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Rating action

Scope Ratings GmbH (Scope) has today assigned a first-time issuer rating of BBB-/Stable to Norwegian Property ASA (NPRO).

Rating rationale

NPRO’s business risk profile (assessed at BBB-) is supported by its large market share of office space in sought-after grade A locations in greater Oslo. Its asset quality is strengthened by the young economic age of its portfolio, which benefits from regular refurbishments and a 93% occupancy rate. Another strength in this regard is a weighted average unexpired lease term (WAULT) of 5.1 years, which is higher than that of Nordic peers. The company’s high profitability as measured by its Scope-adjusted EBITDA margin of around 81% (LTM Q1 2022) and its low volatility further benefit the rating.

Limited geographic diversification constrains the company’s business risk profile, despite a slight improvement expected in the foreseeable future through joint-venture exposure to NORDR (a residential real estate developer; JV partners are Fredensborg and Union Real Estate Fund III). Tenant concentration was adversely affected by the acquisition of Telenor’s headquarters building in 2020. This is mitigated by Telenor’s strong credit quality (high investment-grade). Telenor now provides 22% of NPRO’s rental income (including a guaranteed rent contributing 6pp of total rental income). As a result, the top three and top 10 tenants account for 32% and 48% of total rental income respectively. Tenant concentration is partially mitigated by an implied investment-grade tenant base based on historical bad-debt statistics and broad tenant industry diversification.

NPRO’s financial risk profile (assessed at BBB-) benefits from stable debt protection of around 2.3x (LTM Q1 2022) as measured by Scope-adjusted EBITDA interest coverage. Scope expects this to continue based on: i) EBITDA growing organically and inorganically; and ii) the interest burden remaining at current levels even in a rising interest rate environment, thanks to significant hedging activities (around 70% of debt is hedged). The company’s free operating cash flow remains positive (excluding discretionary acquisition capex) and covers assumed dividends with good headroom. In 2023, NPRO expects the first dividends from its 42.5% preference share stake (42.4% share stake) in the NORDR joint venture, which shall contribute significantly to cash flow in 2024 and beyond.

NPRO’s leverage, as measured by the Scope-adjusted loan-to-value (LTV) ratio, fell below 50% in 2016 and has remained there ever since (Q1 2022: 44%). Despite significant transactions in 2020, such as the investment in the NORDR joint venture and the acquisition of the Telenor portfolio in Fornebu, the company has managed to keep its LTV ratio stable at below 50% by issuing NOK 1.7bn in new equity. Scope’s base case expects the company’s LTV ratio to remain between 45% and 50% going forward based on: i) the company’s target of an LTV ratio of 45% to 55% through the cycle; ii) a continuation of business as usual with acquisitions (expected at NOK 1.5bn per annum for 2022 and 2023) and positive like-for-like growth in rental income; and iii) muted fair value appreciation in Scope's projections balancing debt-funded growth.

The delisting from the stock exchange through the acquisition of all remaining outstanding shares by Geveran Trading Co. Ltd. in July 2021 are assessed as neutral for Scope’s financial policy assessment. This is because i) the risk of higher extraordinary dividends is mitigated by the company’s continued use of the bond market, maintenance of the same reporting routines and commitment to financial policy; and ii) even before the delisting, the majority shareholder was dominant and therefore the main source of equity injections, which Scope foresees to continue as needed.

NPRO’s sustainability program, benefiting its ecological footprint and profitability alike, in addition to ongoing BREEAM certifications of its properties increases the attractiveness of the company’s portfolio and help ensuring high occupancy in a changing office landscape.

The company’s liquidity is assessed as adequate, despite ratios historically below 1x. They are expected to remain at this level due to: i) relatively low amounts of cash on the balance sheet; and ii) most revolving credit facilities being annual rolling and therefore not included. However, Scope believes liquidity to be a manageable risk thanks to: i) all outstanding debt being secured in properties with a current average LTV ratio of 44% and a maximum LTV ratio allowance of 65% to 75% providing ample headroom; ii) the company’s proven access to capital and bank markets through frequent issuances of debt instruments and a willingness to raise equity if needed; and iii) a spread-out maturity profile and the company’s financial policy of not allowing more than 20% of total loans to mature over the following 12 months on a rolling basis.

Outlook and rating-change drivers

The Outlook for NPRO is Stable and incorporates continued inorganic growth through acquisitions within its core markets in central Oslo, financed through a mix of debt and internal cash flow. Scope’s rating case includes acquisitions worth NOK 1.5bn per annum for 2022 and 2023 and no disposals of properties. This results in a Scope-adjusted LTV ratio of between 45% and 50% and Scope-adjusted EBITDA interest cover of around 2.3x.

A negative rating action could occur if the Scope-adjusted LTV ratio climbed towards 55% or Scope-adjusted EBITDA interest cover fell below 2.0x on a sustained basis. This could be caused by a severe reduction in the fair value of properties compared to Scope’s base case, a large drop in achievable rents due to new regulations, drastically different demand patterns, or an unexpected economic downturn. The LTV ratio could also increase due to a large debt-financed acquisition.

A positive rating action would require a Scope-adjusted LTV ratio below 40% and significant growth in assets leading to better diversification of cash flow. The LTV trigger could be driven by a lower proportion of debt-funded capex, decreased refinancing needs through stronger-than-anticipated portfolio cash flow, a substantial improvement in market sentiment resulting in strong fair value appreciation, or a change in the funding mix. Cash flow diversification could be driven by renting out the part of the Telenor property that is currently vacant but guaranteed or by broadening geographies and tenants. 

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, (Corporate Rating Methodology, 6 July 2021, European Real Estate Rating Methodology, 25 January 2022) are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-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 Ratings if the Credit Ratings 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/or Outlook and the principal grounds on which the Credit Rating and/or Outlook is based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
This 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, Executive Director
The Credit Rating/Outlook was first released by Scope Ratings on 28 April 2022.

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.

Conditions of use/exclusion of liability
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