Morningstar DBRS Confirms Credit Ratings on All Classes of COMM 2022-HC Mortgage Trust

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2022-HC issued by COMM 2022-HC Mortgage Trust as follows:

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

All trends are Stable.

The credit rating confirmations and Stable trends are the result of the overall improving performance of the underlying collateral, which remains in line with Morningstar DBRS' expectations. Since the transaction closed in January 2022, three full years of servicer-reported financials have been made available, which reflect improving occupancy, revenue, and net cash flow (NCF) figures as the sponsor works toward leasing up vacant space and stabilizing the property.

The underlying loan is secured by the borrower's fee-simple interest in Hudson Commons, a 26-story, 697,960-square-foot (sf), Class A LEED Platinum certified office tower, located in the Penn Station submarket of New York. The property was built in 1962 and renovated between 2012 and 2018 by the previous owner at a cost in excess of $800.0 million. The renovations primarily consisted of upgrading and reinforcing the existing structure, in addition to constructing an additional 17-story, 304,301-sf glass office tower directly above the existing nine-story building. The original nine stories and the additional 17 stories include two separate condominium units that both serve as collateral for the loan. The transaction is sponsored by a joint venture between CommonWealth Partners LLC and the California Public Employees' Retirement System.

Whole-loan proceeds of $507.0 million, along with $588.0 million of borrower equity, were used to facilitate the acquisition of the property at a purchase price of $1.03 billion, fund a $35.5 million leasing reserve, a $7.9 million free rent reserve, and cover closing costs. The trust balance of $467.0 million consists of five senior A notes with an aggregate principal balance of $265.0 million and a $202.0 million junior B note, with the remaining $40.0 million of senior A notes held by the originator. The fixed rate loan is interest-only (IO) throughout its five-year term with a scheduled maturity date in January 2027. The loan is structured without any extension options.

As of the September 2024 rent roll, the property was 83.4% occupied, an improvement from the YE2023 and issuance figures of 77.7% and 72.7%, respectively. The largest tenants are Peloton Interactive, Inc. (Peloton; 48.1% of the net rentable area (NRA)), and Lyft, Inc. (Lyft; 14.4% of the NRA), with scheduled lease expirations in December 2035 and November 2029, respectively. None of the remaining tenant roster occupies more than 5.0% of the NRA. Of the $33.5 million in leasing reserves collected at issuance, $19.6 million remained in reserve as of the March 2025 reporting period.

Both Peloton and Lyft have termination or contraction options in their respective leases. Lyft's first termination option is in December 2026, when the tenant can terminate its entire space with 18 months' notice and a termination fee of $6.5 million ($65.0 per square foot (psf)). Should Lyft opt to exercise its termination option, the tenant would be required to inform the landlord prior to June 2025 (the servicer has confirmed that Lyft has not provided notice of lease termination to date). If the option is exercised during the loan term, a cash flow sweep would be initiated with funds swept to build a reserve equal to $100 psf for the Lyft space. Peloton's first contraction option is beyond the loan maturity in December 2030, when the tenant can terminate portions of its lease with 15 to 27 months' notice and a termination fee equal to the amount of principal remaining unpaid at a rate of 10% per annum compounding monthly.

In June 2022, Peloton listed approximately 100,000 sf of its space across two floors for sublease, as the fitness company looked to downsize its physical footprint. Peloton has reportedly executed a sublease with AlphaSense for the entire fourth floor (approximately 50,000 sf); the terms of which are unknown at this time. The servicer has noted that Peloton is no longer looking to sublet the remaining space at the property. Both tenants have invested significantly in their spaces, with Peloton investing $167.9 million ($500 psf) and Lyft investing $17.6 million ($175 psf) in addition to their tenant improvement packages.

According to the YE2024 financial reporting, the property generated $38.2 million of NCF (a debt service coverage ratio (DSCR) of 2.11 times (x)) an improvement from the YE2023 figure of $32.1 million (a DSCR of 1.78x), but less than Morningstar DBRS' stabilized NCF derived at issuance of $40.0 million (a DSCR of 2.22x).; although, the property's physical vacancy rate remains elevated, leasing momentum has been positive and tenant abatements continue to burn off, suggesting cash flow will continue to trend higher over the subsequent reporting periods. To achieve the Morningstar DBRS-stabilized occupancy rate of 92.5%, management needs to lease up approximately 63,500 sf at a total cost of approximately $10.6 million ($166.3 psf) based on Morningstar DBRS' tenant improvement and leasing assumptions at issuance. According to Reis, the Penn Station submarket reported a Q4 2024 vacancy rate of 10.8% with an average asking rental rate of $82.16 psf, compared with the subject's in-place rate of $98.4 psf.

Morningstar DBRS maintained the valuation approach from the April 2024 credit rating action, which was based on a capitalization rate of 7.0% and the Morningstar DBRS NCF figure noted above. The Morningstar DBRS Value represents a -44.9% variance from the issuance appraised value of $1.04 billion and results in a loan-to-value ratio (LTV) of 88.6%, compared with the LTV of 48.8% based on the appraised value at issuance. Morningstar DBRS maintained positive qualitative adjustments totaling 5.75% to reflect the low cash flow volatility, favorable property quality, and strong market fundamentals. Despite the adoption of remote and hybrid work, which continues to dampen end-user demand and challenge leasing efforts, the subject property is a high-quality asset that benefits from its strong institutional sponsorship and its location in a premier New York office market. In addition, the loan includes strong structural features including, but not limited to, upfront reserves and cash management provisions.

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 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 factor(s) 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 at https://dbrs.morningstar.com/research/437781 (August 13, 2024).

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 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 (February 28, 2025) https://dbrs.morningstar.com/research/448963.

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

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-DBRS@morningstar.com.

The credit ratings were initiated at the request of the rated entity.

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

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

These are solicited credit ratings.

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

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 (February 28, 2025),
https://dbrs.morningstar.com/research/448962
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024),
https://dbrs.morningstar.com/research/439702
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024),
https://dbrs.morningstar.com/research/438283
-- Legal Criteria for U.S. Structured Finance (December 3, 2024),
https://dbrs.morningstar.com/research/444064

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279 (July 17, 2023).

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