DBRS Morningstar Confirms Ratings on All Classes of Hudson Yards 2019-30HY Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates issued by Hudson Yards 2019-30HY Mortgage Trust as follows:

-- Class A at AAA (sf)
-- Class X at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (high) (sf)
-- Class D at A (low) (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 fixed-rate loan is interest only (IO) throughout its 10-year term and is secured by the borrower’s condominium interest in 1.5 million square feet (sf) of Class A office space in Manhattan. The borrower’s condominium interest spans from floors 16 through 51 of the 30 Hudson Yards building, a recently built 90-story, 2.6 million-sf office building in New York’s revitalized Hudson Yards district. The senior debt consists of $1.12 billion, while the junior debt consists of $310.00 million. The trust includes $698.0 million of senior debt and all of the junior debt. The collateral is designed to LEED gold certification standards and has been 100.0% leased to and occupied by Warner Bros. Discovery (formerly WarnerMedia) since issuance on a triple net lease expiring in 2034, which is five years beyond the July 2029 loan maturity. AT&T, an investment-grade rated entity, has guaranteed the lease since issuance. The loan sponsors are the Arizona State Retirement System, two affiliates of Allianz SE, and affiliates of The Related Companies.

The lease includes 2.5% annual rent steps as well as four five-year extension options, each at 100% of fair market rent. In the fifth year of the lease in 2024, Warner Bros. Discovery has a contraction option for up to 10 floors, or 404,325 sf, at a cost of $24.0 million per floor (approximately $594 per square foot (psf)) up to a maximum of $240.0 million to the lender. Furthermore, if it contracts its space by more than three floors, the tenant will be required to pay an additional $125 psf of the contracted space in excess of the highest three floors, which will be held by the lender in escrow and released to the borrower when the contraction space is re-leased.

According to a September 5, 2022, article from Digiday, Warner Bros. Discovery has put up 450,000 sf for sublease, representing approximately 30% of the subject’s collateral space. In addition, Optimal Spaces, a tenant broker, reported 131,400 sf as available for sublease at the property; however, it is unknown if the space is collateral. DBRS Morningstar has requested an update from the servicer regarding the subleasing efforts. Although the news of subleasing at the subject is worrisome coupled with Warner Bros. Discovery’s available contraction option in 2024, mitigating factors include the subject’s premier property quality, which will continue to benefit from the ongoing flight to quality in the office submarket space. Also, Warner Bros. Discovery’s lease is fully guaranteed by AT&T; termination fees are extremely high at $594 psf, or $24 million per floor; and the submarket is strong. 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 YE2021 vacancy rate of 8.0% and effective rental rate of $48.65 psf.

Based on the December 2022 rent roll, Warner Bros. Discovery reported a rental rate of $80.77 psf, compared with the issuance rental rate of $75.00 psf. As of YE2022, the reported net cash flow (NCF) was $110.6 million, compared with the YE2021 NCF of $110.6 million and the DBRS Morningstar NCF of $112.5 million. The DBRS Morningstar NCF analysis includes a straight-lining of Warner Bros. Discovery’s rent over the loan term given its consideration as a long-term credit tenant, which is not reflected in the current servicer reporting.

ENVIRONMENTAL, SOCIAL, AND 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 at https://www.dbrsmorningstar.com/research/396929 (May 17, 2022).

Class X 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 North American CMBS Surveillance Methodology (March 16, 2023), 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 info@dbrsmorningstar.com.

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 info@dbrsmorningstar.com.

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