The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings GmbH (Scope) has affirmed the issuer rating of BBB-/Stable of Corem Property Group AB.

Rating rationale

Corem Property Group has had a busy last 12 months, dominated by the integration of Corem Kelly AB (previously Klövern AB; rated BBB-/Stable). Through the acquisition in June 2021, the company took over a property portfolio of 342 investment properties (about 2.5m sq m valued at SEK 62bn), broadened its range of property types, customers and geographies and took over a development portfolio. In November 2021 Corem signed a letter of intent with ALM Equity to create a joint venture management company that will develop and hold residential properties. In February 2022 the parties entered into a binding agreement under which Corem intends to transfer building rights and properties with a market value of SEK 5.4bn into the joint venture, resulting in a 51% stake.

Corem’s business risk profile (assessed at BBB) is the primary driver of the rating, benefitting from a portfolio balanced between office and logistics properties and a good market position as a top-three commercial real estate company in Sweden by asset value and square metres. Corem has around 500 properties and a lettable area of 3.4 million sq m, predominantly in Sweden and with some exposure to Denmark and the city of New York. The company’s strong diversification and size, together with Scope-adjusted total assets of SEK 93bn (EUR 9bn) as at end-March 2022, 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 good geographical outreach with properties located mostly in metropolitan areas classed as ‘A’ locations and tenant diversification and quality underscored by the roughly 4,300 tenants with an implied investment grade profile. Increased resource efficiency in terms of renovation and recycling are top priorities, with the company using environmental certification systems for every new construction or refurbishment. These efforts in the social and environmental realm enhance not only the attractiveness of its portfolio but also its profitability as the improvements increase the net rent ratio.

The business risk profile remains somewhat constrained by Corem’s low pro-forma weighted average unexpired lease term of 3.7 years as of end-March 2022. It is around the Nordic median and exposes the company to reletting risk, influenced by changes in the office and logistics landscape. Corem’s occupancy stands at 90%, low compared to peers, which further constrains the business risk profile. This is due to historical growth, refurbishing strategies and a recent ‘focus diversion’ given the acquisition of Klövern, mitigated by the stability of occupancy through the cycle. These factors in addition to merger- related costs have also affected Corem’s profitability, which underperforms similar-sized peers, with a Scope-adjusted EBITDA margin of around 61% over the 12 months ending in March 2022. Management is committed to reducing vacancies in 2022 in order to increase profitability and aims for less expansive growth. Scope foresees a significantly improving EBITDA this year with merger synergies on the cost side starting to materialise while one-offs fall out of the equation and foresees a recovery to an EBITDA margin of 65% over the next two years.

Corem’s financial risk profile (assessed at BB+) benefits from strong and stable debt protection with a historical Scope-adjusted EBITDA interest cover of 2.4x-2.6x, helped by floating-rate debt and a short-term financing profile. This does not necessarily bode well in an increasing interest rate environment. Negative effects on interest cover are however dampened by hedging levels around 70%. Also, the company will be perceived more favourably in capital markets (lower risk, lower financing costs) thanks to the merger and the commitment to an investment grade rating. The latter is exemplified by a reduction in the spread on its commercial paper programme and recent issuances. Scope expects interest coverage to drop to 2.4x in 2022 but to remain above 2.2x in the foreseeable future.

The company’s 52% Scope-adjusted loan/value ratio (LTV) as at March 2022 hinders the rating. Scope, however, positively notes the deleveraging in 2021, helped by fair value adjustments. Scope foresees similar LTVs going forward, based on i) a conservative assumption of toned-down fair value uplifts despite value-accretive developments being completed in the short term; ii) an expected plateauing of interest-bearing debt; and iii) Corem’s toned-down growth strategy.

Liquidity is adequate despite sources being expected to cover uses by 0.6x in 2022. The company, like most Nordic peers, relies on short-term financing. Revolving credit facilities and cheque credit facilities cover short-term needs and secured bank debt and unsecured bonds cover long-term needs. In Corem’s portfolio, the secured LTV ratio stood at 38% at FY 2021, giving sufficient headroom to increase debt on existing properties and cover potential refinancing needs. The company’s next unsecured maturity (excluding commercial papers) is a SEK 484m bond coming to maturity in February 2023. In the unlikely case the company cannot refinance the bond, the SEK 5.4bn of undrawn facilities can still cover it. Scope considers the likelihood of banks not refinancing the company’s secured loans as low.

Outlook and rating-change drivers

The Outlook is Stable and incorporates the successful integration of Corem Kelly AB, a modest growth strategy and an increased focus on reducing vacancies in the combined portfolio. It further incorporates Scope’s expectation of a stable LTV of around 52% and a Scope-adjusted EBITDA interest cover of above 2.2x. Scope also expects continued positive cash flow, as measured by Scope-adjusted free operating cash flow.

A negative rating action would be possible if LTV reached above 60% on a sustained basis or Scope-adjusted EBITDA interest cover weakened 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 put real estate asset values under pressure and/or significantly reduced income while interest costs were high.

A positive rating action could be warranted if LTV stood at around or below 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.

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; Rating Methodology: European Real Estate Corporates, 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 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 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 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
© 2022 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.