S&P Global Ratings' rankings on KeyBank Real Estate Capital (KBREC) are STRONG as a commercial mortgage primary, master, and special servicer. On Nov. 20, 2023, we affirmed the rankings (see "KeyBank Real Estate Capital STRONG Rankings Affirmed; Outlooks Are Stable," published Nov. 20, 2023). The ranking outlook for all three rankings is stable.

Our rankings reflect KBREC's:

• Seasoned and tenured senior management team;
• Strong audit, compliance, and control environment;
• Highly effective technology systems and applications;
• Well-defined training regime;
• Substantial track record and institutional commitment to the servicing platform as evidenced by its Mortgage Bankers Assn. (MBA) December 2022 rankings as the third-largest primary and master servicer, including its second-ranked market position as a Freddie Mac capital markets execution (CME) primary and master servicer, and its top-three market position in commercial mortgage-backed security (CMBS) primary and master servicing, as measured by unpaid principal balance (UPB);
• Market position per the MBA as the third-largest named special servicer as measured by UPB; and
• Diverse property types in its primary and master servicing portfolio, accompanied by strong geographic and investor diversity.

Since our prior review (see "Surveillance: KeyBank Real Estate Capital," published Feb. 10, 2022) the following changes and/or developments have occurred:

• The executive vice president (EVP), who heads up the servicing team, announced he will be retiring in March 2024 following a 23-year career with KBREC. He will be succeeded internally by the senior vice president (SVP), who is currently the head of special servicing and transactions and has served in various roles during his 17-year tenure with KBREC.
• The SVP of finance retired in March 2023 and was replaced by an internal candidate with 21 years of tenure within the company.
• The vice president (VP) of risk management retired in March 2023 and was replaced by an employee with 22 years of company tenure and extensive experience in risk management.
• KBREC enhanced its website's interface to frontline users, added the ability of investor document upload, and created an escalation process for issues noted within the website.
• KBREC upgraded its McCracken Strategy (Strategy) servicing system to version 20 in July 2023 from version 19F.
• KBREC's primary and master servicing portfolio grew 30.8% to $458.1 billion from $350.3 billion. This growth was largely fueled by growth among its other third-party investor (103.2%) and CMBS (29.1%) investor clients.
• Actively special-serviced assets increased to $4.7 billion (206 assets: 194 loans and 12 real estate-owned [REO] assets) from $2.6 billion (189 assets: 176 loans and 13 REO assets) as the average active loan UPB doubled, increasing to $23.3 million from $12.1 million.
• As of mid-year 2023, KBREC was the named special servicer on 385 transactions (up from 332), aggregating $198.6 billion in UPB (up from $163.8 billion); CMBS transactions increased to 178 from 158, aggregating $84.2 billion in UPB (up from $60.7 billion); Freddie Mac CME securitizations increased to 193 from 168, aggregating $106.3 billion in UPB (up from $100.5 billion); and there were 14 commercial real estate collateralized debt obligations (CRE CLOs) aggregating $8.1 billion in UPB (up from $2.6 billion).

The ranking outlook for all three rankings is stable. We believe that KBREC will seamlessly manage the transition in leadership in early 2024 and continue to perform as a highly effective commercial mortgage primary, master, and special servicer of its 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, 2023, 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, the 14th largest U.S. commercial bank, operating in 15 states with $195 billion in assets and approximately 17,000 employees as of June 30, 2023. KBREC's servicing operations are primarily based in Overland Park, Kan., through its loan servicing and asset management division (LSAM), although of its 451 staff members, approximately 30 are in Dallas.

KBREC is a full-service capital provider and mortgage loan servicer. It provides origination and servicing activities for all CRE transactions, from construction and bridge financing to permanent loans across the entire capital stack, including mezzanine and equity positions.

As of June 30, 2023, KBREC reported a primary and master servicing portfolio of $458.1 billion, including a master servicing portfolio of $111.8 billion of loans for which it maintains oversight responsibilities of 28 subservicers. Additionally, the majority (64.2%) of KBREC's primary and master servicing portfolio is contained within securitized structures, including 34.3% CMBS, 25.5% Freddie Mac CME, and 4.3% CRE CLOs.

As of June 30, 2023, KBREC was the named special servicer on 385 transactions aggregating $198.6 billion in UPB across 178 CMBS transactions aggregating $84.2 billion in UPB; 193 Freddie Mac CME securitizations aggregating $106.3 billion in UPB; and 14 CRE CLOs aggregating $8.1 billion in UPB. Its active special servicing portfolio includes 206 assets (194 loans and 12 REO loans with 13 REO assets) aggregating $4.7 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 1-4 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, 2023, KBREC had 451 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. Since our last review, the SVP of finance and VP of risk management retired. Succession plans were in place and both roles were filled by well-experienced and tenured internal employees.

LSAM is managed by an EVP who has more than 30 years of industry experience, including over 20 years with KBREC. A seasoned and tenured group of five LSAM SVPs report to the EVP. These SVPs oversee the following areas:

• Loan servicing and asset management for CMBS, government-sponsored entity (GSE), and Housing and Urban Development/Ginnie Mae investors;
• Loan servicing and asset management for institutional servicing clients;
• Accounting, taxes, and investor reporting, which includes investor reporting, loan accounting, financial reporting, loan operations, risk management, insurance, taxes, 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.

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). These metrics have generally remained consistent since our last review. Special servicing asset managers (AMs) have an average of 16 years of workout experience and eight years of tenure with KBREC, which, while similar to our last review, remains at the lower end of its STRONG-ranked peers.

Table 5

KBREC reported that overall primary and master servicer staff since our last review increased by approximately 15.4%, supporting the overall portfolio growth. Turnover has been within industry norms: for first-half 2023 and full-year 2022, KBREC reported 8.7% and 20.5% turnover, respectively, in primary servicing.

Total headcount in special servicing has remained consistent since our last review and management believes they are adequately staffed and maintain enough depth and experience to handle increases in portfolio volumes. KBREC's reported special servicing turnover of 8.1% (first-half 2023) and 25.8% (full-year 2022) was lower than at the time of our last review and similar compared to its peers.

Training

KBREC targets 35 hours of training per employee annually; it reported an average of 18 hours of training during first-half 2023 and an average of 48 hours of training completed per employee during 2022. We believe a 35-hour training target is generally adequate but note that during first-half 2023, KBREC's reported training hours were the lowest among our STRONG-ranked primary servicers. Other training features considered in our assessment 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.
• Numerous retention efforts include people resource groups, companywide social events, and various diversity, equity, and inclusion efforts.
• KBREC supports staff gaining MBA accreditation with 156 employees obtaining Level 1 Commercial Mortgage Servicer (CMS) certification and 47 staff members obtaining Level II CMS certification since the firm's inception.
• KBREC 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. The most recent program started in late 2021 and included 12 participants.

Systems and technology

KBREC has highly 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 plan. 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 to support KBREC's technology needs, including programming, data backups, and application support.
• KBREC uses Strategy version 20, which it upgraded from version 19F since our last review, 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 advanced monitoring of covenant and compliance triggers not contained in Strategy. Since our last review, enhancements were made to RECWeb, including an improved search function and data automation.
• 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.
• Strategy and RECWeb download data to a data repository daily 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, KBREC enhanced its website's interface to frontline users, added the ability of investor document upload, and created an escalation process for issues noted within the website.

Business continuity and disaster recovery 

• 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.
• The most recent disaster recovery (DR) test for Strategy was performed in May 2023. The most recent DR tests for RecWeb and Key2CRE were performed in June 2023. All applications were completed successfully within the targeted recovery time and point objectives.
• Offsite primary data storage is in Solon, Ohio, and the DR and backup site is in Aurora, Ill.
• The Overland Park and Dallas sites serve as reciprocal locations for DR and business continuity.
• Backups of the Strategy, Key2CRE, and RECWeb applications and respective data are performed daily. 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 data centers that allows for a total loss of utility power without interruption to computer services. There are uninterruptible power supplies 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 three times a year, once internally and twice by an external party, with each external test rotated among vendors. No material issues were cited in the latest external test performed in March 2023.
• Cybersecurity training is provided and phishing emails are randomly sent to employees on a monthly basis with an objective of testing each employee at least four times annually.

Internal controls

KBREC maintains strong internal controls, including extensive and well-documented policies and procedures (P&Ps), internal and external audits, and a quality control environment with proactive, well-documented compliance. The audit program includes internal staff, and external auditor, client, and investor reviews. Features are described below.

P&Ps 

KBREC operates with well-written, documented 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 risk management team, includes creating, revising, and testing P&Ps for operational and investor compliance, and the results are reported to senior management.
• The manuals, which are maintained on the company intranet for employee access, 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 the P&Ps we reviewed have been revised or updated since 2022 (with the vast majority having been reviewed or revised during 2022 or 2023), and management indicated that a full review and update of P&Ps are generally performed every 18-24 months by the P&P owner.

Compliance and quality control 

• Loan servicing activities are reviewed by the risk review group on a regular basis. The programs are designed to evaluate compliance with parent company P&Ps, laws and regulations, and sound industry servicing practices.
• KeyCorp also requires KBREC to complete control testing and certify their quarterly line-of-business risk and control self-assessment (RCSA). Significant changes in risks or control environment noted during the RCSA process are reported to appropriate risk management governance committees for oversight and direction.
• 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.

Internal and external audits 

KBREC's additional operational controls and practices are solid. Highlights considered in our assessment include the following:

• A major public accounting firm performs annual Regulation AB (RegAB) and Service Organization Control 1 (SOC 1) audits. The 2022 RegAB report contained a material instance of non-compliance associated with the adjustment of interest rates on variable-rate loans. Remediation efforts, which have been concluded, included identifying impacted loans, reviewing and revising procedures to include new tracking and action steps, and providing training to relevant staff members.
• The 2022 SOC 1 report, which covered the period through Sept. 30, 2022, received a clean opinion in a Dec. 15, 2022, 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 2023, labeled KBREC's controls as "effective," its highest internal rating, with no reportable findings. Areas tested include loan setup, loan payment processing, paid-in-full processing, investor remittances, tax and insurance and non-escrow monitoring, change management, computer operations, information security and system backups.

Vendor management

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.

• KeyCorp, KBREC's ultimate parent, maintains a third-party management policy and program, which provides a framework to manage risk from domestic and offshore third parties.
• The vendor management process involves assessing, mitigating, and monitoring risks on an ongoing basis. Generally, the VP 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.
• 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, which generally requires various qualifications, such as state certifications, licensing, and insurance coverage.
• 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, as well as its errors and omissions (E&O) insurance coverage, is in line with the requirements of its portfolio size. As of the date of this report, KBREC reported no material pending servicing-related 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. Combined primary and master servicing UPB has increased 30.8% since our last review. Multifamily remains the emphasis (42.7% of UPB; 40.3% of property count), with all property types meaningfully represented, including a substantial increase in industrial, which rose to 11.1% of UPB compared with 8.4% at our last review. Additionally, the portfolio continues to contain a varied geographic mix and substantial investor diversity (see tables 3 and 4).

As of June 30, 2023, the $458.1 billion portfolio (including master servicing; see table 4) was concentrated in securitized structures, primarily CMBS (34.3%) and Freddie Mac CME (25.5%). Investor types rounding out the top five include other third-party investors (18.7%), balance sheet loans (5.3%), and Fannie Mae (4.9%).

As of June 30, 2023, KBRE's reported delinquency rate of 2.0% (see table 6) is similar to the 2.1% rate at the time of our last review as of June 30, 2021.

Table 6

New loan boarding

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 considered in our assessment 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 conduct transition meetings to review the servicing and documentation requirements of upcoming closings.
• Welcome letters are system-generated and generally issued 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.
• In total, 734 loans were boarded during first-half 2023, and 2,141 in full-year 2022. The lower annualized pace of loans boarded through first-half 2023 is largely due to the overall slowdown in commercial real estate lending.

Payment processing

KBREC's practices and integrated technology tools efficiently address payment processing, cash-managed loans, and other complex loan structures. Highlights of payment processing considered in our assessment 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, 2023, KBREC serviced over 1,300 cash-managed loans, approximately 8.9% of its portfolio, slightly down from almost 1,400 (or 9.6% of its portfolio) as of our last review.
• All funds (checks, wires, and automated clearing house [ACH] transactions) are processed through a payment clearing account, which is balanced daily with appropriate segregation of duties.
• Payment processing is highly automated, with all payments received by wire transfer (51%), ACH (46%), or lockbox (3%) as of June 30, 2023.
• If checks are received on-site, they are logged, deposited into a KeyBank clearing account, and posted generally within the same business day through KeyBank check imaging deposit software in a well-controlled process.
• Metrics regarding aged items and funds held in suspense (excluding specially serviced loans) have been consistently reported as zero since our last review.
• Of the total portfolio, 29.3% are adjustable-rate loans, similar to 30.0% reported as of our prior review. Notwithstanding the material non-compliance issue previously noted in the RegAB audit, KBREC maintains clear procedures regarding rate adjustments.

Investor reporting

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

• 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.
• 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 considered in our assessment include the following:

• As of June 30, 2023, the servicer has a 10-person tax administration team and a 61-person insurance group. Of the total portfolio, 33% has tax escrows and 42% has insurance escrows.
• All insurance administration is handled in-house with dedicated insurance units serving each investor type.
• 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 both property insurance and 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 P&Ps exist to support tax administration efforts.
• The servicing system automatically generates borrower notices for accounts without tax escrows.
• KBREC reported a minimal number and amount of non-reimbursable tax penalties paid during 2022 and in first-half 2023.
• 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. 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 (SPOC). 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 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.

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 (4,535 of which were completed during first-half 2023) 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.
• 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 Commercial Real Estate Finance Council (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, 2023, KBREC had received and reviewed 98.9% of the previous year's operating statements for its CMBS portfolio and 97.5% for its 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 first-half 2023, KBREC reported seven lapsed UCCs, for which new UCCs were subsequently filed; no loss of lien position occurred.

Borrower requests

KBREC addresses borrower requests in a proactive manner. Highlights considered in our assessment include the following:

• 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 17-person dedicated transactions group department headed by a VP 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-party vendors to assist in the consent review process.
• During the trailing 12-month period ending June 30, 2023, within its authority as either primary or master servicer, KBREC processed 965 consent requests (579 as primary and 386 as master), including 248 leasing consents, 204 repair extensions, 116 property management changes, 102 defeasance requests, 58 assumptions, 53 partial property releases, 33 maturity extensions, and 22 transfer of interest, 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 within 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, 2023, KBREC served in a master servicing oversight capacity on 28 subservicers that handle over 5,200 loans with a total UPB of $111.8 billion (see table 7). Its master servicing (i.e., serviced by others) delinquency rate is 0.3% as of June 30, 2023, the same level as at our prior review).

Table 7

KBREC has 30 account managers that monitor subservicer reporting and compliance where KBREC is the named master servicer; these personnel also service loans where KBREC is only the primary servicer.

New loan boarding

KBREC has a well-controlled practice to board subserviced loans and integrate the required servicing elements. Its procedures for boarding subserviced loans are similar to those used for its primary serviced loans and is handled by the same staff. Highlights considered in our assessment 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 considered in our assessment 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 track escrow activity. Other highlights considered in our assessment 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 monitor 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, 2023, KBREC has received and reviewed 97.2% 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 28 combined subservicers across the CMBS and Freddie Mac CME platforms.
• To facilitate its oversight and auditing its subservicers, KBREC maintains a master servicing module within the servicing system used for contacts, servicer-level documents, and active CMBS loan pools.
• Annually, KBREC conducts full- or limited-scope audits as part of its subservicer audit program. Determination as to what type of audit is performed is primarily based on the number and balance of the related subservicer loans, previous audit performance, and any other related material issues or concerns.
• During the trailing 12 months, KBREC performed 29 subservicer audits, all of which were limited scope. According to management, full-scope (i.e., on-site) reviews have commenced during second-half 2023 and will continue into 2024.
• 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.
• Annually, the company requires officer compliance certificates from each subservicer, while also reviewing its corporate financial statements, evidence of E&O insurance, and adherence to Sarbanes-Oxley and Uniform Single Attestation Program/RegAB audits.

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 the 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 50.0% of determined realizable value for most property types, though it uses a 30.0% threshold for health care and lodging properties.
• 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, 2023, KBREC was the named special servicer on 385 securitized transactions consisting of more than 12,600 loans with a total UPB of $198.6 billion, a 21.3% increase since our last review. KBREC's named special servicing volume continues to increase as a part of its strategic plan to increase its presence in the marketplace.

Its special servicing staff has 31 full-time employees, up 3% (one employee) since our last review. The staffing remained generally flat despite the 78.9% increase in special servicing UPB as there was only a 9.5% increase in asset count since our last review. Special servicing totaled $4.7 billion, including 194 loans and 12 REO loans (with 13 REO properties) (see table 8) as of June 30, 2023, compared with $2.6 billion, including 176 loans and 13 REO assets as of June 30, 2021.

Within the portfolio, there are 165 CMBS loans and nine REO properties, comprising $4.4 billion and $183 million of UPB, respectively. A group of 21 AMs (up from 20 as of our prior review) are responsible for the special servicing portfolio. Based on the June 30, 2023, portfolio, the AMs handle, on average, 9.9 assets/loans, which we believe demonstrates the team is more than adequately staffed.

Table 8

Loan recovery and foreclosure management

Resolution activity during first-half 2023 totaled 41 loans that aggregated $939.7 million of UPB and included a variety of strategies, which by loan count were: full payoffs (18), loans returned to master servicer (16), discounted payoffs/note sales (4), and foreclosures (3) (see table 9). Average resolution periods totaled 17.2 months, down from the 20.4 month average reported during 2022, when KBREC resolved 92 assets aggregating nearly $2.2 billion, but a bit higher than the 13.9 month average that KBREC produced during 2021.

Table 9

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 considered in our assessment include the following:

• Special servicing personnel participate in monthly watchlist reviews and master servicer conference calls to gain familiarity with each asset before a potential transfer.
• Team leaders assign loans to AMs, considering existing workload, asset relationships, regional location of the asset or 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 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 an 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 and guarantors to sign pre-negotiation letters before entering into workout discussions.
• Loan resolution business plans are targeted for completion no later than 60 days after the transfer, a reduction from 90 days as of our last review. 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 or receivership before completing a business plan.
• Business plans include a recommended strategy accompanied by a review of the borrower or 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. 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, if applicable.

REO management and dispositions

The REO portfolio asset count of 13 has remained largely flat since our last review. At the same time, the average time in special servicing for its REO assets is at a multiyear high of 41.2 months, a substantial increase from 21.7 months at our last review but within industry norms.

Since June 30, 2021, KBREC has disposed of 23 REO assets (see table 10), which were comprised of properties with an average market value of $14.5 million (we note that the June 30, 2023 REO portfolio average UPB is $15.5 million). The average REO hold time for these 23 divested properties was 11.3 months, comparing favorably to its similarly ranked peers. Average gross proceeds relative to market value of 110.9% since our last review (109.1% during first-half 2023) compare favorably to other special servicers.

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.
• AMs generally visit each assigned property within 45 days after the REO date and annually thereafter.
• 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 60 days (down from 90 days as of our last review) of title transfer. In addition to the listing broker, the business plan includes the list price, commission structure, marketing requirements, and engagement terms.
• The 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

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 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 a 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.
• 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 first-half 2023, no such audits were performed, whereas four audits were performed during 2022. Given the modestly sized REO portfolio, we believe the volume of audits performed is adequate.

Performing loan surveillance

KBREC employs formalized surveillance practices to monitor the deals for which it is named as special servicer and maintain continuous communication with master servicers to evaluate loans of concern. Notable aspects of surveillance considered in our assessment 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 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 VP oversees a team of five, which includes three asset managers, an analyst, and a closer.
• During the trailing 12-month period ending June 30, 2023, within its authority as special servicer, KBREC processed 42 consent requests of performing loans with an aggregate UPB of $2.7 billion, including 28 leasing consents, four maturity extensions, and two assumptions, with the bulk of the consent activity derived from the CMBS loan portfolio.

Legal department

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 VP or SVP responsible for special servicing in conjunction with an AM recommendation, approves 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.

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