The credit rating of “Business - Realty” JSC (hereinafter, Business - Realty, or the Company) is based on medium assessments of the operational risk profile, size, profitability, leverage and coverage, strong liquidity indicators, and very strong geographic diversification indicators. The rating is constrained by the high industry risk and weak cash flow assessment.
Business - Realty owns and manages a portfolio of 78 commercial real estate properties, develops the Olimpik Star fitness club, and carries out a co-working project under the officeless brand. The core of the Company’s portfolio is class C commercial real estate properties located primarily in Moscow, as well as in Saint Petersburg. The GBA of commercial real estate is 339,000 sq. m, while the GLA is 245,000 sq. m.
The holding, which is the parent company of Business - Realty, actively participates in the development of the Company, both at operational management level and through the provision of financial support. In 2023, the parent company carried out a RUB 4.0 bln capital injection for Business – Realty, which was used to repay the Company’s debt. Due to this, ACRA highly assesses the possibility of the owner providing support.
KEY ASSESSMENT FACTORS
High likelihood of extraordinary support from the parent company. Support for the Company by its key shareholder in the past and at present indicate the high probability of assistance being provided in the future if this need arises. The degree of support is assessed as medium due to the absence of barriers and limits on the provision of support, high assessment of the Ownership, Control and Regulation sub-factor, and also the medium assessments of such sub-factors as Predisposition/Ability to Provide Support and Guarantees and Other Channels for Obtaining Support. The Strategic Risk and Brand and Reputation Risk sub-factors are assessed as low.
The medium operational risk profile assessment is based on the medium assessments of the market position and business profile, high assessment of corporate governance, and the very high assessment of geographic presence. The medium assessment of the market position takes into account the Company’s limited share in the market of conditionally high-quality commercial real estate. At the same time, the Agency very highly assesses geographic diversification, given the wide scope of the supply of office real estate owned by the Company within Moscow. The Company owns and manages 78 properties with a diverse pool of tenants. The occupancy rate of properties was 80.6% in 2022, more than half of the contracts with tenants are short-term.
The high assessment of the Company’s corporate governance is based on the high assessments of management structure, risk management system and financial transparency, as well as medium assessments of management strategy and group structure. Business - Realty has a board of directors that includes two independent directors. In addition, the Company has a collegial executive body in the form of a management board, which together results in a high assessment of the Management Structure sub-factor. The high assessment of the Risk Management sub-factor is based on the comprehensive approach to managing key risk factors. The Financial Transparency sub-factor was assessed as high for the corporate sector thanks to the regular compilation of IFRS statements.
Medium leverage and coverage. The weighted average ratio of total debt to net operating income (NOI) for 2021–2025 is estimated at 5.5x by the Agency, while the weighted average ratio of total debt to market value of real estate (LTV) is 0.5x. The reduction in leverage was positively affected by the RUB 4.0 bln cash injection received from the holding in 2023, which Business - Realty used to repay loans of affiliated companies in the corresponding amount. The weighted average ratio of NOI to debt (interest plus amortization) for the period from 2021 to 2025 is estimated at 1.4x.
Medium profitability and size of the Company. The Company’s medium size is due to the weighted average NOI for 2021–2025 at RUB 1.37 bln, according to ACRA’s estimates, and the commercial real estate portfolio, the GLA of which equals 245,000 sq. m. According to the Agency’s calculations, the weighted average NOI for 2021–2025 per square meter of leasable area is RUB 5,600, which, along with a weighted capitalization rate of 10.2%, indicates that the Company has medium profitability.
The strong liquidity is driven primarily by the contributions to the Company’s capital from its parent company, which are estimated at a total of RUB 4.0 bln in 2023, as well as by confirmed credit lines. The qualitative assessment of the Company’s liquidity is high thanks to the presence of diversified sources of internal and external financing and the absence of peak debt payments, as well as uniform amortization of bonds.
Weak cash flow. The Company’s free cash flow (including paid interest, FCF) in 2021–2022 was negative, and ACRA expects it to remain below zero in 2023 (excluding share contributions). Starting from 2024 the Agency expects the Company’s FCF to turn positive due to lower debt service costs, the absence of big investments and dividend payouts.
KEY ASSUMPTIONS
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Access to capital markets;
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Average annual growth rate of rental income at 5% in 2023–2025;
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Maintaining the space utilization rate at 79–83% in 2023–2025;
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No big investments;
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No dividend payouts 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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Weighted average capitalization rate growing above 12% along with weighted average ratio of NOI to payments exceeding 2.2х;
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FCF margin exceeding 10%.
A negative rating action may be prompted by:
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Weighted average ratio of NOI to payments falling below 1.2х;
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Negative FCF margin;
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Weighted average ratio of total debt to NOI exceeding 12.0х.
RATING COMPONENTS
Standalone creditworthiness assessment (SCA): bbb.
Support: ACRA assumes that if necessary, the parent company will be able to provide the Company with extraordinary support in the form of capital and/or liquidity. Taking into account the support factors, the Company’s rating is set at А-(RU).
ISSUE RATINGS
No outstanding issues have been rated.
REGULATORY DISCLOSURE
The credit rating has been assigned to “Business - Realty” JSC 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, Methodology for Analyzing Rated Entities Associated with a State or a Group, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
A credit rating has been assigned to “Business - Realty” JSC for the first time. 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 “Business - Realty” JSC, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited and “Business - Realty” JSC 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 “Business - Realty” JSC. No conflicts of interest were discovered in the course of credit rating assignment.
