Servicer Evaluation: CWCapital Asset Management LLC Servicer Analyst: Timothy E Steward, New York (1) 212-438-3799; timothy.steward@standardandpoors.com Secondary Contact: Pamela C Wertman, New York (1) 212-438-2398; pamela.wertman@standardandpoors.com Table Of Contents Major Ranking Factors Opinion Key Changes Since Our Last Review Outlook Profile Management And Organization Loan Administration Financial Position Related Criteria And Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 5, 2013 1
Servicer Evaluation: CWCapital Asset Management LLC Ranking Overview Management and organization Administration Overall ranking Outlook Commercial special servicer STRONG STRONG STRONG Stable Financial condition Sufficient Major Ranking Factors Strengths: Good leverage of special servicing technology system; Experienced senior management and asset management staff; and Strong audit, compliance, and control framework. Weakness: Higher than average turnover in 2012. Opinion Standard & Poor's Ratings Services' has affirmed its STRONG ranking for CWCapital Asset Management LLC (CWCAM) as a commercial special servicer. We believe CWCAM maintains an efficient and reliable platform for managing a high volume portfolio of nonperforming commercial and multifamily mortgage loans. In particular, it has a highly experienced management team, solid internal controls and risk management program, and a strong technology platform. Key Changes Since Our Last Review CWCapital, which originated commercial mortgages and performed primary loan servicing, was sold to Walker & Dunlop Inc. in June 2012; CWCAM formed CompassRock Real Estate LLC to focus on property management for its special servicing portfolio and other clients; Rockwood Real Estate Advisors, a full-service real estate investment banking firm, was sold in late 2012; and It acquired RealInsight, the developer of its special servicing system. Outlook The outlook for the commercial mortgage special servicer ranking is stable. CWCAM's primary business focus has been on commercial mortgage-backed securities (CMBS) and commercial debt obligations (CDO) asset management; it is not a mortgage originator. CWCAM expects to increase assets under management in the future by working with distressed debt buyers, legacy CMBS buyers, and on new CMBS transactions. CWCAM makes a concerted effort to be WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 5, 2013 2
retained as special servicer on CMBS portfolios where there has been a securitization change-of-control. It expects a wave of new loan defaults as a result of a spike in CMBS maturities between 2015 and 2017. We believe CWCAM's growth projections are reasonable, and consistent with its strategy to focus on third-party commercial real estate asset management. CWCAM (and its predecessors) has been in operation since 1995 and management has demonstrated its commitment to investing in staffing, systems, and other resources necessary to manage its portfolio in accordance with industry standards, and to serve its clients and investors. Profile Servicer Profile Servicer name Office headquarters Parent holding company Special servicing system Affiliated service providers CWCapital Asset Management LLC Bethesda, Md. CW Financial Services LLC Affiliates of certain Fortress Investment Group LLC Managed Funds CMBS Asset Management System (CAMS) CompassRock Real Estate LLC and Real Insight CW Financial Services (CW) is a unique, vertically integrated commercial real estate finance and investment management company. Its history as a commercial/multifamily mortgage lender and servicer dates to 1972. On Sept. 1, 2010, affiliates of certain Fortress Investment Group LLC (NYSE:FIG) managed funds acquired CW, including CWCAM. The acquisition has allowed CWCAM to continue expanding its business and be opportunistic as the real estate markets evolve. The special servicing platform, CWCAM, manages distressed and nonperforming loans and real estate owned (REO) that are a part of assets under management for CW as well as for third parties. The special servicing team utilizes proactive methods to maximize recoveries and mitigate risks and losses so as to enhance investor returns. The special servicing business dates to 1995 and was formed through the acquisition and merger of Allied Capital Corp. and CRIIMI MAE Inc. In January 2012, continuing with expansion and diversification plans, the company launched CompassRock Real Estate LLC, a premier property management firm. In September 2012, CW sold its agency lending and primary servicing platform, CWCapital, to Walker & Dunlop and now operates through five subsidiaries: CWCapital Investments, Convergent Risk, RealInsight, CWCapital Asset Management, and CompassRock Real Estate. Management And Organization The subranking for management and organization is STRONG. Organizational structure, staff and turnover CWCAM's principal offices are located in Bethesda, Md.; as of Dec. 31, 2012, it had a staff of 131. The organization is headed by David Iannarone, president of CW and CWCAM, who oversees all special servicing activity and has over 25 years' industry experience. There are teams responsible for real estate dispositions, valuations, operations, small WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 5, 2013 3
balance loans, medium balance loans, and borrower consents, and a special assets team for large, complex loans. REO management is further segregated based on property type (e.g., office, retail, lodging, and multifamily), and a team is dedicated to the Peter Cooper Village/Stuyvesant Town asset. The special servicing business is supported by CW Financial Services' corporate legal and accounting divisions. Senior and middle management members possess a high average level of industry experience compared with other servicers we rank (see table 1). Overall, there are approximately eight assets managed per employee; special servicing loan and REO asset managers have 25 years' industry experience and six years' tenure with the company. Turnover for the six months ended Dec. 31, 2102 was 13.77%: While this was higher than previous years, management says employment market conditions improved, so the higher turnover ratio was not unexpected. Only about 3% of the overall turnover rate was at the senior and middle management level. Table 1 Industry Experience/Company Tenure As Of Dec. 31, 2012 --Senior managers-- --Middle managers-- --Staff-- Experience Tenure Experience Tenure Experience Tenure Special 26.6 8.4 22.3 6.5 9 4 In our view, CWCAM's management and staff members exhibit the capacity,professional experience, and skills needed to effectively manage its portfolio in accordance with generally accepted industry servicing standards. Training CWCAM continues to maintain a robust employee training and professional development program; its training committee (formed in 2006) has representatives from various departments in the company. The stated mission of this committee is to organize, plan, and continuously enhance all training programs to ensure targeted topics and 40 minimum training hours are achieved. CWCAM believes training is a key component of its success and that employee development leads to higher staff retention rates. Training is accomplished through a combination of in-house training seminars, industry-sponsored training courses and events, and a corporate tuition reimbursement program. CWCAM offers a wide range of training topics with an emphasis on practical, hands-on education and high level, strategic topics. Employees new to CWCAM or the industry are provided with a formal on-boarding program and orientation in the first two weeks of their hire date. In 2012, the training program focused on providing seminars that would benefit CWCAM's more experienced employees. A number of these seminars incorporated actual deals and results; e.g. one seminar was led by senior asset managers and focused on distressed loan case studies. Presenters provided a walk-through of the decision making process for several resolutions and they explained the creative solutions and asset manager's thought process behind the results achieved. CWCAM has offered an annual offsite program for analysts and associates from across the company. In 2012, this intensive "boot camp" program focused on negotiation training. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 5, 2013 4
CWCAM centrally tracks and monitors all training hours. For the 12 months ended Dec. 31, 2012, actual training hours averaged 43 hours per asset management employee. Systems and technology In our view, CWCAM maintains a well-developed technology platform that facilitates efficient collateral, loan and portfolio information, and data management. It continues to demonstrate a strong commitment to enhancing its systems and business applications. Special servicing activities are managed and tracked through CMBS Asset Management System release 2012-07-24 (CAMS). CAMS was developed using the Microsoft 2.0 Net Application Framework and resides on a Microsoft SQL-Server 2008 database. The rich-client GUI front-end is Web-enabled, using XML Web services. Since our last review, CWCAM acquired RealInsight, the software developer of CAMS, in an effort to better control development costs and possibly create additional revenue opportunities by licensing the system to other servicing companies. CAMS is a full-function asset management platform capable of tracking assets seamlessly from loan origination or acquisition through asset disposition. CWCAM does not maintain other database systems for the management of the assets. CAMS' standard features provide the basics to track loans from the due diligence phase (in development) through loan inception, to securitization, as both performing or nonperforming, until disposition. CWCAM has focused on customizing the special servicing functionality within CAMS to meet its specific needs as detailed in the controlling Pooling and Servicing Agreements (PSA) as well as adhering to CWCAM's internal policies and procedures. This means CAMS can track servicers, PSA abstracts, calculate servicing fees, prepare expense reimbursements, spread financial statements, generate OSARs, track appraisals, and import and export CREFC standard reports. It also provides a unique platform for Asset Management to create and generate annual business plans and cases on specially serviced loans. We believe CWCAM's full use and customization of the CAMS system should help investor reporting and improve compliance with servicing contracts and internal policies and procedures. Additional key components of CWCAM systems include: Reports are developed using Crystal Reports and can be delivered in PDF, Excel, Word, or raw data formats. Documentum is used for imaging and document management. Property-level cash flow modeling is done through Argus or standard Excel templates; however, both are imported through an interface into CAMS. A corporate Web site is maintained and updated regularly, with links to current lists of REO properties for sale, and to loan sale advisor Web sites with active listings. Planned enhancements include continued improvements to core functionality and integrating the newest version of CAMS with an underwriting/acquisition module, foreign currency, and a Web-based third-party portal. CWCAM plans enhancements to the system to incorporate fair market value and valuation processes. CW supports disaster recovery and business continuity planning for CWCAM. Plans are documented and include comprehensive emergency response and business process recovery procedures. CW also provides plan training, WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 5, 2013 5
testing and maintenance, and maintains dedicated business continuity plans drafted by internal risk management staff that reflects the needs by location, and detailed checklists, guidance, and response times for each business unit. Exercises are conducted at least twice each year; the last was on Dec. 12, 2012, with simultaneous tests/exercises in the New York and Bethesda offices. Disaster recovery sites are located at SunGard Emergency Operations in Herndon, Va. (approximately 25 miles west of CWCAM's Bethesda facility) and Carlstadt, N.J. (16 miles West/Northwest of CW's New York offices.) The most recent tests were successful, with only minor procedural and related improvements recommended. All critical systems are backed up using enterprise-level backup software and storage appliances. Weekly and monthly full backups are performed to disk in the production datacenter and then replicated to the disaster recovery datacenter. These backups are duplicated to tape and stored with Iron Mountain for their retention lifecycle. Daily incremental and differential backups are performed to disk in the production datacenter and then replicated to the disaster recovery datacenter. In addition to standard system backups, data replication is used between the production and disaster recovery datacenters to allow for the fastest recovery possible in the event of an emergency. Audit, compliance and internal controls We believe CWCAM has a solid control environment designed to mitigate operational risk and maximize recoveries for investors and clients. CW Financial Services' compliance department conducts periodic audits of CWCAM. The audit and test work scope is designed to determine compliance with internal policies and procedures as well as REO management requirements; a detailed report is then issued. The sample audit reports we reviewed contained several findings; however, they appeared to be minor, and were addressed by the business manager. As an additional control to improve compliance with PSAs and internal policies and procedures, CWCAM uses an internal compliance module within CAMS. The module tracks the completion and delivery of all required third-party reports, and other requirements, such as appraisal subordinate entitlement reduction (ASER) calculations, business plans, and official notices. Compliance testing is ongoing, and the results are available online to asset management staff in the form of reminders/ticklers; exception reports are distributed to senior management. Special servicing policies and procedures are detailed, comprehensive, and available to all employees online via a shared network. CWCAM reviews and updates its manual annually and there is staff designated to manage the process. It uses a committee format for all lender consents and special servicing credit decisions. Members of the senior management team participate on the committee and provide feedback to the presenting asset manager. Compliance and legal staff review cases to determine adherence with PSAs and documented procedures. The most recent internal audit was completed in November 2012; there were no material exceptions. External audits CWCAM engaged an independent accountant to review PSA compliance and the effectiveness of internal controls. The most recent report contained no material findings. We reviewed the 2012 USAP report and 2012 Regulation AB attestation and found no material exceptions. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 5, 2013 6
Vendor management CWCAM handles the management and oversight of subcontractors in a controlled and effective manner and follows formal guidelines. Contracting for third-party reports (e.g., appraisals, environmental assessments, and property condition reports) is centralized under designated staff on the operations team. CWCAM maintains an approved vendor list for receivers, property managers, leasing agents, and brokers. The legal department assists in executing standard form engagement contracts. Documented policies and procedures must be followed when engaging service providers. This process must also be followed when using affiliates companies (e.g., CompassRock Real Estate). Qualifications, market knowledge and fees based on particular locations and property types are taken into consideration. Insurance and legal proceedings CWCAM has acceptable Directors and Officers (D&O) and Errors and Omissions (E&O) insurance coverage. Management indicated that there are no material legal matters against CWCAM. Loan Administration Special servicing The subranking for commercial mortgage special servicing loan administration is STRONG. CWCAM manages all special servicing from its headquarters office in Bethesda, and five smaller regional offices. As of year-end 2012, there were approximately 131 full-time employees, of which 75 were dedicated loan workout and REO asset managers. As of Dec. 31, 2012, CWCAM was the named special servicer on 155 CMBS securitizations backed by 10,533 loans with an unpaid principal balance (UPB) of $140.5 billion. As of the same date, CWCAM managed three commercial real estate (CRE)/CDO transactions with 26 assets and a UPB of $291 million. CWCAM has built a successful track record of managing and disposing of troubled assets nationwide, while handling complex assets collateralized by multiple property types. As part of our evaluation, we reviewed CWCAM's policies and controls related to managing potential conflicts of interest and the use of affiliates. In our view, CWCAM's asset resolution strategies are consistent and the company maintains appropriate internal controls covering vendor selection and engagement (see Audit, compliance and internal controls, above). Loan recovery and foreclosure management The loan and collateral surveillance department identifies issues early and protects lender/investor interests (see table 2). CWCAM regularly analyzes financial information, market data, and trustee reports, and works closely with master and primary servicers to proactively monitor the portfolio. Key objectives of the surveillance team are to identify problem loans, prevent unnecessary loan transfers to special servicing, and petition for the early transfer of loans that require immediate intervention. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 5, 2013 7
Table 2 CWCapital Asset Management LLC Total Active Special Servicing Portfolio --As of Dec. 31-- --2012-- --2011-- --2010-- --2009-- - Volume Number Average age (months) Volume Number Average age (months) Volume Number Average age (months) Volume Number Average age (months) Volume Loans 13,466.91 617.00 13.70 15,078.70 593.00 11.8 16,314.10 736.00 10.3 15,997.70 832 7.5 3,030.70 Real estate owned 9,507.23 475.00 29.97 7,061.90 565.00 25.3 4,208.70 422.00 18.4 971.30 81 20.5 320.30 Total 22,974.14 1,092.00 -- 22,140.60 1,158.00 -- 20,522.80 1,158.00 -- 16,969.00 913 -- 3,351.00 Nu The asset managers complete asset status reports within 30 days of transfer to special servicing and a full asset business plan is due within 90 days of transfer and within 90 days of a loan converting to REO. The full asset business plan is a more detailed loan assessment and develops a strategy to maximize the recovery to the trust, devoting special attention to valuing each property. It is formally presented to the CWCAM credit committee and then to the appropriate controlling class representatives. Asset managers meet with senior management to review all assets monthly, and the business plans are updated at least every six months. CWCAM bases its workout and liquidation strategies on net present value calculations and takes the potential for litigation into consideration. The asset manager develops a loan business plan or real estate business plan, depending if the property is real-estate owned. The business plan establishes a target timeframe for the manager to resolve the loan or asset through a loan reinstatement, restructure, payoff, foreclosure, or sale, and establishes the collateral's target recovery value. Asset strategies are reviewed monthly with senior management, and if it is determined that a strategy should be altered, or a new one undertaken, the asset manager may be required to produce a new business plan (depending on the extent of the change). All plans are reviewed every six months, and updated every 12 months from the last approved plan, or when a material change has occurred to the asset or its strategy. CWCAM uses a committee approach to credit decisions. Asset managers submit draft proposals and recommendations to senior management for feedback prior to the actual committee presentation. The credit committee meets each week and includes representatives from legal and compliance to ensure adherence with REMIC rules, servicing standards, company procedures, and servicing contracts (see table 3). Table 3 CWCapital Asset Management LLC Special Servicing Loan Resolutions Resolutions Unpaid principal balance --As of Dec. 31-- --2012-- --2011-- --2010-- --2009-- --2008-- Loans (number) Unpaid principal balance Loans (number) Unpaid principal balance Loans (number) Unpaid principal balance Loans (number) Unpaid principal balance Loans (number) Loans 3,169.62 230 6,177.30 441 11,148.30 461 2,430.60 192 691.30 91 Foreclosed loans 2,066.91 94 4,146.30 298 3,957.50 347 653.00 66 158.90 20 Total 5,236.53 324 10,323.50 739 15,105.80 808 3,083.60 258 850.20 111 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 5, 2013 8
Table 3 CWCapital Asset Management LLC Special Servicing Loan Resolutions (cont.) Resolution breakdown Returned to master 1,666.34 75 4,045.70 197 4,082.80 182 1,120.70 67 421.40 41 Full payoffs 679.92 61 1,164.60 92 678.80 55 204.00 54 94.80 29 DPO and/or note sale Foreclosed loans Other servicing transfers out 820.08 87 841.50 149 6,090.30 201 363.20 55 175.10 21 2,066.91 94 4,146.30 298 3,957.50 347 653.00 66 158.90 20 3.28 7 125.50 3 296.40 22 742.80 16 -- -- Total 5,236.53 324 10,323.50 739 15,105.80 807 3,083.60 258 850.20 111 REO management and dispositions Asset managers from both the loan and REO departments are involved in transferring assets to REO status. During the conversion-of-title process, these parties work together to ensure a smooth transition and verify that assets are properly reclassified within both the trust and the special servicing department. CWCAM has specific policies and procedures and monitoring methods in place to ensure that the asset's transfer at the property level is as seamless as possible. These involve: The loan asset manager coordinates all steps necessary to deliver a clean title to the REO department. CWCAM allocates REO properties to asset managers according to their experience with a particular property type, their knowledge of the local market, and their current workloads. The REO asset manager generally takes over direct management of an asset when a receiver is appointed to oversee a property, or in a transfer-of-title action roughly 60 days prior to the planned foreclosure date, and inspects the property at least 45 days before the expected transfer. REO asset managers must prepare a REO plan within 90 days of a foreclosure or transfer of title to the trust. A REO plan is a detailed asset plan that outlines the operating, repositioning, and liquidation strategies that the company expects would produce the highest value recovery for the trust. Once approved, the REO plan also provides the asset manager with the budget authority required to implement the plan. The selected strategy specified in the REO plan must be based on a thorough analysis of the property, its surrounding location, and existing market conditions. Among other functions, the REO plan serves as an internal control by enabling senior management to review and approve each recommended plan. The company approves REO plans in accordance with an established credit approval matrix. REO accounting and reporting REO asset managers are responsible for ensuring that property operating accounts are opened when a property is transferred to REO and that CWCAM cash controls are established immediately. CWCAM established dual operating accounts for rent collections and payment of property operating expenses, and a monthly sweep of net cash flow for the trust. The accounts, which require dual signature authority within the property management company, are held at a federally insured bank and opened in the name of the trust or the special-purpose entity. Property managers deposit all funds into the operating account within 24 hours of receipt, and pay operating expenses from funds in the account to the extent that they are consistent with an approved budget. A maximum permitted WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 5, 2013 9
operating account balance is established, and property managers disburse excess funds to CWCAM via wire. The director of special servicing must approve any requests for capital expenditures that REO asset managers submit. Property managers must submit a monthly financial reporting package to CWCAM no later than the 15th of each month. Approximately 75% of property management companies send these reports to CWCAM electronically. The REO asset manager, working with an REO analyst, must review and audit each package upon receipt to ensure that it is complete and meets any specific requirements stated in the property management agreement. Variance reports are included in the monthly packages and are reviewed by the REO managers. Additionally, CWCAM has developed and implemented a formal REO property management and audit program. The company uses test results to streamline contractual agreements and improve oversight. Regular ongoing testing is performed on various properties by a third-party auditor. Legal department CWCAM has a full-time, three-person dedicated legal team that is fully integrated in the day-to-day special servicing/loan management process. CWCAM selects outside counsel from an approved counsel list that groups the attorneys by geographic location and specialty. In all cases, the asset manager will provide the legal department with information to avoid conflicts of interest, including the exact name of the borrower, the name and address of the collateral property, and the names of any guarantors or principals. The legal department will contact the law firm and request that it perform a conflict check. If the firm is clear to handle the matter, the legal department will issue an engagement letter. The asset manager reviews all invoices the attorney submits for conformance with the engagement letter. The legal team also reviews and approves (or revises, as needed) each legal invoice and approvals are tracked in CAMS. Financial Position We deem CW Financial Services LLC's financial position to be Sufficient. We have reviewed its audited financial statements and believe that sufficient financial strength exists to sustain operations, as described herein, for the next 12 to 18 months. CW Financial Services LLC is a wholly owned subsidiary of CWFS Holdings LLC, which is wholly owned subsidiary of CW Financial Services Holding Company LLC, which is a wholly owned subsidiary of Galaxy Acquisition LLC. Galaxy is an affiliate of the Fortress Investment Group LLC. CW Financial Services LLC maintains six principal wholly owned operating subsidiaries including CWCAM. Related Criteria And Research Servicer Evaluation: CWCapital LLC And CWCapital Asset Management LLC, April 2, 2012 Revised Criteria For Including RMBS, CMBS, And ABS Servicers On Standard & Poor's Select Servicer List, April 16, 2009 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 5, 2013 10
Servicer Evaluations: Servicer Evaluation Ranking Criteria: U.S., Sept. 21, 2004 Select Servicer List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 5, 2013 11
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