The credit rating of J-S.C. “PIONEER GROUP” (hereinafter, Pioneer Group, the Company, or the Group) has been affirmed based on the continued strong assessment of the operational risk profile, low leverage, very high profitability and coverage indicators, and strong assessments of liquidity and cash flow. The credit rating continues to be limited by the very high industry risk and medium assessments of the Company’s market position and business size.
The Group’s positive performance in 2023 and the expected further improvement in debt metrics in 2024–2026 led to ACRA changing the outlook from Negative to Stable.
Pioneer Group has operated in the real estate market since 2001, and is a leading developer in Moscow. The Company is focused on the construction of comfort, business and premium class residential buildings, as well as commercial real estate properties. The Group is one of the leaders of the market in terms of sales of office real estate. As of the end of May 2024, the total floor area of projects at construction and design stages in the Company’s portfolio was 718,000 sq. m and 1.000 mln sq. m, respectively.
KEY ASSESSMENT FACTORS
Very high industry risk. According to the Agency’s methodology, the very high risk of the residential construction industry is a serious constraining factor for the Company’s credit rating.
Results of 2023 and forecast for 2024. Against the backdrop of favorable market conditions, the total sales of residential and commercial real estate of Pioneer Group amounted to 135,000 sq. m at the end of last year, which is almost double the figure for 2022. In monetary terms, sales grew by 2.6 times as a result of higher sales prices due to an increase in the share of sales of premium and luxury real estate, which had a positive impact on the Group’s financial performance. As of the end of five months of 2024, Pioneer Group had recorded a considerable increase in the volume of sales compared to the same period last year. As a result, this year ACRA expects the Group’s revenues to grow by 15–20% year-on-year due to the positive impact of growth of the average percentage of readiness of projects, heightened demand for comfort class projects in Q2 2024 prior to the end of the subsidized mortgage program, and lower dependence of sales of the Company’s premium class residential real estate on mortgage products compared to the industry average (average share of mortgages in sales for 5M 2024 was 46%).
The Agency takes into account the presence of the land bank of Pioneer Group, which allows it to increase its portfolio of ongoing construction to more than 1 mln sq. m and materially increase sales and revenues in the forecast period.
Medium size of business and very high profitability. In 2023, the Group’s revenues amounted to RUB 40.8 bln, while FFO before net interest payments and taxes was RUB 10.0 bln (growth of 68% and 216% year-on-year, respectively). The medium size of business is due to the weighted average FFO before net interest payments and taxes from 2021 to 2026 at RUB 14.2 bln as per ACRA’s estimates. The volume of the project portfolio at construction stage is 718,000 sq. m (as of May 31, 2024), which also corresponds to a medium size of business as per the Agency’s methodology.
The FFO margin before net interest payments and taxes as of the end of last year increased by 23% compared to 19% in 2022. The significant presence of the Company’s projects in the high-budget real estate segment has a positive impact on sales margins. The weighted average indicator for 2021–2026 indicates the very high profitability of Pioneer Group.
Low leverage and very high coverage. When calculating the ratio of net debt to FFO before net interest payments, ACRA adjusts the Company’s total debt by the amount of debt raised as part of project financing under escrow accounts and fully secured by funds transferred into escrow accounts by buyers. Taking into account this adjustment, the ratio of net debt to FFO before net interest payments was 2.6x in 2023, which allows us to positively assess the implementation of the Company’s plans to reduce its debt burden. The improvement is driven by strong growth of FFO before net interest payments and taxes in 2023, amid a moderate increase in net debt. The Agency expects the weighted average ratio of adjusted net debt to FFO before net interest payments for 2021–2026 to be 1.7x. The weighted average ratio of total debt to capital is estimated by ACRA at 0.8x, which, when coupled with the above ratio of adjusted net debt to FFO before net interest payments, indicates the Company’s low leverage.
When assessing coverage, ACRA takes into account interest payments on corporate debt as interest payments, while payments on project debt under escrow accounts are taken into account as part of the cost price. ACRA estimates the weighted average ratio of FFO before net interest payments to net interest payments for 2021–2026 at 11.7x due to corporate debt being maintained at a low level.
Strong liquidity assessment. The positive free cash flow (taking into account adjustments for expenses under projects backed by escrow accounts) in 2023 and the expectation that this indicator will remain positive in 2024–2026, as well as the comfortable debt repayment schedule, determine the moderately high assessment of the Company’s liquidity. Additional support to liquidity is provided by the current size of the land bank, which ensures the Company can operate in the medium term without making significant capital investments, as well as the wide opportunities to attract additional liquidity from external sources.
KEY ASSUMPTIONS
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Implementation of the construction and sales plans;
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ACRA only took into account projects under construction and projects that are expected to be commissioned in accordance with the Company’s current financial plan;
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No significant fall in prices in Moscow’s primary real estate market in 2024–2026.
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:
- Stronger market positions of the Company, simultaneous growth of the current construction project portfolio above 1 mln sq. m, and weighted average FFO before net interest payments and taxes exceeding RUB 30 bln.
A negative rating action may be prompted by:
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The weighted average ratio of FFO before net interest payments to net interest payments falling below 8.0x;
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The average weighted ratio of adjusted net debt to FFO before net interest exceeding 2.0x;
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Prices in Moscow’s residential real estate market declining by over 15% in 2024–2026;
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Regulatory changes that may impair the Company’s financial metrics.
RATING COMPONENTS
Standalone creditworthiness assessment (SCA): a-.
Adjustments: none.
ISSUE RATINGS
No outstanding issues have been rated.
REGULATORY DISCLOSURE
The credit rating has been assigned to J-S.C. “PIONEER GROUP” 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 J-S.C. “PIONEER GROUP” was published by ACRA for the first time on November 25, 2019. 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 J-S.C. “PIONEER GROUP”, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited and J-S.C. “PIONEER GROUP” 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 J-S.C. “PIONEER GROUP”. No conflicts of interest were discovered in the course of credit rating assignment.
