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Rating action

Scope Ratings GmbH (Scope) has today affirmed its issuer rating of BBB- on Norwegian Property ASA (NPRO) and revised the Outlook to Negative from Stable.

Rating rationale

The Negative Outlook is driven by the recent acquisitions and associated debt, which have put significant pressure on NPRO's credit metrics. Scope expects the company to alleviate the pressure on its credit metrics through an announced equity raise following the completion of the ML33 transaction, which, combined with the refinancing of the overdue bond loan, could return the credit metrics to a level consistent with the BBB- issuer rating.

NPRO’s business risk profile (assessed at BBB-) continues to be supported by its large market share of office space in sought-after Grade A locations in the Oslo area, where it has recently strengthened its foothold through the acquisition of Telegrafen in the CBD and Martin Linges vei 33 in Fornebu. These transactions and recent major lease renegotiations have strengthened the WAULT to 6.0 years as at Q1 2024 from 5.0 years a year ago, stronger than the market average of four years, while EPRA vacancy has fallen to 5.6% from 6.3% (though it increased somewhat due to the ML33 acquisition; vacancy stood at 3.5% at year-end 2023). High profitability, as measured by a Scope-adjusted EBITDA margin of circa 81% (LTM Q1 2024) with low volatility, provides further support to the issuer’s business risk profile.

Limited geographical diversification remains a constraint, although this is slightly improved by the joint venture exposure to NORDR (a residential property developer; JV partners are Fredensborg and Union Real Estate Fund III), which paid its first dividends to NPRO in Q2 2023. The high tenant concentration, with the top 3 and top 10 tenants accounting for 34% and 49% of total rental income as at Q1 2024 respectively, continues to be impacted by the dominant tenant Telenor (17.6% vs. 21.0% last year) and the newly gained large tenant Equinor (12.2%). The tenant concentration is partially mitigated by the high credit quality (high investment grade) of Telenor and Equinor and an implied investment grade credit quality of the remainder based on historical default statistics and broad tenant industry diversification.

NPRO’s financial risk profile (revised to BB+ from BBB-) has been positively impacted by a significant 9.8% increase in rental income through 2023. This is offset by fair value depreciation of 11.7% over the same period and a sharp increase in headline interest rates, which is somewhat mitigated by NPRO's hedging ratio of around 67% as of Q1 2024.

Scope-adjusted EBITDA interest cover remained stable in 2023 at 2.3x (2.6x including the NORDR contribution), ending the year better than expected (2.1x) thanks to the interest income achieved, hedging effects and a significant 9.8% increase in rental income through 2023. After the significant acquisition at the end of October 2023 (Telegrafen) and end of March 2024 (Martin Linges vei 33), Scope expects the interest cover to decline to 1.8x in 2024, as the related expensive NOK 2.2bn senior bond loan will be overtaken by NPRO, which has increased its average interest rate to 4.7% as of Q1/2024 (up from 3.8% YoY). Scope expects a recovery of Scope-adjusted EBITDA interest cover to 2.2x in 2025 and 2.4x in 2026 once the NOK 2.2bn senior bond loan is refinanced/repaid by equity and bank/bond debt at lower NPRO conditions in the second half of 2024 and early 2025 and dividends from NORDR are resumed. The company's financial policy of hedging 50-100% of all variable-rate debt at all times, with a track record of around 70% of macro hedges (currently 67% despite significant assumed debt), with a remaining maturity of 3.7 years, ensures that refinancing will largely benefit from these macro hedges, which ultimately limit the exposure to change in borrowing costs.

Like most property companies, NPRO was not protected from rising yields in 2023, resulting in a negative fair value adjustment of NOK 3.2bn (11.7%). At the end of October, NPRO acquired the Telegrafen property in CBD Oslo, financed by NOK 1.0bn of debt and NOK 0.5bn of equity. The fair value adjustments and the leveraged transaction increased the Scope-adjusted loan/value (LTV) to 53% in Q4/23 from 48% in Q3/23. In Q1/24, NPRO gained access to the ML33 property through its holding of junior debt in the owner company, which failed to cure a covenant breach on senior debt and consequently defaulted. NPRO acquired the shares for NOK 1 with a commitment to guarantee a private placement of up to NOK 0.5bn (with a minimum allocation of 80%) and to guarantee/servicing the NOK 2.2bn senior debt attached to the property.

NPRO intends to refinance the overtaken/guaranteed bond loan tied to the property with a new equity issue and long-term financing for the property once the acquisition has been fully completed in/after the summer, with all legal matters relating to the previous existing shareholders and the covenant breach by the previous owner remedied. Scope notes that the ongoing litigation surrounding these transactions poses a risk to the execution of the transactions and an unclear ownership structure until completion. While these transactions have temporarily increased NPRO's LTV to 55% as at Q1 2024, the planned equity issuance and associated debt reduction is expected to reduce the LTV back towards 50% in 2024 and below 50% in 2025. Scope has also taken into account the recent fair value appreciation in Q1/24 of NOK 245m and expects property values to remain at least stable throughout 2024 linked to a stabilisation of cap rates and the recent acquisition of distressed properties at a discount to market value. Scope-adjusted debt/EBITDA was around 13-14x before the major acquisitions in 2020 and around 14-15x in 2022 and 2023. Planned equity injections in 2024, together with a significant increase in EBITDA from the two recent large transactions and the treatment of NORDR dividends as EBITDA, will support a reduction of Scope-adjusted debt/EBITDA to below 10x by 2026.

The company's liquidity is considered adequate. NPRO currently has NOK 3.2bn in undrawn facilities, of which NOK 2.7 bn extend beyond 2024, resulting in a liquidity of 122% in 2024. Liquidity could fall below 100% in 2025 due to the significant refinancings coming up in 2025, including the debt assumed for the ML33 transaction. However, Scope considers the liquidity risk to be manageable given that: i) all outstanding debt is secured on properties with a current LTV ratio of 55% and the ability to draw down new debt under existing facilities up to an LTV of 65%-70%, significantly minimising refinancing risk; ii) the company's proven access to capital and the banking markets through frequent issuance of debt and willingness to raise equity if required; and iii) a relatively well-diversified maturity profile and the company's financial policy of not having more than 20% of total debt maturing in the next 12 months on a rolling basis (which is currently above this due to the assumption of the ML33 loan).

Several new ESG reporting requirements have been introduced into legislation in Norway in 2022, and NPRO reports in accordance with the Transparency Act and the Equality and Anti-Discrimination Act, with the aim of conducting its climate reporting in accordance with the Taskforce on Climate-related Financial Disclosures (TCDF) in the future. NPRO has set environmental targets in line with the UN SDGs, with a base year of 2019 and a target year of 2025: 5-10% reduction in energy consumption for the existing portfolio (achieved), 10-20% reduction in CO2 equivalents (CO2 emissions per sq m reduced to 7kg in 2023 from 14kg in 2019) and 60-65% for sorted waste (59% achieved). As part of its ESG strategy, NPRO aims to have all its properties achieve a BREEAM rating or BREEAM-in-Use of ‘Very Good’ or better by 2025. Approximately 81% of all office, retail and restaurant space is already certified (up from 66% as at Q1 2023), increasing the attractiveness of the portfolio and strengthening asset quality, which will support rental growth and stable cash flow in the future (ESG factor credit positive).

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating-change drivers

The Outlook for NPRO is Negative reflecting Scope's expectation of weak credit metrics in 2024 due to recent large acquisitions, with LTV remaining above 50% and Scope-adjusted EBITDA interest cover declining below 2.2x.

A positive rating action, i.e. a revision of the Outlook to Stable, could be justified if the LTV improves towards 50% and the Scope-adjusted EBITDA interest coverage remains at or above 2.2x on a sustained basis. Both assumes the resumption of dividend payments from the NORDR joint venture in 2025, strong rental growth in line with Scope's expectations and the effective ownership of the Equinor building in Oslo (ML33 transaction), followed by the announced capital increase of NOK 1bn to partially refinance the NOK 2.2bn bilateral bond linked to the ML33 transaction and a successful refinancing of the remainder on improved terms.

A downgrade could occur if the LTV does not improve towards 50% or Scope-adjusted EBITDA interest cover fell and remains below 2.2x. This could be triggered by a delay in the refinancing of the ML33 transaction or a delay in the resumption of dividends by the NORDR joint venture.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for this Credit Rating and/or Outlook, (European Real Estate Rating Methodology, 28 March 2024; General Corporate Rating Methodology, 16 October 2023), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Rating if the Credit Rating was to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating: public domain, the Rated Entity, third parties and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Rating originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and/or Outlook and the principal grounds on which the Credit Rating and/or Outlook are based. Following that review, the Credit Rating and/or Outlook was not amended before being issued.

Regulatory disclosures
The Credit Rating and/or Outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating and/or Outlook is UK-endorsed.
Lead analyst: Thomas Faeh, Executive Director
Person responsible for approval of the Credit Rating: Philipp Wass, Managing Director
The Credit Rating/Outlook was first released by Scope Ratings on 28 April 2022. The Credit Rating/Outlook was last updated on 4 May 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
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