DBRS Morningstar Finalized Provisional Ratings on COMM 2022-HC Mortgage Trust

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the classes of Commercial Mortgage-Pass Through Certificates to be 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. Class X is an interest-only (IO) class whose balance is notional.

The COMM 2022-HC Mortgage Trust transaction is secured by the fee-simple interest in Hudson Commons, a 26-story, 697,960-square-foot (sf) LEED Platinum office tower. The building is on Ninth Avenue between West 34th Street and West 35th Street in the Penn Station submarket of Manhattan, New York. The property was built in 1962 and was renovated from 2018 to 2012 by the seller, a joint venture of Cove Property Group LLC and The Baupost Group LLC. Renovations of more than $800 million consisted of upgrading and reinforcing the existing structure, in addition to constructing an additional 17-story, 304,301-sf glass tower of office space directly above the existing structure. The property is split into two condominium units that both serve as collateral for the loan: the original nine-story podium base and the additional 17-story glass tower. Following a competitive bidding process with numerous institutional offers, a joint venture between CommonWealth Partners LLC (CWP) and the California Public Employees’ Retirement System (CalPERS) purchased Hudson Commons for approximately $1.03 billion ($1,480 per sf (psf)). The sponsor’s business plan is to lease-up the remaining vacant space and stabilize the property.

Hudson Commons is currently 72.7% leased to six tenants: Peloton (48.1% net rentable area (NRA)/66.7% gross rent/lease expiration date (LXD): December 2035), Lyft (14.4% NRA/19.8% gross rent/LXD: November 2029), Ovid Therapeutics (2.7% NRA/4.9% gross rent/LXD: September 2032), True Talent Advisory (2.5% NRA/4.3% gross rent/LXD: December 2032), Brevet Capital (2.3% NRA/4.2% gross rent/LXD: August 2030), and In Common Coffee (0.2% NRA/0.1% gross rent/LXD: October 2036). Peloton and Lyft have committed to significant out-of-pocket investment in their spaces, investing $500 psf ($167.9 million) and $175 psf ($17.6 million), respectively. These amounts are in addition to the tenant improvement (TI) packages received from landlord, demonstrating a long-term commitment to the property. Hudson Commons is situated at the focal point of current development in Manhattan, standing between Hudson Yards, Manhattan West, and the redeveloped Moynihan Train Hall/Penn Station. The location provides exceptional access to transit, situated one block from the 34th Street-Hudson Yards subway entrance, and steps away from six subway lines (A, C, E, 1, 2, and 3), commuter rail (NJ Transit and LIRR), and Amtrak service at Moynihan Train Hall/Penn Station. The property is a three-minute walk to the High Line; a 10-minute walk to the Whitney Museum of American Art; and one block away from the amenities, retail, and restaurants at Brookfield’s 7 million-sf Manhattan West development.

While DBRS Morningstar has historically taken a favorable view on assets in desirable Midtown Manhattan locations such as the collateral’s, weakened tenant demand throughout the Midtown Manhattan office market in the wake of the Coronavirus Disease (COVID-19) pandemic reflects a degree of uncertainty related to post-pandemic office work trends. Fortunately, Class A vacancy rates have remained relatively low throughout the subsection of the submarket in which the collateral resides, showing the area’s strength and resilience relative to even the historically top-tier Midtown Manhattan office market. Tenant demand in the submarket around the property has been exceptionally strong, even after the onset of the pandemic. The top tenants in the submarket include BlackRock, Pfizer, and TimeWarner. In August 2020, Facebook committed to a 730,000-sf lease at the Farley Post Office redevelopment, just one block from the property. Additional notable tenants in the area include AmLaw 100 firms (Skadden Arps and Cravath), Amazon, Dentsu, the National Hockey League, and KKR, among many others.

At loan closing, approximately $33.5 million of cash equity ($176 psf on the currently vacant square footage) will be placed into an upfront reserve account to be used for accretive TI and leasing commissions (LC) along with approximately $1.97 million allocated to existing leases. In addition the excess cash flow, up to $100 per rentable square foot will be swept for the two largest tenants (Peloton and Lyft) upon the earlier of (1) the date 12 months prior to the lease expiration date; (2) the date each tenant is required to give notice of its exercise of a renewal option; (3) the early termination, early cancellation, or early surrender of a major tenant lease; (4) a major tenant goes dark; (5) default of the lease; or (6) bankruptcy of a major tenant or its parent company. Given the superior quality of the property, strong institutional sponsorship, its location in a premier New York office market, lack of any rollover during the five-year loan term along with the substantial loan structure including upfront reserves for future accretive leasing, DBRS Morningstar concluded to a stabilized economic occupancy of 92.5% for the property. As of Q3 2021, Cushman & Wakefield reported a Class A office vacancy rate in the Penn Station submarket of 4.7% with asking rents of approximately $112.50 psf.

There is a possibility that the sponsor will not execute its business plan to lease-up vacant space and that the stabilized cash flow will not be realized during the loan term. Failure to execute the business plan could result in a term default or, more likely, the inability to refinance the loan balance at maturity. To achieve the DBRS Morningstar stabilized occupancy, management needs to lease-up approximately 146,002 sf at a total cost of approximately $24.3 million ($166.30 psf) based on DBRS Morningstar’s TI/LC assumptions, which is below the $33.5 million of upfront reserves dedicated to accretive leasing costs. In addition, the DBRS Morningstar stabilized value of $886 psf is significantly lower than the appraiser’s comparable office sales, which averaged $1,207 psf across eight transactions since June 2019. It is also approximately 29.4% below the $1,146 psf invested by the seller to gut renovate the property.

The transaction sponsorship is a joint venture of CWP and CalPERS. CWP is a privately held, vertically integrated real estate investment, development, and management firm based in Los Angeles, with offices across the United States. CWP has executed more than $13 billion of transactions in partnerships with CalPERS, beginning in 1998, and will be an active investor on behalf of the pension fund with a significant capital allocation for investment across the United States. Currently, CWP manages a portfolio valued in excess of $8 billion and is CalPERS’ exclusive partner for domestic, core office investment and has been designated as one of only five strategic partners for CalPERS’ overall real estate program. CalPERS is the largest public pension fund in the United States and manages pension and health benefits for more than 1.6 million California public employees, retirees, and their families. As of December 15, 2021, CalPERS reported over $495 billion in assets under management and $49 billion of investments in real assets.

DBR Investments Co. Limited originated the five-year loan that pays fixed-rate interest of 3.5125% on an IO basis through the entire term. The $507 million whole loan is composed of seven promissory notes: six senior A notes totaling $305 million and one junior B note of $202 million. The COMM 2022-HC transaction will total $467 million and consist of five senior A notes with an aggregate principal balance of $265 million and the $202 million junior B note. The remaining senior A note will be held by the originator and may be included in a future securitization. The senior notes are pari passu in right of payment with respect to each other. The senior notes are generally senior in right of payment to the junior notes.

The whole loan proceeds, together with an equity contribution of approximately $588.0 million (53.7% of cost) from the sponsor, were used to facilitate the acquisition of the property. DBRS Morningstar typically views cash-in acquisition financings more favorably, given the stronger alignment of borrower incentives compared with situations in which a sponsor is refinancing and cashing out of its equity position.

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/373262.

Class X is an IO certificate that references a single rated tranche. 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.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

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

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is the North American Single-Asset/Single-Borrower Ratings Methodology (March 2, 2021), 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/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

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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