Morningstar DBRS Places Two Classes of COLEM 2022-HLNE Mortgage Trust Under Review With Developing Implications and Confirms Credit Ratings on All Remaining Classes

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on three classes of Commercial Mortgage Pass-Through Certificates, Series 2022-HLNE issued by COLEM 2022-HLNE Mortgage Trust.

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)

Morningstar DBRS also placed its credit ratings on two classes Under Review with Developing Implications as follows:

-- Class D at BBB (high) (sf)
-- Class E at BBB (high) (sf)

With the exception of Classes D and E, all trends are Stable.

The credit rating confirmations reflect the stable performance of the transaction as the collateral office buildings have been fully leased since issuance to Yahoo (formerly Verizon Media) through 2037 on a triple net lease. Yahoo's lease is guaranteed by the company's parent, Verizon Communications, Inc. (Verizon), who is rated investment grade by S&P (BBB+), Moody's (Baa1), & Fitch (A-). As further described below, the bottom two rated classes were placed Under Review with Developing Implications while Morningstar DBRS evaluates the creditworthiness of Verizon considering the credit ratings' reliance on the tenant and the repayment during the ARD period for those two classes.

The loan is secured by the borrower's fee-simple interest in Coleman Highline IV, an office campus composed of two Class A buildings totaling 657,934 square feet (sf) in San Jose, California. The buildings were constructed in 2021 as a build-to-suit for Yahoo. The lease has two seven-year extension options, with no early termination rights (other than material casualty or condemnation). The collateral is part of the larger 1.6 million-sf Coleman Highline, which includes seven office buildings, four amenity buildings, a hotel, and retail space. The loan sponsor is by AGC Equity Partners Investments, Ltd., an affiliate of AGC Equity Partners, a London-based investment firm focused on sourcing and executing exceptional yield-producing asset investments and achieving above-market risk-adjusted returns. The sponsor has approximately $6.5 billion of assets under management.

The $513.5 million whole loan is composed of nine senior pari passu notes totaling $245.0 million and two subordinate notes totaling $268.5 million. The $309.5 million trust debt consists of two senior notes totaling $41.0 million and the two subordinate notes. The remaining senior debt is held across several 2022 multi-borrower commercial mortgage-backed securities (CMBS) transactions, none of which are rated by Morningstar DBRS. The fixed-rate interest-only (IO) loan has a five-year anticipated repayment date (ARD), ending December 2026, after which the loan will hyper-amortize through the final maturity date in April 2032. Morningstar DBRS expects excess cash flow to only pay down the outstanding loan balance by 29.1%, from $513.5 million to $364.0 million, by final maturity.

Although Yahoo invested significant capital into the collateral to achieve the business-critical infrastructure desired for its Silicon Valley headquarters, the tenant subleased its entire space to ByteDance, the parent company of TikTok, shortly after issuance. The commencement of the sublease is divided into three phases, with each phase beginning with nine months of free rent. Phases 1 (49.8% of the net rentable area (NRA)) and 2 (25.6% of the NRA) commenced in January 2023 with a starting rental rate of $51 per sf (psf) and January 2024 with a starting rental rate of $53 psf, respectively. Phase 3 will commence in January 2026 for the remaining space (24.6% of the NRA) at $56 psf. Per the September 2024 rent roll, the property's average rental rate was $52.20 psf, above the Santa Clara/Sunnyvale submarket's average asking rent of $50.13 psf, with a vacancy of 22.8%, as of YE2024 per Reis.

Per the trailing nine-month financials for the period ended September 30, 2024, the subject reported an annualized net cash flow (NCF) of $39.1 million (reflecting a debt service coverage ratio (DSCR) of 2.99 times (x)), above the YE2023 figure of $37.4 million (DSCR of 2.88x). The increase is driven by a 27.1% decline in operating expenses, including real estate taxes and repairs, property insurance, and repairs and maintenance.

For this review, Morningstar DBRS maintained the valuation approach from the April 2024 credit rating action, that considered a Morningstar NCF of $31.9 million (derived at issuance) and an increased cap rate of 7.25% to reflect the continued impact of increased remote work in the San Francisco area and the lower investor demand for office properties in general. Morningstar DBRS also maintained positive qualitative adjustments to the Loan-to-Value Ratio (LTV) Sizing benchmarks totaling 7.50% to account for the long-term cash flow stability, strong property quality, and expectations of the submarket. The Morningstar DBRS concluded value of $439.4 million represents a -43.7% variance from the issuance appraised value of $780.0 million.

Although the paydown would only cover a portion of the outstanding balance on Class A, Morningstar DBRS applied an amortization benefit and increased its LTV thresholds by 3.0% for Classes A, B, and C, leaving the credit rating of Classes D and E dependent largely on the credit given to the hyper-amortization achievable after the ARD from cash flow provided by Verizon. Given that analytical approach, Morningstar DBRS is evaluating the tenant's creditworthiness of the tenant and that process will be completed during the Under Review period.

The Morningstar DBRS credit ratings assigned to Classes B and C and are lower than the results implied by the LTV sizing benchmarks. The variances are warranted given the stability of cash flows through the term of the loan, as Yahoo's lease expiration is well beyond the loan's ARD and final maturity.

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, or 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.

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 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.

This credit rating is Under Review with Developing Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period.

DBRS Limited
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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.
-- 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/north-american-commercial-mortgage-servicer-rankings.

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

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