Morningstar DBRS Upgrades Credit Ratings on Three Classes of Hudson Yards 2016-10HY Mortgage Trust

DBRS, Inc. (Morningstar DBRS) upgraded its credit 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 C to A (sf) from A (low) (sf)
-- Class D to A (low) (sf) from BBB (sf)
-- Class E to BBB (high) (sf) from BBB (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (sf)

All trends are Stable.

The credit rating upgrades on Classes C, D, and E reflect the updated Morningstar DBRS value, following consistent improvements in financial performance since 2020, when credit ratings were assigned. Given the sustained cash flow growth, Morningstar DBRS updated the loan-to-value (LTV) sizing benchmarks based on a stressed haircut to the most recent full-year net cash flow (NCF), discussed further below. The subject continues to report a near 100% occupancy rate, coupled with negligible rollover risk ahead of the loan's scheduled maturity date in August 2026, supporting the Stable trends and remaining credit rating confirmations on Classes A and B.

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 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 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; $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 Morningstar DBRS.

The property continues to benefit from high occupancy rates which was reported at 98.7% and an average office rental rate of $75.70 per square foot (psf) as of the October 2024 rent roll. Approximately 80.0% of the net rentable area (NRA) at the property is leased long-term to investment-grade entities. According to a Reis, Inc. report, office properties in the Penn Station submarket reported a Q4 2024 vacancy rate of 10.8% and an asking rental rate of $82.16 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). Tapestry continues lease 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 has been subleasing approximately 150,000 sf of Tapestry's space since 2019 with an expiration in June 2036. Other large tenants at the property include L'Oréal USA, Inc. (26.6% of the NRA, lease expiry in June 2031), Boston Consulting Group (13.0% of the NRA, lease expiry in April 2032), and SAP America, Inc. (8.0% of the NRA, lease expiry in May 2032). There is minimal rollover risk with leases representing only 7.0% of the NRA expiring during the remaining loan term.

According to the trailing nine-month (T-9) financials for the period ended September 30, 2024, the loan reported an annualized NCF of $114.6 million (debt service coverage ratio (DSCR) of 4.19 times (x)), compared with the YE2023 and YE2022 figures of $114.3 million (DSCR of 4.20x) and $80.7 million (DSCR of 2.96x), respectively. The performance improvements have been a result of increased rents via realized rent steps, increased expense reimbursements, and a decline in repairs and maintenance expenses in the past two years. Given the stable occupancy with minimal rollover and long-term leases, Morningstar DBRS expects NCF to stabilize above issuance expectations.

The April 2024 Morningstar DBRS credit rating analysis and action included an update to the Morningstar DBRS value. For more information regarding the approach and analysis conducted, please refer to the press release titled "Morningstar DBRS Takes Rating Actions on North American Single-Asset/Single-Borrower Transactions Backed by Office Properties," published on April 15, 2024. For the purposes of this credit rating action, Morningstar DBRS updated the Morningstar DBRS NCF, which is based on a haircut to the YE2023 servicer reported financials. The updated value is based on a capitalization rate of 6.75% applied to the updated Morningstar DBRS NCF of $91.5 million. Morningstar DBRS also maintained positive qualitative adjustments to the LTV Sizing benchmarks totaling 7.0% to reflect the subject property's quality and long-term, in-place tenancy to investment-grade tenants. The Morningstar DBRS concluded value of $1.35 billion represents a 13.6% variance from the April 2024 Morningstar DBRS value and a -33.9% variance from the issuance appraised value of $2.05 billion, implying a whole-loan LTV of 88.6%.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt credit rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024; https://dbrs.morningstar.com/research/437781).

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

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

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

The principal methodology is North American CMBS Surveillance Methodology (December 13, 2024; https://dbrs.morningstar.com/research/444617).

Other methodologies referenced in this transaction are listed at the end of this press release.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- North American Single-Asset/Single-Borrower Ratings Methodology (December 13, 2024; https://dbrs.morningstar.com/research/444612)

-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024; https://dbrs.morningstar.com/research/439702)

-- Legal Criteria for U.S. Structured Finance (December 3, 2024; https://dbrs.morningstar.com/research/444064)

-- North American Commercial Mortgage Servicer Rankings (August 23, 2024; https://dbrs.morningstar.com/research/438283)

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.