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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BBB-/Negative issuer rating on Corem Property Group AB (Corem).

Rating rationale

The issuer rating affirmation is based on the company’s resilient operations with stable portfolio key performance indicators and current focus on managing its balance sheet through disposals and debt retirement to help preserve credit metrics. The Negative Outlook remains in place and is based on the adverse impact that the economic environment is having on the company’s financial risk profile, with interest coverage expected to remain under pressure.

Corem responded earlier than peers to the adverse effect of rising interest rates. In November 2022 it announced that it would sell a SEK 5.35bn portfolio consisting mostly of logistics space to Blackstone in 2023 to strengthen its balance sheet. Corem sold SEK 15.7bn of Scope-adjusted assets in 2023 (YTD), including a SEK 1.2bn stake in Castellum and shares in joint venture Klövern, which led to a SEK 1.4bn cash inflow. Asset proceeds were used to reduce debt, with all senior unsecured bond maturities being redeemed during the year.

Corem’s business risk profile (assessed at BBB-) is the primary driver of the rating. It benefits from a portfolio balanced between office and logistics properties and Corem’s good position in Sweden as a top-five commercial real estate company by both asset market value and floor space. Corem has around 361 properties and a lettable area of 2.6m square metres, predominantly in Sweden. It also has some exposure to Denmark and New York City. The company’s strong diversification and size, with Scope-adjusted total assets of SEK 74.6bn (EUR 6.5bn) as of end-September 2023, enhances its 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 reach, with properties located mostly in metropolitan areas classified by Scope as ‘A’ locations. The diversification and quality of tenants is another benefit, underscored by the roughly 3,400 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 3.6 years as of end-September 2023 (unchanged since end-March 2023). This is around the Nordic median and creates reletting risk, which is further influenced by changes in the office and logistics landscape. An additional constraint is the low occupancy rate (versus peers) of around 90% (unchanged since end-March 2023), although associated risks are largely mitigated by the company’s track record to keep the ratio stable through the cycle. Reasons for the low occupancy rate are past growth and refurbishing strategies and a recent ‘focus diversion’ after the acquisition of Corem Kelly. Corem’s efforts to prioritise resource efficiency through renovations and recycling as well as its usage of 93% renewable energy are requirements for some multinational tenants and desirable features for the remainder. These things make its properties more appealing to existing clients and potential new clients. They also assure stable occupancy rates and related cash flows amid a potentially softer economic environment and/or changing demand patterns. However, inherent industry-specific risks in commercial real estate have become more apparent over the last 12 months. This has resulted in heightened volatility of asset values and forced disposals, leading to a smaller property portfolio.

Profitability in 2022 was hit hard by rising energy prices. The reported EBITDA margin was 61%, or 68% in terms of triple-net profitability to facilitate peer comparability. Management has committed itself to take steps to increase profitability amid the property disposals. Such steps include reducing vacancies, improving energy contracts and improving energy efficiency to reduce consumption and costs and eventually achieve climate neutrality. Management is committed to cutting costs at all levels in 2023, including a reduction in personnel. With this in mind, Scope observed a Scope-adjusted EBITDA margin of around 70% at Q3 2023 and the agency expects Corem to exceed that level over the following two years.

Corem’s financial risk profile (assessed at BB+) is affected by the current macroeconomic environment, with strongly rising interest rates observed throughout 2023. The result has been higher yield requirements, which has put asset values under pressure, exemplified by significant fair value adjustments in every quarter of 2023. The company has responded with significant disposals since late 2022, with the proceeds directed solely towards deleveraging. After factoring in the latest disposals during Q4 2023, Scope expects the Scope-adjusted loan-to-value (LTV) ratio to improve to around 50% by YE 2023 from 54% at YE 2022. Further disposals in 2024 should support a stable LTV going forward.

Rising interest rates have also caused Corem’s floating-rate debt to become much more expensive to service. In response, Corem has focussed to keep its interest rate hedging ratio around 60% (58% as at September 2023), dampening the increase in interest payable. The Scope-adjusted interest cover ratio stood at 2.5x at YE 2022 but has fallen to 2.0x at Q3 2023, a level Scope expects to remain unchanged for FY 2023. The recent decision by Sweden’s central bank to keep rates unchanged in late November suggests a peak in rates, which provides better visibility for the year to come. However, Scope cautions that refinancing of upcoming debt might happen at higher levels than previously achieved. Nevertheless, Scope expects coverage to recover somewhat from 2024 after EBITDA improves due to rent increases made possible by the contractual linking of rents to the consumer price index. The agency also expects coverage to benefit from Corem continuing to reduce its overall debt load during 2024.

Liquidity is adequate. The company had SEK 13.8bn of short-term debt at Q3 2023, of which SEK 4.1bn was senior unsecured. Unsecured maturities over the next 12 months include a SEK 0.8bn bond in November (already repaid), a SEK 1.4bn bond in mid-April 2024 and a SEK 1.9bn bond in late April 2024. These are covered by achieved disposal proceeds (net proceeds SEK 3bn), cash on the balance sheet (SEK 0.6bn), undrawn long-term credit facilities (SEK2.7bn) and free operating cash flows. The remainder of maturing debt is secured, and the likelihood that banks will not refinance is low as shown by the issue of SEK 8.3bn in secured debt YTD. Within Corem’s portfolio, the secured LTV ratio stood at 45% at Q3 2023, providing a reasonable possibility to increase debt on existing properties if needed for refinancing.

Scope highlights that Corem’s short-term financing structure, which is typical of Nordic competitors, significantly increases refinancing risk when there is limited access to capital markets. As a result, Scope expects the company to address all upcoming debt maturities in the capital market in a timely manner.

Outlook and rating-change drivers

The Negative Outlook continues to factor in the higher risk of the Scope-adjusted EBITDA interest cover ratio 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 remains below 2.2x while the company is unable to reduce the Scope-adjusted loan/value ratio to below 50%. A downgrade could also be driven by a further deterioration of the company’s business risk profile triggered by additional asset disposals beyond Scope’s base case.

A positive rating action, i.e., a return of the Outlook to Stable, would require the Scope-adjusted EBITDA interest coverage ratio to improve to 2.2x or above in 2025, while the Scope-adjusted loan/value ratio does not significantly exceed 50%. It further requires the company’s business risk profile to stabilize including no significant asset disposals beyond Scope’s base case.

An upgrade is considered unlikely at this point in time.
 
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, (General Corporate Rating Methodology, 16 October 2023; 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/or Outlook and the principal grounds on which the Credit Rating and/or Outlook are based. Following that review, the Credit Rating and/or Outlook was not amended before being issued.

Regulatory disclosures
This Credit Rating and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating and/or 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 19 June 2023.

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.

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