DBRS Morningstar Confirms Ratings of Hudson Yards 2016-10HY Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Hudson Yards 2016-10HY Mortgage Trust, Commercial Mortgage Pass-Through Certificates issued by Hudson Yards 2016-10HY Mortgage Trust as follows:

-- Class A at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BBB (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations. The 10-year interest-only (IO) loan, maturing in August 2026, provided whole-loan proceeds of $900.0 million to, among other uses, facilitate the refinancing of 10 Hudson Yards, purchase the fee interest of the property from the Metropolitan Transit Authority, repurchase the indirect interest in the borrower from Coach, Inc. (Coach), and return $171.0 million of equity to investors. A $300.0 million mezzanine loan with a coterminous maturity date and $950.0 million of sponsor equity also supported the transaction. The whole loan is split into 11 senior pari passu notes totaling $708.1 million and two junior B notes totaling $191.9.0 million. This trust includes two of the senior pari passu notes totaling $408.1 million and both of the junior B notes for a total trust balance of $600.0 million. The remaining pari passu companion notes were contributed to four other commercial mortgage backed securities (CMBS) transactions including CD 2016-CD1 Mortgage Trust, which is also rated by DBRS Morningstar. The loan is sponsored by a joint venture between The Related Companies, L.P., Oxford Properties Group, JPMorgan Asset Management, Kuwait Investment Authority, and Allianz HY Investor LP.

The 1.8 million-square-foot (sf) collateral property is part of the Hudson Yards redevelopment project in the Penn Station submarket of New York. While primarily consisting of 1.7 million sf of Class A office space, the property also includes 8,400 sf of ground-floor retail, a 34,000-sf food hall, and nearly 60,000 sf of garage space. The property continues to benefit from high occupancy rates with high-quality tenants, as investment-grade entities lease nearly 70.0% of the net rentable area (NRA) at the property. As of the December 2020 rent roll, the property was 99.9% leased, with an average office rental rate of $78.32 per square foot (psf). According to the Reis Q4 2020 Penn Station submarket report, the average vacancy rate for the submarket was 6.9% and the average effective rental rate was $50.18 psf.

At issuance, the largest tenant at the property was, and remains, Coach, which is now known by the name of its parent company Tapestry, Inc (Tapestry). As of the December 2020 rent roll, Tapestry leases nearly 700,000 sf of office space representing 37.4% of the total NRA, and uses the subject as its corporate headquarters. Two more of the top five tenants use the subject as their U.S. headquarters, including L’Oréal USA, Inc. (which leases 22.5% of NRA), and SAP America, Inc. (which leases 7.8% of NRA). Notable is the minimal rollover during the loan term with leases representing only 12.0% of the NRA expiring during the loan term, including garage (3.2% of NRA) and property management office space (1.6% of NRA). The largest tenant expiring during the loan term is VaynerMedia, which occupies 3.6% of NRA and has a lease expiration in June 2026.

As of the year-end (YE) 2020 financials, the servicer reported a net cash flow (NCF) of $79.6 million, with a debt service coverage ratio (DSCR) of 2.92 times (x) and an occupancy rate of 99.9%. This compares with $89.7 million, 3.30x, and 99.9%, respectively, as of YE2019. While the NCF has declined year over year, it remains in line with the DBRS Morningstar derived NCF of $80.5 million and DSCR of 2.96x. Additionally, the servicer has advised that a tenant allowance for a $9.5 million bad debt was categorized under the General and Administrative expense line item, which contributed to the year over year variance. An updated analysis is expected in the next reporting cycle.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262

Class X-A is an interest-only (IO) certificate that references a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the North American CMBS Surveillance Methodology (March 26, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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