DBRS Morningstar Confirms Ratings on 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 (the 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 (sf)
-- Class E at BBB (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 transaction is secured by 10 Hudson Yards, a 1.8 million-square-foot (sf) property that 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 whole-loan proceeds of $900.0 million along with $300.0 million of mezzanine debt and $950.0 million of sponsor equity were used to refinance existing debt, 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. The whole loan consists of $708.1 million of senior debt and $191.9 million of junior debt, of which $408.1 million of the senior debt and the entirety of the junior debt is held in the transaction. 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 subject loan is interest-only (IO) on a fixed rate with a 10-year term, maturing in August 2026. The loan is sponsored by a joint venture among The Related Companies, L.P., Oxford Properties Group, JPMorgan Asset Management, Kuwait Investment Authority, and Allianz HY Investor LP.

The property continues to benefit from high occupancy rates with high-quality, long-term tenants as investment grade entities lease nearly 70.0% of the net rentable area (NRA) at the property. As of the September 2022 rent roll, the property was 99.9% leased with an average office rental rate of $72.96 per square foot (psf). According to Reis, office properties in the Penn Station submarket reported a Q4 2022 vacancy rate of 6.9% and an effective rental rate of $59.53 psf, compared with the Q4 2021 vacancy rate of 8.0% and effective rental rate of $48.65 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 September 2022 rent roll, Tapestry leases nearly 700,000 sf of office space, representing 38.3% of the NRA with a lease expiring in July 2036, and uses the subject as its corporate headquarters. Guardian Life Insurance had subleased approximately 150,000 sf of Tapestry’s space since 2019 with an expiration in June 2036. Although, it is uncertain if Guardian Life Insurance will remain at the subject considering a Loopnet posting noted its space as available for lease. Other large tenants at the property include L’Oréal USA, Inc. (22.7% of NRA, lease expires in June 2031) and SAP America, Inc. (8.9% of NRA, lease expires in May 2032), both of which use the subject as their U.S. headquarters. There is minimal rollover risk with leases representing only 7.6% of the NRA expiring during the remaining loan term.

According to the trailing nine month (T-9) ended September 30, 2022 financials, the loan reported an annualized net cash flow (NCF) of $84.1 million with a debt service coverage ratio (DSCR) of 3.09 times (x), compared with the YE2021 NCF of $87.4 million and DSCR of 3.21x and the YE2020 NCF of $89.7 million and DSCR of 3.30x. Although NCFs have declined year-over-year, it is still above the DBRS Morningstar NCF of $80.5 million.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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 athttps://www.dbrsmorningstar.com/research/396929 (May 17, 2022).

Classes X-A is an 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.

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

The principal methodology is the North American CMBS Surveillance Methodology (October 3, 2022), 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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 not 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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