DBRS Morningstar Confirms Ratings on Five Classes of COLEM 2022-HLNE Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following 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)
-- Class D at BBB (high) (sf)
-- Class E at BBB (high) (sf)

All trends are Stable.

The rating confirmations and Stable trends reflect the overall performance of the underlying collateral, which remains in line with DBRS Morningstar’s expectations at issuance. The property is 100% leased to Yahoo through 2037, and the lease is fully guaranteed by the investment-grade rated tenant affiliate, Verizon Communications, Inc. (Verizon).

The collateral for the trust consists of the borrower’s fee-simple interest in Coleman Highline IV, a newly built office property in San Jose, California. The office campus is made up of two Class A buildings totaling 657,934 square feet (sf), bifurcated between 603,363 sf of office space and 54,571 sf of amenity space. It 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 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. As of YE2022, the sponsor had approximately $6.5 million in assets under management across real estate, infrastructure, and yield-producing opportunities.

The borrower used whole loan proceeds of $513.5 million along with $291.0 million of sponsor equity to purchase the property, fund all outstanding free rent and rent abatements, and cover closing costs. The loan comprises nine senior pari passu notes in the aggregate amount of $245.0 million and two subordinate notes in the amount of $268.5 million. The $309.5 million trust loan is part of a split loan structure, comprising two senior pari passu notes totaling $41.0 million and the two subordinate notes. The transaction has a five-year anticipated repayment date (ARD) ending December 2026, and the loan is interest only through the ARD.

As noted above, the property is 100% leased to Yahoo, pursuant to a triple net lease through April 2037. The lease has two seven-year extension options at fair market value, with no early termination rights (other than material casualty or condemnation). While the tenant had invested significant capital of approximately $225 per sf (psf) into achieving the business-critical infrastructure desired for its Silicon Valley headquarters, the servicer has confirmed the entire space has been sublet to ByteDance, the parent company of TikTok, a Beijing-based social media platform.

According to the terms of the sublease agreement, TikTok will take over the space in three phases; each phase begins with nine months of free rent. Phase 1 began in January 2023 for 327,662 sf (49.8% of the net rentable area (NRA)) at a rental rate of $51 psf. Phase 2 will begin in January 2024 for an additional 168,615 sf (25.6% of the NRA) of the space at a rental rate of $53 psf. Phase 3 will begin in January 2026 for the remaining 161,657 sf (24.6% of the NRA) at a rental rate of $56 psf. Per the September 2022 rent roll, the property had an average rental rate of $49 psf excluding the free rent periods. According to Reis, as of February 2023, office properties within one mile from the subject reported vacancy and average rental rates of 3.0% and $36 psf, respectively.

Based on the September 2022 financials, the loan reported an annualized net cash flow (NCF) of $31.1 million, reflecting a debt service coverage ratio (DSCR) of 2.39 times (x), in line with DBRS Morningstar’s NCF of $31.9 million (a DSCR of 2.45x). DBRS Morningstar valued the collateral at $490.1 million based on the concluded NCF and a capitalization rate of 6.50%. DBRS Morningstar’s valuation resulted in a loan-to-value ratio (LTV) of 104.8% on the $513.5 million whole loan.

The ratings on Classes D and E depend in large part upon if DBRS Morningstar gives credit to any amortization after the ARD from the cash flow provided by Verizon. As such, the ratings currently mirror the rating of the tenant affiliate, Verizon. Future changes to the tenant affiliate’s rating would likely result in a change to the ratings on Classes D and E. As of February 2023, Verizon upholds its investment-grade rating. DBRS Morningstar calculated its own dark value at $438.5 million, which represents a modest 80.6% LTV to the Class C cumulative proceeds, which is the most subordinate class whose rating does not largely depend upon Verizon’s rating.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no environmental, social, and governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

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

The principal methodology is North American CMBS Surveillance Methodology (October 3, 2022), 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.

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@dbrsmorningstar.com.

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.

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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