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Rating action

Scope Ratings GmbH (Scope) has affirmed the BBB-/Stable issuer rating of Corem Kelly AB (previously known as Klövern AB).

Rating rationale

Following the acquisition by Corem Property AB and the merger with that company in 2021, Corem Kelly’s (previously known as Klövern) business and financial risk profiles remain in line with Scope’s previous assessment. The February 2022 announcement of Corem Property Group AB and ALM Equity AB forming a JV triggered a renaming of Klövern AB to Corem Kelly. The Klövern name will live on in the JV, and subsidiary Tobin Properties AB will be the main component. Scope’s understanding is that Corem Kelly will live on as a standalone company as long as it has listed bonds outstanding. Operationally, the company is fully merged with Corem Property Group AB.

Corem Kelly’s BBB- issuer rating incorporates no adjustments for parent support under the supplementary rating drivers. The standalone credit quality of Corem Kelly is equal to the issuer rating of its parent, Corem Property Group AB (BBB-/Stable rating by Scope). Scope continues to rate Corem Kelly as a separate entity as it has no explicit guarantee from its parent and still acts as a financing entity with outstanding bonds in the market. Corem Kelly’s commercial paper programme is being replaced by Corem Property Group’s and further refinancing shall happen on group level, further supporting the perception of its strong integration into the group.

Scope’s assessment of Corem Kelly’s business risk profile (assessed at BBB) remains unchanged and is the primary driver of the assigned rating. The current portfolio, with around 350 properties and a total gross leasable area of 2.4m sq m, translates into decent diversification in terms of tenants and locations. This enhances resilience to cash flow volatility caused by economic cycles, industry developments, regulatory changes, and the loss or default of single tenants. Corem Kelly’s moderate or dominant position in most areas provides visibility to new tenants and flexibility for the needs of existing ones. Its in-house sales expertise and access to a significant logistics portfolio as a subsidiary of Corem Property Group has broadened its visibility further. The rating also benefits from the company’s geographical reach across three countries and its focus on liquid markets that Scope classifies as ‘A’ cities.

The business risk profile continues to be constrained by the relatively short WAULT, unchanged at 3.5 years since the last review. This exposes the company to ongoing re-letting risk, although this is somewhat mitigated by the stability of the metric. The company’s strategy thus far (acquiring properties in inner-city/near-city locations with below-par occupancy with the potential for property development) has resulted in a low occupancy rate relative to peers (around 90%). This holds the rating back, although the effect is tempered by the stability of the rate over the last decade. As Corem Kelly enteres a maturation phase in 2022, its management is focusing on decreasing vacancy. Profitability of 60%-65% (2021: 60%), as measured by the Scope-adjusted EBITDA margin, is at the lower end of the peer group. Scope expects this to improve towards 63% over the medium term due to the focus on increasing occupancy and finishing large developments in the US.

Corem Kelly’s financial risk profile assessment (assessed at BB+) remains unchanged. The financial risk profile benefits from historically strong debt protection as measured by Scope-adjusted EBITDA interest cover, which has remained above 2.2x during the pandemic (2021: 2.5x) and is expected to continue above this rating threshold. The company’s leverage, as measured by the Scope-adjusted loan/value ratio, constrains the rating somewhat. However, Scope highlights a significant reduction in leverage during 2019 due to portfolio streamlining and a rights issue in 2020. Corem Kelly continued to deliver during 2021 (2021: 52%) thanks to fair value gains on its properties, and Scope foresees a continuation of leverage at current levels of 51%. Despite Corem Kelly’s reliance on short-term financing, Scope views liquidity as adequate, also in light of the large undrawn facilities available via Corem and a secured loan/value ratio of 33%, which provide ample room to increase debt on existing properties if needed.

Outlook and rating-change drivers

The Outlook for Corem Kelly is Stable. This incorporates Scope’s view that Corem Kelly will be a fully consolidated and integrated subsidiary of Corem Property Group AB and that it will continue its developments in its core markets of Sweden, Copenhagen and New York, with capital expenditures amounting to SEK 2bn in 2022. The Scope-adjusted loan/value ratio, currently at 51% (including 50% equity credit on its hybrid bond), is expected to be stable while interest coverage remains around 2.2x.

A negative rating action is possible if Corem Kelly’s leverage, as measured by its loan/value ratio, increased towards 60% or interest cover dropped below 2.2x on a sustained basis, which naturally would also apply pressure on its parent’s credit metrics. This could be driven by an increase in interest-bearing debt through highly debt-financed acquisitions or remortgaging and/or interest rate risk not being adequately hedged in future.

A positive rating action could be warranted by deleveraging with a loan/value ratio substantially below 50% on a sustained basis while keeping interest coverage around 2.2x, supported by break-even free operating cash flow, which would support the parent’s credit metrics. This could be driven by less debt-funded capex or a positive development in current development projects, resulting in positive fair value adjustments.

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 Corporates Rating Methodology, 25 January 2022), 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 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 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: Henrik Blymke, Managing Director
The Credit Rating/Outlook was first released by Scope Ratings on 10 June 2020.

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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