Berkadia Commercial Mortgage LLC

Berkadia Commercial Mortgage LLC

Commercial Mortgage Servicer / North America

October 2019

Content

Servicer Summary3

Key Rating Drivers4

Company Overview

5

Financial8

Employees9

Operational Infrastructure11

Information Technology12

Internal Control Environment

15

Primary Servicing

17

Master Servicing

20

Structured Finance

Commercial Mortgage Servicer

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Servicer Summary

Structured Finance

Commercial Mortgage Servicer

Berkadia Commercial Mortgage LLC (Berkadia, or the company), a joint venture between Berkshire Hathaway and Jefferies Financial Group Inc. (Jefferies, formerly Leucadia National Corporation), is a commercial real estate (CRE) lender, broker, servicer and third-party outsource provider of CRE servicing functions. The company maintains three business lines: commercial mortgage banking, investment sales and commercial mortgage servicing. Berkadia originates commercial mortgage loans for government-sponsored entities (GSEs), third parties (such as life companies, private investors and institutional banks) and CMBS transactions, as well as for its own portfolio.

The servicing portfolio has grown by balance through increased originations as well as subservicing for thirdparty clients. Since year-end 2016, Berkadia's overall servicing portfolio has declined 8% by loan count as of June 30, 2019; however, Berkadia's total servicing portfolio is up 20% by balance for the same timeframe, reflecting a continued trend in larger balance loans as legacy CMBS loans mature. As of June 30, 2019, 55% (by loan count) of Berkadia's total portfolio was subserviced for third parties that include commercial banks, insurance companies, investment banks, private equity firms, as well as other servicers. The company also retains primary servicing for approximately 90% of internally originated loans. During 2018, Berkadia originated $26.1 billion in commercial mortgages and $12.8 billion through June 30, 2019.

Servicer Ratings

? Fitch rates primary and master servicers, which protect the interests of the certificateholders in the trust, by servicing and administering the mortgage loans. The primary servicer is responsible for day-to-day servicing functions, while the master servicer is responsible for monitoring the activities of the primary servicers, investor reporting, and timely remittance of funds to trustees.

? Fitch also rates special servicers, which are key to maintaining the credit quality of a pool containing nonperforming commercial mortgages and real estate-owned assets. The special servicer is responsible for working out loans, foreclosing, and liquidating assets.

? In assessing and analyzing the capabilities of primary, master, and special servicers, Fitch reviews several key factors, including the management team, organizational structure and operating history, financial condition, information systems, and, with respect to the special servicer, workout and asset disposition experience and strategies.

? Fitch rates commercial mortgage primary, master, and special servicers on a scale of 1 to 5, with 1 being the highest rating. Within each of these rating levels, Fitch further differentiates ratings by plus (+) and minus (-) as well as the flat rating.

Ratings Commercial Primary Servicer Commercial Master Servicer

CPS1 CMS2

Related Research

? Fitch Affirms Berkadia's Commercial Servicer Ratings (September 2019)

Related Criteria

? Criteria for Rating Loan Servicers (February 2017)

? Criteria for Rating North American Commercial Mortgage Servicers (February 2017)

Analysts

James Bauer +1 212 908-0343 james.bauer@

Daniel Stallone +1 212 908-0869 daniel.stallone@

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Structured Finance

Commercial Mortgage Servicer

Key Rating Drivers

Company/Management: Berkadia benefits from strong sponsorship support contributing to a stable and growing servicing platform. Berkshire Hathaway and Jefferies each own 50% of the company which has been servicing commercial mortgages since 1994. Berkadia entered the single-family rental market (SFR) in 2018 and added seven Freddie Mac SFR transactions collateralized by 5,675 homes with an outstanding balance of $643 million. Berkadia also became both a Freddie Mac and Fannie Mae approved small balance lender in 2019.

Staffing and Training: Berkadia employs 68% of its servicing staff through Berkadia Services India Private Limited (Berkadia India), the company's captive offshore operation, the largest percentage among servicers rated by Fitch Ratings. Berkadia extensively trains offshore employees and frequently makes training visits to India and trains key Indian personnel in the U.S. Berkadia's employee base has continued to decrease as ongoing technology investments create efficiencies limiting the need to replace staffing departures.

The company maintains a strong management group, which has stabilized following two consecutive years of elevated management turnover. Berkadia maintains a deep management bench with 33 senior and middle managers who collectively average 24 years of experience and 17 years of company tenure. Additionally, Berkadia continues to focus on employee retention through robust training programs and an evolving employee development program.

Technology: Berkadia uses McCracken Strategy release 17.6 as its primary servicing application, which is integrated with a suite of ancillary applications. Fitch notes as a strength Berkadia's commitment to investing significant resources in technology development. Berkadia maintains 40 development teams of six to seven employees each and has taken additional office space in India and in its headquarters to accommodate growth in the IT group. Berkadia continues to focus on building a single cloud-based database across the company to improve processing times and create a single repository for data. The database forms the foundation for other applications like the proprietary interactive market analysis application, the new workflow tool called Mega Workflow, and the redesigned IRIS application which consolidated data from various systems and allowed Berkadia to sunset a legacy reporting application. Additionally, the company's proprietary borrower website continues to be redesigned for better user experience and increased access to loan data.

Procedures and Controls: Berkadia maintains a comprehensive reporting process to manage output from its servicing operations, using data validation reports, exception reporting and dashboards. Additionally, the company's risk, control and compliance department samples servicing functions for compliance with internal policies, regulations, and pooling and servicing agreements. Berkadia performs annual risk assessments across the company to develop audit plans, and internal audits are performed on a 24-month rotation.

Loan Administration: Berkadia maintains a quality control-focused platform for primary servicing, predominantly utilizing operational staff in India, while maintaining subject-matter expertise in the U.S. The use of its India operations provides the company with significant scale that can facilitate planned future growth while minimizing added costs to the platform.

Financial Condition: While Fitch determined the company's short-term financial viability adequate to support the servicing platform and its liquidity sufficient to meet advancing obligations, the lack of an investment-grade rating limits the master servicer rating.

Company Experience Since CRE Servicing CMBS Servicing Overseeing Primary Servicers

1994 1994 1994

Operational Trends

Business Plan

Stable business plan with steady flow of new business offsetting portfolio declines

Servicing Portfolio

Year-over-year loan count change of approximately 10%

Financial Condition

Outlook/Trend

Staffing

Staffing changed less than 12% +/-

Best in class to Technology improving technology,

well managed upgrades

Internal Controls

Strong/Consistent internal control resources; fully articulated three lines of defense; no material audit findings.

Servicing Operations

Stable operations, no material changes yearover-year

Note:

Approximately one-half of the servicing portfolio is subserviced on behalf of third-parties (55% by loan count), of which Berkadia performs full subservicing for 65% (by loan count) and noncashiering subservicing for 35%. Noncashiering subservicing refers to a select number of servicing functions performed by Berkadia, which may not include cash management.

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Structured Finance

Commercial Mortgage Servicer

Company Overview

Berkadia is a limited liability company and through a series of holding companies is ultimately a joint venture between Jefferies and Berkshire Hathaway Inc. In December 2009, the company began operations as Berkadia by acquiring the commercial mortgage origination and servicing business of Capmark Financial Group Inc. through Capmark's bankruptcy. The platform has been operating since 1994, previously as GMAC Commercial Mortgage.

The company services over 18,400 CRE loans totaling approximately $268.4 billion across its client base, which includes GSEs, insurance companies, conduits, banks, third parties and its own proprietary portfolio. Berkadia's largest servicing clients include the U.S. Department of Housing and Urban Development (HUD), Freddie Mac and Fannie Mae. At June 30, 2019, 17% (by loan count) of the total servicing portfolio was in CMBS transactions, while the remainder was weighted toward the company's subservicing for its third-party clients ( ??%), GSEs (19%) and life companies (8%).

Berkadia's subservicing portfolio consists of 10,088 loans totaling $159.8 billion, which has grown as the company continues to add new clients and expand relationships with existing clients. The subservicing relationship with KeyBank began in 2012 and as of June 30, 2019 represented 1,221 loans totaling $20 billion. The KeyBank portfolio represents 12% (by loan count) of the subservicing portfolio for third-parties and 7% of Berkadia's total servicing portfolio, down from 18% and 9% at the last review, respectively. Fitch expects the KeyBank portfolio to continue to decline as runoff exceeds additional assignments.

During 2018, Berkadia originated $26.1 billion in commercial mortgages and $12.8 billion through June 30, 2019, continuing the overall upward trend from $25 billion originated in 2017, $20.2 billion in 2016, and $22 billion in 2015. During 2018, the company was the number two HUD lender, second largest Fannie Mae lender, and third largest Freddie Mac lender. Berkadia contributed over $10.1 billion to Freddie Mac K-series transactions during the 12 months ending June 30, 2019, up from $6.9 billion at the previous review. The company also contributed approximately $2 billion to CMBS conduit transactions, slightly above the prior year. Berkadia also maintains annual origination volumes of approximately $3 billion for life companies, as well as approximately $200 million in annual production for its proprietary balance sheet loan program, which focuses on bridge loans for stabilized properties seeking permanent GSE financing.

Berkadia is headquartered in New York and maintains its U.S. servicing operations in Ambler, PA, and its offshore operations in Hyderabad, India. The company has servicing staff located in New York, Irvine, CA, St. Louis, MO, Midvale, UT, and Scottsdale, AZ. Berkadia continues to place investment sales and mortgage banking personnel together to help improve customer service and expand business lines.

Servicing Portfolio Growth

Total

Primary

(% Change from Prior Period) 20

10

0

(10)

(20)

(30)

(40)

(50) YE17

YE18

Master 2Q19

Source: Berkadia Commercial Mortgage LLC.

Office Locations

Primary office

New York, NY

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Structured Finance

Commercial Mortgage Servicer

Company Overview (Cont'd)

All Servicing Types

Total Servicing UPB ($ Mil.) No. of Loans

6/30/19

268,382.3 18,491

% Change

14 3

Primary Servicing UPB ($ Mil.) No. of Loans

267,800.2

14

18,434

3

Master Servicing

UPB ($ Mil.)

6,170.4

(14)

No. of Loans

881

(20)

Note: Primary servicing numbers include 3,547 loans that are limited subservicing. Source: Berkadia Commercial Mortgage LLC.

2018

235,880.1 18,019

% Change

15 7

235,247.1

15

17,950

8

7,149.9

(39)

1,106

(30)

2017 205,911.9

16,769

205,186.5 16,677

11,795.8 1,576

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Structured Finance

Commercial Mortgage Servicer

"Berkadia maintains a significant investment in its offshore servicing platform. The Hyderabad, India operations center provides Berkadia flexibility and scalability relative to its servicing volume. The company's India operations have been a captive offshore platform for 16 years and employ 68% of its servicing staff, the largest percentage among Fitch-rated servicers. "

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Financial

Fitch does not maintain a credit rating for Berkadia; however, Fitch performed a financial assessment of the company and determined its short-term financial viability adequate to support the servicing platform. Financial condition carries greater weight in master servicer ratings given a master servicer's need to advance payments for securitized loans. In contrast to its master servicing peers, typically divisions of investment-grade banks or insurance companies, Berkadia is not publicly rated and maintains a smaller balance sheet.

Fitch's assessment of Berkadia noted continued profitability, larger scale relative to its peers, decreasing leverage and significant management experience. Fitch also noted Berkadia's reliance on short-term secured funding and historically high dividend payout rates of over 100%. A stress analysis of Berkadia's master servicing portfolio was performed to assess advancing and indicated third-party credit facilities, cash and liquid investments on the company's balance sheet, as well as the financial benefits of its parent's investment in the platform, provide liquidity to support advancing obligations in a market downturn.

Structured Finance

Commercial Mortgage Servicer

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