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Rating action

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

The rating affirmation is based on the company’s resilient operations with stable profitability and portfolio key performance indicators. Disposal proceeds of SEK 2.6bn since December 2023 as well as an equity raise of SEK 1.0bn in 2024, have been used to repay debt and have helped to maintain credit metrics.

The maintenance of the Negative Outlook continues to reflect the risk of the EBITDA interest cover remaining below 2.2x and the Scope-adjusted loan/value* ratio remaining above 50%.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business risk profile: BBB- (unchanged). Corem's business risk profile is the main driver of the rating. It benefits from a balanced portfolio between office and logistics properties and Corem's good position in Sweden as one of the top three commercial property companies in terms of both asset market value and floor area. Corem owns around 290 properties with a gross lettable area of 2.3 million square metres, mainly in Sweden. It also has some exposure to Denmark and New York City. The company's strong diversification and size, with total assets of SEK 62.2bn (EUR 5.5bn) at the end of September 2024, 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, underpinned by some 3,100 tenants with an average implied investment grade profile.

The business risk profile remains constrained by Corem's low weighted average unexpired lease term of 3.3 years at the end of September 2024 (down 0.3 years; YoY). This is slightly below the Nordic median and creates re-letting risk, which is further influenced by changes in the office and logistics landscape. An additional constraint is the low occupancy rate (relative to peers) of around 87% (down 3pp; YoY), mainly driven by a property development in New York (9% of the portfolio's market value at end-September 2024), although the associated risks are largely mitigated by the company's track record of maintaining a stable ratio of around 90% over the cycle. Corem's efforts to prioritise resource efficiency through refurbishment and recycling, as well as its use of 93% renewable energy, are requirements for some multinational tenants and desirable features for the rest. These things make its properties more attractive to existing customers and potential new ones. They also ensure stable occupancy rates and related cash flows in a potentially softer economic environment and/or changing demand patterns. However, the industry-specific risks inherent in commercial property have become more apparent over the past 24 months. This has led to increased volatility in asset values and disposals, resulting in a smaller property portfolio.

EBITDA margin was 70% in 2023 in terms of triple net profitability to facilitate peer comparisons. Management has committed to taking steps to improve profitability which Scope considers a prerequisite and expects to see such efforts reflected in lower property costs in 2025. Such steps include reducing vacancies, improving energy contracts and improving energy efficiency to reduce consumption and costs and ultimately achieve climate neutrality.

Financial risk profile: BB+ (unchanged). Corem's financial risk profile has been strongly affected by the macroeconomic environment in 2023, with sharply rising interest rates throughout 2023 negatively impacting asset values and leading to increased cash outflows through rising interest payments. The company has responded with significant disposals since the end of 2022 (SEK 1.1bn in H2 2022, SEK 15.8bn in 2023, SEK 2.6bn in 2024), with the proceeds being used exclusively to reduce debt. Including the latest disposals in Q4 2024, Scope expects the loan/value ratio to improve to about 52% by YE 2024 from 54% at YE 2023, also supported by the equity injection of over SEK 1bn in H2 2024. Further small divestments in 2025, in addition to a change in sentiment on fair value adjustments, should support a decline in loan/value going forward. Debt/EBITDA remains elevated (YE 2023 at 12.9x) and the timing effect of disposals on the balance sheet and EBITDA has introduced volatility in this ratio (14.4x as of Q3 2024). Scope expects deleveraging towards 12x, driven by a stabilised portfolio with no significant asset disposals or acquisitions expected going forward.

The rising interest rate environment has also made Corem's floating rate debt much more expensive to service. In response, Corem has focused on increasing its interest hedging ratio to around 72% at September 2024 (up 3pp; YoY), which has helped to mitigate the increase in interest payable. EBITDA interest cover was 2.0x in 2023, but has weakened to 1.9x for LTM as at Q3 2024, a level that Scope expects to remain unchanged for FY 2024. The Swedish central bank's decision to cut interest rates to 2.5% in December 2024 (from 4% earlier this year), with clear guidance on further cuts announced for 2025, provides i) better visibility on the likely direction of the base rate going forward compared to the situation in December 2023, and ii) relief on the variable-rate exposed part of Corem's interest rate exposure. The agency also expects interest coverage to benefit as Corem continues to reduce its overall debt burden in 2025, bringing the ratio back to 2.2x by YE 2025.

Liquidity: adequate (unchanged). At Q3 2024, Corem had SEK 2.6bn of capital market debt to refinance over the next 12 months: a SEK 610m senior unsecured bond in October 2024 (already repaid), a SEK 1.8bn bond due in February 2025 (reduced to 1.5bn by buy-backs as of 19.12.2024) and a SEK 200m bond due in September 2025. The company intends to refinance the due SEK 1.5bn (in February 2025) on one or more occasions during the year with a total of senior unsecured bonds of a similar size, backstopped by its long-term unused bank facilities (SEK 2.6bn at Q3 2024), cash (SEK 754m) and FOCF. Thereafter, the next capital market maturity is in May 2026 (SEK 1.7bn senior unsecured bond).

The remainder of Corem's short-term debt consists of senior secured bank loans. Scope considers it unlikely that the banks will not refinance such loans, which are secured on properties with LTVs well below the banks' requirements. The company has good relationships with all major Nordic banks.

Supplementary rating drivers: credit-neutral (unchanged).

Scope highlights some inherent risks in the company's financial policy, which allows for a relatively highly leveraged capital structure, while the market practice of a short-term maturity profile exposes the company to ongoing refinancing. This is somewhat mitigated by the higher proportion of macro hedges, which should reduce the volatility of the interest cover compared to previous years. Risks would increase if the company were to show higher leverage or lower hedging rates, indicating a higher risk appetite.

Outlook and rating sensitivities

The Negative Outlook continues to factor in the risk of the EBITDA interest cover to remain below 2.2x and loan/value to remain above 50%, while Scope acknowledges improved market conditions with recent rate cuts by the Swedish Riksbank, increased issuance activity on capital markets and stabilized property values. The Outlook also assumes short-term debt to be either refinanced or rolled-over and occupancies and WAULT of the stabilized portfolio to improve back to 2023 levels.

The upside scenarios for the rating and Outlooks are (collectively):

1. EBITDA interest cover to improve to or above 2.2x by 2025
    
2. Loan/value not significantly exceeding 50%

The downside scenarios for the rating and Outlook are (collectively):

1. EBITDA interest cover not to improve to or above 2.2x by 2025
    
2. Loan/value staying at or above 50%

Environmental, social and governance (ESG) factors

Overall, ESG factors have no impact on this credit rating action.

All rating actions and rated entities

Corem Property Group AB

Issuer rating: BBB-/Negative, affirmation

*All credit metrics refer to Scope-adjusted figures.

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, 28 March 2024), 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 and/or Outlook were not amended before being issued.

Regulatory disclosures
The 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: 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 22 December 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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use/exclusion of liability
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