The credit rating of Gogolevsky 11, LLC (hereinafter, Gogolevsky 11, or the Company) has been affirmed based on the Company maintaining high profitability and medium leverage, coupled with high coverage and a strong cash flow. The Company’s operational risk profile is characterized by a medium market position and business profile, very high geographic diversity assessment (the business center is located in the center of Moscow), and a medium corporate governance assessment. The credit rating continues to be constrained by high industry risk, which is typical for companies of the commercial real estate segment, small size of business, and low financial transparency.
The Company is the owner of a class A business center in Moscow located at 11 Gogolevsky Boulevard. The total area of the business center is 9,985 sq. m, leasable area is 8,800 sq. m. Management company Hines International, Inc. carries out all functions to manage the business center and administer lease contracts.
KEY ASSESSMENT FACTORS
Medium business profile. The Company owns a single property with a diversified pool of tenants — the Gogolevsky 11 business center in central Moscow. After a number of tenants departed in spring 2022, occupancy fell to 78% last year, and it had further declined to 69% by the start of May 2023. The Company expects to lease out part of the vacant floor space by the end of this year, but due to the reconstruction of the business center’s entrance lobby, lease rates during the renovation period are slightly lower than usual, which will have a negative impact on the Company’s lease income and its leverage in 2023. Around 60% of the lease contracts are long-term, running until 2025 and 2027.
High profitability and small size of business. The heightened level of vacancy of floor space in 2022 led to a fall in the Company’s revenues (from RUB 454 mln in 2021 to RUB 383 mln in 2022). ACRA expects the Company’s lease revenues to recover in 2023–2024 as vacant floor area is occupied. According to the Agency’s calculations, averaged net operating income (NOI) for 2020–2025 is RUB 303 mln. Weighted average NOI for the specified period per square meter of leasable area is RUB 34,500, which when coupled with the weighted average capitalization rate (9.6%) indicates the Company’s high profitability.
Medium leverage and high coverage. In 2021, the parent company of Gogolevsky 11 raised two-tranche debt at fixed interest rates, which will be serviced using the Company’s cash flows, while the assets of Gogolevsky 11 are pledged to the creditor. These liabilities are not reflected on the Company’s balance sheet, however, ACRA takes them into account when determining the credit rating.
The Company’s leverage remains medium. As of the end of 2022, the ratio of total debt to NOI was assessed at 7.9x, and the Agency expects this indicator to fall to 6.0–6.5x in 2024–2025 if no new financing is raised. LTV (loan-to-value) is 55%.
The decline in the Company’s lease income last year led to a slight deterioration in the debt service indicator. The ratio of NOI to payments (including the principal and interest expenses) for 2022 is assessed by ACRA at 1.6x, while the weighted average indicator for 2020–2025 is 2.0x, taking into account the anticipated recovery of lease income in the forecast period.
Strong cash flow and medium liquidity. The low level of the Company’s capital expenditures (2–3% of revenues) and lack of dividend payments in the forecast period has a positive impact on cash flow — the averaged FCF margin for 2020–2025 is 14%. The comfortable debt repayment schedule ensures a very high liquidity assessment (weighted short-term liquidity ratio of 10.8), however, as financing is solely provided by banks and the debt repayment peak is long-term (2026), its assessment is limited to medium.
Medium corporate governance assessment. ACRA notes that Gogolevsky 11 successfully carries out its development strategy, and that the group has a simple structure and an adequate risk management. At the same time, the corporate governance assessment is limited by the management structure, as well as the low level of financial transparency, which is due to the Company not publishing IFRS reporting (the Company releases RAS reporting).
KEY ASSUMPTIONS
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Floor space occupancy at 85% in 2023 and 95% in 2024–2025;
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Capital expenditures according to the financial model in the forecast period;
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No dividend payments in 2023–2025.
Potential outlook or rating change factors
The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Floor space occupancy exceeding 95%;
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Weighted average ratio of total debt to NOI falling below 5.0x and weighted average ratio of NOI to payments exceeding 2.2x;
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Improvement of corporate governance practices.
A negative rating action may be prompted by:
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Significant decline in NOI in the forecast period;
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Capitalization rate falling below 3%;
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Weighted average ratio of total debt to NOI growing above 12.0x;
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Weighted average ratio of NOI to payments falling below 1.2x;
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Weighted average FCF margin falling below 5%;
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Considerable deterioration of liquidity assessment;
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Considerable change to macroeconomic conditions that can have a significant negative impact on the Company’s performance.
RATING COMPONENTS
Standalone creditworthiness assessment (SCA): bbb.
Support: none.
ISSUE RATINGS
There are no outstanding issues.
REGULATORY DISCLOSURE
The credit rating has been assigned to Gogolevsky 11, LLC under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
The credit rating of Gogolevsky 11, LLC was published by ACRA for the first time on June 23, 2021. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.
The credit rating was assigned based on data provided by Gogolevsky 11, LLC, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited and Gogolevsky 11, LLC participated in its assignment.
In assigning the credit rating, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to Gogolevsky 11, LLC. No conflicts of interest were discovered in the course of credit rating assignment.
