DBRS Morningstar Confirms All Ratings on Hudson Yards 2019-30HY Mortgage Trust, Removes UR-Dev. Status

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the following classes of the Commercial Mortgage Pass-Through Certificates issued by Hudson Yards 2019-30HY Mortgage Trust:

-- 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 ratings have been removed from Under Review with Developing Implications, where they were placed on November 14, 2019.

The Class X balance is notional.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, on the DBRS Morningstar website at www.dbrsmorningstar.com.

Prior to the finalization of the NA SASB Methodology, the DBRS Morningstar ratings for the subject transaction and all other DBRS Morningstar-rated transactions subject to the methodology in question were previously placed Under Review with Developing Implications, as the proposed methodology changes were material.

The subject rating actions are the result of the application of the NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology,” as applicable. Qualitative adjustments were made to the final loan-to-value (LTV) sizing benchmarks used for this rating analysis.

This loan is secured by the Borrower’s condominium interest in 1.5 million square feet (sf) of Class A office space at 30 Hudson Yards. The Borrower’s condominium interest spans floors 16 through 51 of the 30 Hudson Yards building, a newly built 90-story, 2.6 million-sf office building located in New York’s revitalized Hudson Yards district. Loan proceeds of $1.43 billion in addition to an equity contribution of $782.0 billion financed the Borrower’s nearly $2.2 billion acquisition of the subject collateral and funded $57.00 million of closing costs associated with the transaction. The $1.43 billion whole-loan amount is structured as a $1.12 billion Senior A note and a $310.0 million Junior B note. The Senior A note and the Junior B note were bifurcated into multiple pari passu notes. The 10-year loan is full-term interest only (IO) and represents a relatively modest loan-to-cost ratio of 66.4% based on the whole-loan amount of $1.43 billion.

The collateral portion is 100.0% leased to WarnerMedia via a 15-year lease scheduled to expire in May 2034. WarnerMedia was acquired by AT&T Inc. (AT&T) in 2018 and AT&T will serve as the guarantor on WarnerMedia’s lease within the collateral. DBRS Morningstar considers AT&T to be investment-grade rated, thereby providing enhanced cash flow stability to the transaction through the duration of the lease term.

The collateral is located along the easternmost boundary of the Hudson Yards district. The building broke ground in 2008 and, upon completion, will include over 18.0 million sf of commercial and residential space across 26.0 acres. The 30 Hudson Yards development has been supported by more than $4.0 billion of public investment, which includes a new Line 7 subway station located at the base of the 30 Hudson Yards building that positively enhances the commutability of the collateral. The Hudson Yards development is situated at the north-easternmost corner of New York’s Hudson Yards district, which was rezoned to include approximately 25.8 million sf of Class A office product, 20,000 residential units, 2.0 million sf of hospitality space, 1.0 million sf of retail space, a 750-seat public school, and more than 20 acres of open space.

The sponsor of the loan is a joint venture among Arizona State Retirement System (ASRS; 49.9%), two affiliates of Allianz SE (Allianz; 49.0%), and affiliates of The Related Companies, L.P. (Related; 1.01%). ASRS is a state agency that administers a pension plan, long-term disability plan, retiree health insurance plans, and other benefits to qualified government workers for the state of Arizona. The ASRS total fund is currently at approximately $39 billion in assets under management (AUM). Allianz is a European financial services company headquartered in Munich with core businesses in insurance and asset management. Related owns and manages a portfolio of assets valued at more than $60.00 billion, including 32 luxury rental buildings with more than 13,000 apartments, more than 30 million sf of commercial space, 5,500 luxury condominium residences, and approximately 60,000 affordable and workforce housing units located throughout the United States.

DBRS Morningstar believes that the subject’s superb location, excellent curb appeal ,and favorable market dynamic within a strong subsection of a gateway market and financial metropolis will provide stable levels of demand for the collateral through a variety of real estate cycles, thereby dampening downside volatility in years to come. The long-term and investment-grade strength of the collateral’s tenancy should also provide cash flow stability to the asset during the foreseeable future. Furthermore, despite the elevated DBRS Morningstar LTV and high loan of $977 per sf, there is approximately 35.0% of Borrower equity behind the loan amount.

The DBRS Morningstar net cash flow (NCF) derived at issuance was re-analyzed for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The resulting NCF figure was $112.4 million and a cap rate of 6.5% was applied, resulting in a DBRS Morningstar Value of $1.7 billion, a variance of 19.8% from the appraised value at issuance of $2.2 billion. The DBRS Morningstar Value implies an LTV of 82.7%, as compared with the LTV on the issuance appraised value of 66.4%. The NCF figure applied as part of the analysis represents a 7.7% variance from the Issuer’s NCF, primarily driven by rent step credits, vacancy, and a management fee.

The cap rate applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for office properties, reflective of the location, quality, and market position. In addition, the 6.5% cap rate applied is above the implied cap rate of 5.6% based on the Issuer’s underwritten NCF and appraised value.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis totaling 7.5% to account for cash flow volatility, property quality, and market fundamentals.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology and North American CMBS Surveillance Methodology, 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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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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