This Summer I had the opportunity to join Rialto Capital as a Summer Associate. Rialto was formed in 2007 by industry veteran Jeff Krasnoff as a subsidiary of Lennar, the nationally recognized homebuilder. Krasnoff was previously president of LNR, another prior subsidiary of Lennar that was formed in the early 90’s to take advantage of real estate market distress brought about by the savings and loans crisis. Initially purchasing distressed loans from the Resolution Trust Corporation (RTC), LNR went on to become a pioneer of the CMBS industry, issuing some of its first bonds as well as purchasing some of the first available B-Piece investments and specially servicing those loans. LNR was spun off from Lennar in 1997, with Jeff staying on board as President until he returned to Lennar in 2007 to form Rialto. In December 2018, Stone Point Capital bought Rialto from Lennar with the goal of expanding its operations within the CMBS industry.
The founding of Rialto and the closing of its first fund in 2009 coincided with the depths of the Great Recession. Having come to the table with some of the most experienced industry veterans in the world of CMBS, Rialto quickly achieved success acquiring large portfolios of distressed real estate and working-out and/or recovering borrower principal on behalf of bondholders. Along the way, Rialto itself became rated as a Special Servicer, giving it the ability to fully asset manage its B-Piece investments for the life of the loan. As the market began to recover in 2013 and CMBS rules evolved to reflect more cautious underwriting, Rialto shifted to primarily B-Piece investments from distressed loan portfolio acquisitions. Since 2009 the company has raised approximately $8 billion across four major funds that also invest directly in opportunistic, value-add, and distressed real estate. Currently Rialto is named as the special servicer for over $100 billion of real estate across approximately 7,000 loans.
The driving engine of Rialto is its asset management business, which is divided into four different groups: Real Estate Owned (REO), Loan Workout (Special Servicing), Performing Loans (Non-Transfer Requests or NT’s), and Portfolio Surveillance. I primarily worked across both the Performing Loans and Portfolio Surveillance groups. The Performing Loans group deals with loans that are current in their payments to the trust yet need lender approval of major decisions at either the property or loan level. The Pooling and Servicing Agreement (PSA) is the document that largely governs the rights and responsibilities of the borrowers, the bondholders, the master servicer, and the special servicer. Generally, major property decisions are subject to review and approval of the special servicer. These decisions are relative to a wide array of transactions, from lease approval for a tenant comprising a large percentage of leasable area (typically 30% or 30,000 SF), to reserve disbursements, loan assumptions, or hotel flag changes. In each case, a member of the performing loans group evaluates the effects of the change being considered on the underlying collateral, essentially re-underwriting the loan and issuing an approval or denial of the request.
The portfolio surveillance group is responsible for constantly monitoring the performance of each and every loan in Rialto’s portfolio. With this portfolio comprising some 7,000 loans, this is no small task. In addition to identifying potential property damage from weather related events, the group is constantly monitoring economic events such as bankruptcies, store closures, and local market anomalies that could adversely impact borrower’s abilities to remain current on their loan payments. The group also spearheads Rialto’s annual re-underwriting efforts in which every portfolio loan is reviewed. Weekly, members of the group are assigned entire pools (typically between 60-90 loans each) to review and identify changes in performance at the property, market, and borrower level. Loans can be flagged for failure to comply with loan documents (such as for reporting requirements), changing market dynamics (large malls are nearly always annually re-underwritten), or delinquent payments. Loans that are identified are then assigned to Rialto employees for a full re-underwriting. Every employee at Rialto, from analyst to director, takes part in the re-underwriting of these identified loans. Additionally, the surveillance group communicates directly with the Master Servicer to obtain the proper documents or information to determine whether or not the loan needs to be cash managed or sent to special servicing for loan workout or modification.
I had an incredibly engaging and busy summer. I had the opportunity to analyze from a lender’s point of view a wide variety of real estate across the entire continental United States. Additionally I was able to learn and understand the motivations and relationships of the various players in the CMBS industry and how important CMBS is as a needed provider of liquidity to banks in order to facilitate commercial lending and ensure stable real estate markets. Rialto is a firm that has been able to consistently evolve throughout market cycles and is well-positioned to take advantage of either a continued bull-market or a potential recession. In the tenth year of the cycle, that is a good position to be in.
