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      Scope affirms Corem Kelly’s issuer rating at BBB-/Stable
      MONDAY, 05/06/2023 - Scope Ratings GmbH
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      Scope affirms Corem Kelly’s issuer rating at BBB-/Stable

      The rating affirmation is mainly driven by the strong business risk profile exemplified by the company’s market position in Sweden, while balance sheet management through disposals and debt repayments is helping to safeguard credit metrics.

      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 BBB-/Stable issuer rating of Swedish commercial real estate company Corem Kelly AB.

      Rating rationale

      The rating affirmation is based on Corem Kelly’s well-performing operations and takes into account the company’s focus on managing its balance sheet through disposals and debt retirement to help preserve credit metrics.

      Corem Kelly’s business risk profile (assessed at BBB) remains unchanged and the primary rating driver. The portfolio has decent diversification in terms of tenants and locations, containing around 300 properties over a gross lettable area of 2.2m sq m. This diversification improves cash flow resilience against economic downturns, industry developments, regulatory changes, and the loss or default of single tenants. Corem Kelly’s moderate or dominant position in most locations provides visibility to potential new tenants as well as flexibility to meet the needs of existing ones. Its in-house sales expertise and access to a significant logistics portfolio as a subsidiary of Corem Property Group broadens this visibility even further. The rating also benefits from the geographical reach across three countries, with the US exposure increasing during 2022 through finished developments in New York City. The focus on liquid markets classified as ‘A’ cities by Scope (69% of portfolio) is also credit-supportive.

      The business risk profile continues to be constrained by the relatively short WAULT of 3.6 years (as at end-March 2023), unchanged since the last review. This creates re-letting risk, although this is somewhat mitigated by the company’s track record to extent leases or re-let vacant space as evidenced by the stability of the metric. The company’s occupancy rate is also low among peers, at around 90%, which is due to its strategy to acquire properties in the inner city and outskirts with below-par occupancy but development potential. This holds the rating back, although the effect is tempered by the stability of the ratio over the last decade. In the adverse market environment Corem Kelly is reducing vacancies and selling non-core assets to reduce debt. Profitability of 60%-65% (2022: 59%), as measured by the Scope-adjusted EBITDA margin, is low among peers. Scope expects this to improve to above 60% over the medium term through the focus on increasing occupancy domestically and the recent addition to the portfolio of newly finished properties in the US.

      Corem Kelly’s financial risk profile assessment (assessed at BB+) also remains unchanged. The financial risk profile benefits from historically strong debt protection as measured by Scope-adjusted EBITDA/interest cover, which remained above 2.2x during the Covid-19 pandemic (2021: 2.5x) and was 2.6x at YE 2022. Scope expects the ratio to weaken towards 2.2x in 2023 due to the increasing interest rates but remain above this rating threshold in 2024 and beyond thanks to expected EBITDA growth. Leverage, as measured by the Scope-adjusted loan/value ratio, has continued to improve since the significant deleveraging in 2019. Despite major fair value depreciations, Corem Kelly’s loan/value ratio was unchanged at 52% at YE 2022 supported by successful deleveraging efforts via property disposals and Scope foresees a continuation at current levels or slightly below. Scope-adjusted debt/EBITDA stood at 18.2x in 2022 and is expected to reduce primarily driven by strong anticipated growth in EBITDA thanks to CPI linked rents and some debt repayments enabled by either disposal proceeds or internal cash generation.

      Despite the reliance on short-term financing, Scope continues to view liquidity as adequate, also in light of the large undrawn facilities available via Corem and a secured loan/value ratio of 38%, which provide ample room to increase debt on existing properties if needed. 

      Outlook and rating-change drivers

      The Outlook for Corem Kelly is Stable. Corem Kelly is expected to maintain its core focus on Sweden and the cities of Copenhagen and New York, with capital expenditure being balanced by asset disposals (net seller). Scope also expects the Scope-adjusted loan/value ratio to stay at around the current level of 52% (including a 50% equity credit on the hybrid bond) and interest coverage at around 2.2x.

      A negative rating action is possible if Corem Kelly’s loan/value ratio increased towards 60% or interest cover dropped significantly below 2.2x on a sustained basis, which 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 an inadequate hedging of interest rate risk.

      A positive rating action is seen remote but could be warranted by a loan/value ratio that reaches well below 50% on a sustained basis while interest coverage remains above 2.2x at all times, 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 fair value appreciation on current development projects.

      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, (General Corporate Rating Methodology, 15 July 2022; European Real Estate Rating Methodology, 25 January 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 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 Ratings 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
      This 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 Ratings: Philipp Wass, Managing Director
      The Credit Rating/Outlook was first released by Scope Ratings on 10 June 2020. The Credit Rating/Outlook was last updated on 8 June 2022.

      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
      © 2023 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund 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.

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