaced at a lower rate.

As previously noted, in the first quarter of 2022, a portfolio of 280 loans with an UPB of approximately $800 million was acquired and boarded as part of a larger corporate acquisition. According to PrinREI management, this portfolio primarily consists of loans secured by small retail, office, hotel, and mixed-use properties. The servicing scope is limited to loan operations, cash management and reporting, so PrinREI was able to absorb the acquisition within its current team.

Delinquencies remained negligible from 2017 through 2019 (i.e., no more than 0.01%) as the loan portfolio benefited from strong underwriting and favorable market conditions (see table 4). As of Dec. 31, 2021, delinquencies were 0.14%, which consisted of two loans (one secured by an office property and one secured by a mixed-use property), which is down from 0.41% as of Dec. 31, 2020. PrinREI's delinquency rates are at the low end of the peer group of other STRONG ranked servicers having a sizeable portion of life insurance company mortgages. CMBS delinquencies are also relatively low at 0.07% of the total portfolio and 0.88% of the CMBS portfolio as of Dec. 31, 2021.

While PrinREI maintains an active role as a subservicer for 27 CMBS transactions consisting of 129 loans with an UPB of $2.1 billion as of Dec. 31, 2021, we note that this portfolio has been decreasing (from 40 transactions consisting of 157 loans with an UPB of $2.2 billion at our prior review), while the balance sheet, and life insurance company and pension fund portfolios have been increasing.

PrinREI predominantly services loans on its own balance sheet, with a portfolio of $16.7 billion representing 62.7% of UPB of the total portfolio as of Dec. 31, 2021, compared to $15.4 billion representing 63.8% of UPB of the total portfolio at our prior review (as of June 30, 2020). The company's life insurance company and pension fund portfolios increased in UPB by 5.2% and 151.7%, respectively, since our prior review (see table 6). PrinREI services these portfolios, along with the other third-party investor and bank or financial institution portfolios, for non-affiliated clients, which increased to a total of 27 from 23 at the time of our prior review and is a continued area of focus.

Table 4

Table 5

Table 6

New loan boarding

PrinREI has superior controls in place for initial loan boarding. The new loan set-up function is in the asset management, surveillance, and compliance group and the team consists of three dedicated employees. According to management, this teams' broader experience provides a deeper understanding of loan structure and asset management processes to provide a better loan boarding experience. The team also handles the custodial document process, as well as processing data changes associated with loan modifications and daily operations. Other aspects of new loan setup operations include the following:

• Prior to loan funding, an audit of the loan agreement and related loan documents is conducted to confirm that material loan terms are consistent with committee approval of the loan, and to ensure compliance with the Sarbanes-Oxley Act.
• For complex loans, a transfer of information meeting is held in person within approximately seven business days of the closing date, in which the loan documents are reviewed for critical information that is needed to complete the loan boarding process and effectively service the loan.
• The majority of the loan data boarding process is automated from either data in the origination system or data feeds received from a prior servicer.
• PrinREI's origination system is interfaced with the servicing system, allowing for automated data transfer for selected key fields; for fields that require more details, such as tax and insurance items, the tax and insurance teams within loan operations input the information.
• Upon completion of loan boarding, loan documents and other related information are indexed and imaged, with original documents stored based on the requirements of the given portfolio.
• The loan setup area is responsible for initiating the proper audits for all new loans and loan modifications. Audits are conducted to confirm that loan-level data built in Enterprise! is consistent with source documents and to identify discrepancies and potential issues that could impair the future servicing of the loan. Audit tracking is coordinated via the use of a SharePoint site.
• The loan set-up team, in conjunction with the closing team, tracks post-closing documents and follows up monthly. As of Dec. 31, 2021, a minimal amount (2.0%) of new loan documents for loans boarded more than six months ago were outstanding.
• The company sends borrowers welcome letters within eight days of loan closing, indicating the servicing manager as the point of contact for the borrower.
• There were 144 new loans boarded to the system in 2021.

Payment processing

The payment processing operation is efficient. PrinREI has a series of electronic uploads from its servicing and online banking systems to efficiently handle fund transfers between clearing and custodial accounts. Other aspects of PrinREI's payment processing operations include the following:

• The cash management and investor reporting area handles payment posting. Separate individuals handle payment processing and reconciliations, maintaining a well-controlled segregation of duties.
• The company has a high level of automation in payment processing, with 99.0% of payments posted electronically as of Dec. 31, 2021.
• Multiple payment clearing accounts are used because of the diverse investor base.
• The payment processing division has access to online banking and transfers money between the payment clearing accounts and investor custodial accounts along with appropriate general ledger entries.
• Daily reconciliations are performed between the servicing system and clearing accounts.
• A small number of checks are received through an internal lock box. These checks are tightly controlled and remain secure in the cash management area. A corporate electronic deposit application is utilized for bank deposits of all checks received. Checks are scanned and then deposited through a bank web portal.

Investor reporting

The previously noted cash management and investor reporting team handles investor reporting and remitting based on individual investor requirements, which cover daily, weekly, monthly, and quarterly reporting and remitting cycles. Other highlights include the following:

• Enterprise! supports National Association of Insurance Commissioners reporting, which the insurance industry requires, along with standard reporting for government-sponsored entity securities and CMBS transactions.
• Enterprise! supports standard watchlist reporting based on automated (CREFC reporting) triggers, and it provides an internal report based on company-directed triggers.
• Cash is verified before remittance, at which time the bank balance is verified to the remittance amount and the system report. Bank accounts are reconciled monthly to the general ledger.
• Separate personnel handle the reporting, remitting, and bank reconciliation functions.
• A second-level management review occurs before releasing reports and funds.
• Funds are remitted by wire through the online bank system under dual approval.

Escrow administration

PrinREI has well-controlled procedures for escrow and loan administration (taxes, insurance, and loan-level credit compliance reserves). Highlights include the following:

• Separate groups within loan operations handle tax (three dedicated employees) and insurance (five dedicated employees), as well as overall escrow testing and analysis. Approximately 30.0% and 13.0% of loans were escrowed for taxes and insurance, respectively, as of Dec. 31, 2021.
• Assigned servicing managers handle loan-level credit compliance reserves (tenant improvement and replacement reserves) within the portfolio and CMBS servicing areas.
• The company uses a third-party tax service for all loans (escrowed and non-escrowed).
• The servicing system tracks tax compliance for escrowed loans and vendor tax-due reports are reconciled to the servicing system records.
• The tax vendor tracks non-escrowed loans for payment due dates and notifies loan operations of tax delinquencies.
• Tax escrows are analyzed no less than annually in Enterprise!.
• In addition to the five dedicated insurance staff members, PrinREI outsources part of the insurance review process, including document imaging, and maintaining and filing insurance certificates, to a third party.
• Insurance information tracking and compliance are maintained in Enterprise!, with notice of policy renewal reminder notices sent to the borrower 21 days before expiration.
• Carrier ratings are reviewed annually at renewal.
• Force-placed insurance coverage has a 120-day look-back provision for property insurance and flood insurance. PrinREI force places insurance for deficient loans immediately upon notification that the deficiency will not be cleared or no later than 120 days after the policy expires. As of Dec. 31, 2021, PrinREI had no loans that were force-placed.

Asset and portfolio administration

PrinREI has efficient, well-controlled processes for primary servicing asset management and surveillance. As previously noted, the director of primary servicing asset management, with 34 years of industry experience and company tenure, retired in March 2021, and the manager of compliance and surveillance, with 16 years of industry experience and company tenure, was promoted to director of asset management and compliance. The primary servicing asset management, compliance, and surveillance functions were merged, which management indicated provides staffing flexibility and additional growth and development opportunities. Notable features include the following:

• The servicing asset management area consists of 12 employees and is responsible for borrower customer service; analyzing and recommending borrower requests to portfolio managers; monitoring collateral covenants and property reserves; property and loan analysis; new loan set-up; compliance with servicing mandates; transferring loans to special servicing; and re-boarding modified loans that are returned from special servicing.
• A five-person surveillance team (within servicing asset management) is responsible for new loan set-up; cash management waterfalls; loan trigger calculations; loan payoffs; and responding to inquiries related to property surveillance from master servicers, special servicers, and clients.
• The surveillance team also processes financial statements. PrinREI utilizes Berkadia Commercial Mortgage LLC, an S&P Global STRONG ranked primary servicer, to image the operating statements and rent rolls, and perform the data entry and initial analysis in Enterprise!.
• PrinREI has consistently collected and reviewed year-end financials for 100% of its CMBS loans. Collection and review rates for non-CMBS loans has been lower at 90.0% as of Dec. 31, 2021. Management indicates that this is due to financial statements not being required for several smaller loans that the company services for third parties.
• Asset management and surveillance responsibilities were expanded to include annual financial and lease reviews for the private debt origination team.
• PrinREI outsources property inspections to two vendors. Letters are sent to borrowers to inform them of any deferred maintenance items, and PrinREI tracks deferred maintenance items in Enterprise!. This process is managed by the loan operations team.
• UCC renewals are performed using a combination of one full-time equivalent staff dedicated to UCC monitoring and a third-party vendor system, based on tickler information within Enterprise!. Continuations are filed with the assistance of the vendor. During 2021, PrinREI reported no lapsed UCC filings.

Borrower requests

PrinREI has seven dedicated employees, who address borrower requests in a well-controlled manner. Highlights of the process include the following:

• For non-CMBS loans, PrinREI contractually has the responsibility to process all requests for the borrowers. Servicing asset managers review and process routine level requests.
• For assumptions and other requests that would materially affect the collateral, the servicing asset manager and servicing portfolio manager would present their recommendation to the material servicing committee for review and approval, obtaining lender-client approval as necessary.
• For CMBS loans, PrinREI works with the deal parties in processing all requests and obtaining their approval if required.

During 2021, PrinREI processed 148 borrower requests with an aggregate UPB of approximately $4.0 billion as primary servicer. By number, request actions were as follows:

• Leasing consents (79.7%);
• Assumptions (8.1%);
• Maturity extension (5.4%);
• Defeasance (4.1%);
• Management changes (2.0%); and
• Releases--partial property/collateral (0.7%).

During 2020, PrinREI processed 172 borrower requests with an aggregate UPB of $4.4 billion as primary servicer. By number, request actions were as follows:

• Leasing consents (77.3%);
• Maturity extension (8.1%);
• Assumptions (6.4%);
• Releases--partial property/collateral (5.8%)
• Defeasance (1.8%); and
• Substitution of collateral (0.6%).

Early-stage collections

Two servicing managers handle early-stage collections. As previously noted, from 2017 through 2019 PrinREI's servicing portfolio maintained nominal delinquency rates. During 2020, delinquencies rose modestly, primarily in the structured debt and CMBS portfolios due to the COVID-19 pandemic. As of Dec. 31, 2021, delinquencies were 0.14% of the portfolio, which consisted of two loans. Noteworthy features include the following:

• The servicing system generates automated email notices that are sent to the assigned servicing managers based on due dates or grace period days as defined at new loan setup.
• Servicing managers contact borrowers by phone two days after the grace period expires and input collection notes in the servicing system or into the imaging system. The company assesses the situation and sends default notices in compliance with servicing agreements, which could be up to 30 days past due. This is a lengthier time frame than those of peers.
• Management reviews system-generated delinquency reports in weekly and monthly discussions for watchlist and credit review inclusion and potential transfer to special servicing.
• Transfers to special servicing are monitored for compliance with pooling and servicing agreements and investor agreements.

Loan Administration--Special Servicing

The loan administration subranking is STRONG for special servicing.

PrinREI has built a track record of successfully managing and disposing of troubled assets nationwide through multiple economic cycles, while handling complex assets collateralized by diverse property types. PrinREI management has reported that from 2009 through 2021 the company resolved 591 loans with an UPB of more than $6.5 billion.

The special servicing group handles nonperforming loans and REO assets. Most of the active special servicing volume has historically involved non-CMBS life insurance company assets and structured debt assets, which also holds true as of Dec. 31, 2021, because no CMBS loans were actively special serviced.

As of Dec. 31, 2021, there were 11 active non-CMBS loans (nine performing and two nonperforming) in special servicing, with aggregate UPB of $227.8 million. PrinREI's active special servicing portfolio includes both affiliated and nonaffiliated clients. Each client has different strategic goals, driven by tax implications, liquidity, and investment criteria, which greatly influence loan workout strategies and REO hold times. As of Dec. 31, 2021, the investment real estate portfolio comprises 506 assets with a value of $39.0 billion, (see table 7) and averages $33 billion in value and 560 properties over the last five years.

PrinREI reported a total of 115 employees/resources in its special servicing operations as of Dec. 31, 2021, that are allocated as follows:

• Three employees are dedicated to special servicing and are responsible for loan asset management. This team is led by the director of special servicing, who has 33 years of industry experience and company tenure; and includes two asset managers, one having 11 years of asset management experience and 14 years of company tenure, and one having seven years of asset management experience and 17 years of company tenure.
• As many as 112 real estate equity asset management employees, who are responsible for the company's investment real estate assets, are available resources to be utilized in the REO process, overseeing foreclosed properties. The equity asset management area is led by a senior managing director, who has over 35 years of industry experience and company tenure.
• Equity asset managers work in teams that are aligned across three regions in the U.S. (western, central, and eastern), enhancing direct knowledge of local market conditions. These 18 asset managers' responsibilities include developing and executing business plans, budgeting, selecting and overseeing third-party leasing teams, and hiring property managers.

Within the PrinREI equity asset management group is an acquisitions/disposition team that develops hold/sell analysis and provides input to asset management on positioning an asset for marketing. Its employees are distributed across two regions (western and eastern) and have a deep network of long-standing relationships with buyers, developers, joint venture partners, borrowers, and brokers. According to management, from 2001 through 2019, the group has stabilized/sold 430 projects in the U.S. valued at approximately $24.0 billion, on behalf of PrinREI clients.

PrinREI also utilizes the efforts of commercial mortgage servicing, private debt origination, in-house counsel, appraisal services, engineering services, and external counsel, to support the efforts of its dedicated special servicing personnel.

Table 7

Loan recovery and foreclosure management

PrinREI displays effective and proactive, loan recovery and foreclosure management protocols to efficiently resolve nonperforming loans across a broad spectrum of property types. Highlights include the following:

• The special servicing team strives to formalize an asset recovery plan within 30 days of transfer, well within industry norms, which must be approved by the portfolio asset management committee. This committee comprises the CEO of PrinREI, senior managing director-–portfolio management, assigned client portfolio manager, managing director-–commercial mortgage servicing, senior managing director-–private debt origination, the special servicing asset manager not assigned to the transaction, and for Principal Life Insurance Co. loans only, the chief investment officer or portfolio manager.
• Special servicing updates recovery plans upon any significant change in restructure negotiations, foreclosure, or bankruptcy filing.
• Foreclosure recommendations result in ordering third-party fee appraisals, engaging outside counsel, and assessing environmental issues. The team initiates the appointment of a receiver when applicable.
• The special servicing team holds regular meetings during the foreclosure process and notifies the accounting/financial management, operations management, and real estate equity groups of pending foreclosures.
• An online database application tracks timeline milestones during the recovery and foreclosure process.
• Upon taking title, same-day emails notify all parties, including corporate accounting, that a loan has been transferred to REO, at which time all systems are updated.

PrinREI's loan resolution activity from 2017 through 2021 totaled 189 loans with an UPB of over $2.4 billion (see table 8), of which nearly 80.0%, by loan count, were resolved during the past two years. The average resolution times during 2021 and 2020 were more rapid than historical industry norms; largely driven by loans being considered for COVID-19 pandemic-related forbearance or relief requests, of which over 90.0% were returned to PrinREI as primary servicer. During 2017, 2018, and 2019, PrinREI reported lower but a bit more diverse resolution activity and slightly longer average resolution times. In 2018, the average resolution time of over 14 months was skewed by nine loans that involved protracted workout scenarios. The sample workout plans we reviewed indicate a thorough current status, analytical review, and course of action.

Table 8

REO management and dispositions

PrinREI demonstrates proactive REO management and sales oversight. Notable aspects include the following:

• PrinREI's equity operations staff is responsible for overall coordination and selection of property management companies, leasing activities, capital improvements, and dispositions.
• PrinREI selects all third-party service providers, including property management companies, and leasing and sales brokers, based on approved vendor lists compiled by each functional area. The lists are based on credentials, experience, reputation, performance, and fees. The approved vendor list is reviewed annually.
• Property management companies are engaged before foreclosure and are supplied with PrinREI's property management manual and accounting software. The manual is comprehensive and includes detailed, standardized procedures, as well as specifics on operating and reporting requirements.
• Within 30 days of taking title, asset managers perform site inspections and develop business plans including an operating budget and capital expenditures.
• The real estate investment committee approves REO plans, and PrinREI updates them during the fourth quarter of each year to establish budget information and refine the asset strategy for the coming year.
• The property management company electronically provides standardized monthly financial and property status reports, which are uploaded to OnBase and the REO accounting system.
• All sale offers are approved by the real estate investment committee, and upon acceptance, the equities investment management team facilitates the closing with accounting and local counsel.

PrinREI has completed five REO property sales since 2017 (see table 9). The company's strategy is internal rate of return driven in determining whether to execute a quick REO sale or invest in the property. In general, over the past five years, PrinREI achieved favorable gross sales-to-market value ratios for its REO dispositions. Additionally, from 2017 through 2020, PrinREI sold 665 investment real estate assets for a total of $22.7 billion, demonstrating its substantial disposition experience (see table 9). The outsized 2018 volume of $11.5 billion included the real estate assets of a PFG subsidiary that PrinREI sold during that year.

Table 9

REO accounting and reporting

PrinREI's controls and procedures for property-level accounting and oversight are sound. REO accounting and reporting activities are effectively handled by the equities accounting group. Highlights include the following:

• Accounting handles all property accounting, including hard lockboxes, and performs monthly reviews and reconciliations of property manager reports and bank statement reconciliations.
• Tenant rent payments go into property-specific depository accounts, and a weekly automated clearing house process sweeps the funds to the appropriate client account.
• A zero-balance disbursement account pays for operating expenses, with property management companies receiving payment via wire transfers.
• Accounting also tracks and records all taxes and insurance on REO properties and works with asset management to ensure appropriate insurance coverage and tax appeals.
• Bank checking accounts are downloaded and reconciled weekly, and property managers submit weekly listings of checks issued.
• The accounting group reconciles deposit and disbursement activity with the monthly property manager's accounting packages via downloads to the REO accounting system. Property management companies are subject to random audits under a program by PrinREI's external auditor according to investor criteria and the PrinREI controller's area. Asset managers review the audit results, and any findings are reviewed and corrected. In 2021, nine formal audits were conducted. Due to the COVID-19 pandemic, no formal audits were performed in the first six months of 2020, and three formal audits were performed in the second six months of 2020.

Subcontracting management

PrinREI handles the management and oversight of subcontractors in a controlled and effective manner. It has appraisal and engineering professionals on staff who manage external consultants. The company has a formal performance review process for all vendors, and applies the following guidelines:

• Property managers and real estate brokers are selected from an approved vendor management list and standard agreements are used.
• Appraisal reports for problem loans are completed by an independent pre-approved consultant with a Member Appraisal Institute (MAI) designation, state license, or certified appraiser using a standardized engagement letter, depending upon the factors involved with the problem loan. The in-house MAI is responsible for reviewing the report.
• Environmental and property condition assessment reports are completed by pre-approved consultants in accordance with guidance documents. The in-house environmental engineer is responsible for requesting, reviewing, and providing recommendations to special servicing based on findings in the Phase I report. The problem loan team collectively determines if a Phase II report is necessary.

Performing loan surveillance

PrinREI's special servicing group performs active surveillance on loans that have been identified as potential problems, which have imminent default risk or a short-term monetary default. Resources are coordinated and implemented based on each client's specific desired financial result. Notable aspects include the following:

• The special servicing team is assembled once a loan is considered a watchlist loan.
• Loans are included on the company's active watchlist based on one or more of the following: imminent default, 30-day delinquencies, nonpayment of taxes or insurance, tenant bankruptcy, or breach of legal or technical requirements.
• The team holds a fact-gathering meeting once an asset is included on the watchlist, at which time the team develops preliminary strategies. If, based on the review, the team deems it appropriate to transfer the loan to special servicing, the team updates applicable systems.
• PrinREI uses support teams (appraisal and engineering) for updated appraisals, inspections, and environmental analysis.
• Special servicing meets semi-annually with private debt origination and portfolio management to decide whether to add loans to the watchlist, according to criteria that varies by client.
• Special servicing provides monitoring and quarterly surveillance reporting for each client's watchlist loans.

Legal department

PrinREI maintains a well-controlled legal function. Currently, two in-house attorneys support the special servicing operation; however, the number of attorneys assigned has historically varied in correlation with the volume of problem assets. Other notable aspects of the legal function include the following:

• The legal division engages external counsel based on approved vendor lists. External counsel handles litigation, bankruptcies, foreclosures, and loan restructures.
• In-house attorneys oversee outside counsel and approve the payment of all legal bills.
• Servicing will also leverage in-house counsel for complex transactions, document interpretation issues, and complex borrower requests.

Financial Position

The financial position is SUFFICIENT.

Related Research

• Select Servicer List, July 26, 2022
• Principal Financial Group Inc., June 8, 2022
• Servicer Category Descriptions Expanded And Revised , Feb. 28, 2022
• Principal Financial Group Inc. Projected Capital Adequacy Unchanged Amid Divestitures, Jan. 31, 2022
• Servicer Evaluation: Principal Real Estate Investors LLC, Jan. 12, 2021
• Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019