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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BBB- issuer rating on Corem Property Group AB (Corem) and changed the Outlook to Negative from Stable.

Rating rationale

The Negative Outlook is based on the adverse impact that the economic environment is having on the company’s financial risk profile, with interest coverage expected to deteriorate. The issuer rating affirmation is based on the company’s strong operations in commercial real estate and current focus on managing its balance sheet through disposals and debt retirement to help preserve credit metrics.

Corem was earlier than peers to respond to the adverse effect of rising interest rates when it announced in November 2022 it would sell a SEK 5.35bn portfolio of predominantly logistics space to Blackstone, to strengthen its balance sheet. The transfer and related payments have largely been undertaken as of Q2 2023, allowing deleveraging to proceed promptly. Further property sales in Q4 2022 and H1 2023 have shown the fungibility of Corem’s assets. The sale of its significant stake in Castellum worth SEK 1.2bn provided further liquidity to reduce debt and improve credit metrics.

Corem’s business risk profile (assessed: BBB-) is the primary driver of the rating, benefitting from a portfolio balanced between office and logistics properties and its good position in Sweden as a top five commercial real estate company by both asset market value and floor space. Corem has around 420 properties and a lettable area of 3.0m 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 Scope-adjusted total assets of SEK 85.3bn as of end-March 2023 (EUR 7.4bn), 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 classified by Scope as ‘A’ locations, and tenant diversification and quality, underscored by the roughly 3,800 tenants with an implied investment grade profile on average.

The business risk profile remains somewhat constrained by Corem’s low weighted average unexpired lease term of 3.8 years as of end-March 2023, which is around the Nordic median and creates reletting risk, also influenced by changes in the office and logistics landscape. A further constraint is the low occupancy against peers of around 90%, 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 reason for the low occupancy rate is past growth and refurbishing strategies and a recent ‘focus diversion’ after the acquisition of Corem Kelly. Inherent industry-specific risks in commercial real estate have become more apparent over the last 12 months, resulting in heightened volatility of asset values and forced disposals and leading to a shrinkage of the property portfolio.

Profitability in 2022 was hit hard by the rising energy prices. The reported EBITDA margin was 61%, or 68% in terms of triple-net profitability to facilitate peer comparability. To increase profitability amid the property disposals, management is committed to reducing vacancies, improving its energy contracts, working with energy-efficient measures to reduce consumption and costs and eventually achieve climate neutrality, and cutting costs on all levels in 2023. Scope therefore foresees the reported EBITDA margin to improve towards 65% over the next two years.

Corem’s financial risk profile (assessed: BB+) is affected by the current macro-economic environment with strongly rising interest rates. The rising yield requirements as a result have put asset values under pressure. The company has responded with significant disposals since late 2022, with the proceeds directed solely for deleveraging. Hence, Scope expects the Scope-adjusted loan/value ratio to improve to around or even below 50% by YE 2023 from 54% at YE 2022.

The rising interest rates have also caused Corem’s floating-rate debt to become much more expensive to service. In this matter, Corem had an interest rate hedging ratio of 60% as of FY 2022, dampening the increase in interest payable. The Scope-adjusted interest coverage still stood at 2.5x at YE 2022 and 2.4x at Q1 2023 but is expected to deteriorate to 1.8x at YE 2023. However, from 2024 Scope expects coverage to recover somewhat after EBITDA improves through an expected increase in the consumer price index that drives rental growth.  

Liquidity is adequate with sources expected to cover uses by 1.1x in 2023. On Corem’s portfolio, the secured loan/value ratio stood at 45% at FY 2022, giving a sufficient possibility to increase debt on existing properties if needed for refinancing.

At Q1 2023, Corem had SEK 13.4bn of short-term debt, including a SEK 700m bond that has since been repaid. Unsecured maturities over the next 12 months are a SEK 850m bond in September and a SEK 900m bond in November 2023, which Scope assumes will be repaid with disposal proceeds and cash on the balance sheet. The large remainder of maturing debt is secured, and the likelihood that banks will not refinance is low.

Scope highlights that the issuers short-term financing structure, which is also typical for the Nordic competitors, significantly increases the refinancing risk in times of limited access to capital markets. Therefore, Scope expects the issuer to address in particular all upcoming debt maturities in the capital market in a timely manner.

Outlook and rating-change drivers

The revised Outlook to Negative factors in the higher risk of Scope-adjusted EBITDA interest cover declining and remaining below 2.2x. The Outlook also incorporates Scope’s expectation that Corem will maintain the disposal strategy since late 2022 that has helped reduce debt significantly. Scope understands the issuer is aiming to reduce debt by releasing further capital through asset disposals, which could partly compensate for the weaker interest cover depending on the measures’ eventual impact on the Scope-adjusted loan/value ratio.

A downgrade could be triggered if the Scope-adjusted EBITDA interest coverage were to fall and remain below 2.2x and the company is unable to reduce the Scope-adjusted loan/value ratio to below 50%.

A positive rating action, i.e. a return of the Outlook to Stable, would require Scope-adjusted EBITDA interest coverage to remain above 2.2x and the Scope-adjusted loan/value ratio to not significantly exceed 50%. Scope may also return the Outlook to Stable if the company could reduce debt and lower the Scope-adjusted loan/value ratio below 50% while keeping Scope-adjusted EBITDA interest coverage at around 2x. An upgrade is considered unlikely at this point.

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 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 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 Rating: Philipp Wass, Managing Director
The Credit Rating/Outlook was first released by Scope Ratings on 15 July 2021. The Credit Rating/Outlook was last updated on 20 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 Rating.

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