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Rating action

Scope Ratings GmbH (Scope) has assigned a first-time issuer rating of BBB-/Stable to Corem Property Group AB (Corem).

Rating rationale

Corem’s business risk profile (assessed: BBB) is the primary driver of the assigned rating, benefitting from a portfolio balanced between office and logistics properties as well as a moderate market position as a top three commercial real estate company by market value of assets and square metres in Sweden. The broadened portfolio and increased market position follow the recent successful acquisition of Klövern AB through an all-share offering, resulting in Klövern’s integration into Corem and delisting. Management will eventually consist of employees from both companies. Corem has around 500 properties and a lettable area of 3.4m square metres, predominantly in Sweden and with some exposure to Denmark and the US city of New York. The company’s strong diversification and size, with pro-forma Scope-adjusted total assets of SEK 82bn as of end-March 2021 (EUR 8bn), enhances resilience to cash flow volatility, provides visibility to tenants, enables good access to investment markets and ensures diversified funding in its jurisdictions.

The rating further benefits from Corem’s moderate geographical outreach, with properties located mostly in metropolitan areas classified as ‘A’ locations, and tenant diversification and quality, underscored by the roughly 4,900 tenants with an implied investment grade profile on average.

The business risk profile is somewhat constrained by the low occupancy of around 90% compared to peers. This has been due to the historical growth and refurbishing strategies, mitigated by the stability of occupancy through the cycle. Further, Corem’s low pro-forma weighted average unexpired lease term of 3.7 years as of end-March 2021 is slightly below the Nordic average and exposes the company to reletting risk, influenced by changes in the office and logistics landscape. These factors have also affected Corem’s profitability, which underperforms that of similar-sized peers, with a Scope-adjusted margin of around 65% (pro-forma) as of end-March 2021 and similar levels expected going forward. Management is committed to reducing vacancies to increase profitability going forward and pursue a less expansive growth.

Corem’s financial risk profile (assessed: BB+) benefits from strong and stable debt protection with a Scope-adjusted EBITDA interest cover of 2.5x historically, helped by floating-rate debt and a short-term financing profile. Scope continues to project a floating-rate profile with significant hedging. The spread is also forecasted to reduce and thereby lift Scope-adjusted EBITDA interest cover towards 3x in the medium term, based on a stronger standing in capital markets after the merger with Klövern AB and the company’s commitment to be investment grade¹.

The company’s pro-forma Scope-adjusted loan/value ratio (LTV) after the merger of around 56% hinders the rating. However, this will be mitigated by the deleveraging trend assumed going forward, based on i) value-accreditive developments being completed in the short term; ii) an expected plateauing of interest-bearing debt; and iii) Corem’s toned-down growth strategy, even with the expectation of lower fair value appreciations.

Liquidity is adequate despite sources being only expected to cover uses by 0.6x in 2021. The company, like most Nordic peers, relies on short-term financing. Revolving credit facilities and cheque credit facilities cover short-term needs, while secured bank debt and unsecured bonds cover the long-term ones. On Corem’s standalone portfolio, the secured loan/value (LTV) ratio stood at 43% at end-March 2021, giving sufficient possibility to increase debt on existing properties if needed for refinancing, with the same mirrored on Klövern’s standalone portfolio, at 33% secured. The merged company’s next unsecured maturity is a SEK 2.5bn green bond in April 2022 – in the unlikely case the company cannot refinance the bond, the SEK 4.6bn of undrawn facilities can still cover it. Scope considers the likelihood of banks not refinancing the company’s secured loans to be low.

Outlook and rating-change drivers

The Outlook is Stable and incorporates the successful integration of Klövern AB, a modest growth strategy going forward, and an increased focus on reducing vacancies in the combined portfolio. It further incorporates Scope’s expectation of a slow decrease in LTV while Scope-adjusted EBITDA interest cover remains above 2.2x. Scope also expects continued positive cash flow, as measured by Scope-adjusted free operating cash flow, as well as positive discretionary cash flow once the development programme is complete.

A negative rating action is possible if LTV reaches above 60% on a sustained basis or Scope-adjusted EBITDA interest cover weakens below 2.2x. This could be driven by an increase in interest-bearing debt through heavily debt-financed acquisitions, or remortgaging amid a worsening economic or market sentiment that puts real estate asset values under pressure and/or significantly reduces income while interest costs are elevated.

A positive rating action could be warranted if LTV reaches around 50% on a sustained basis. This could be driven by lower debt-funded capex, decreased debt needs through stronger-than-anticipated portfolio cash flows, and improved market sentiment resulting in fair value appreciation.

Rating driver references
1. Investor presentation in relation to merger

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 Outlook, (Corporate Rating Methodology, 6 July 2021; Rating Methodology: European Real Estate Corporates, 15 January 2021), are available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
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-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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-scale. 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://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Rating if the Credit Rating were 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 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 Outlook and the principal grounds on which the Credit Rating and Outlook are based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
The Credit Rating and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating and Outlook are UK-endorsed.
Lead analyst: Thomas Faeh, Executive Director
Person responsible for approval of the Credit Rating: Philipp Wass, Executive Director
The Credit Rating/Outlook was first released by Scope Ratings on 15 July 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.
Scope Ratings provided the following Other Services to the Rated Entity and/or its Related Third Parties within the two years preceding this Credit Rating action: Rating Assessment Service

Conditions of use / exclusion of liability
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