Training on сorporate credit analysis, March 19–20

ACRA assigns BBB+(RU) to "Garant-Invest Commercial Real Estate" JSC, outlook Stable

The credit rating of "Garant-Invest Commercial Real Estate" JSC (hereinafter, the Company) is based on a strong business profile, high business profitability and very strong cash flow. The rating is under pressure from a high industry risk and a low liquidity assessment.

The Company is the main business asset of the Financial and Industrial Corporation "Garant-Invest." The Company owns and manages a portfolio of commercial real estate, as well as engaged in the development and redevelopment of commercial real estate in Moscow. The Company owns 13 shopping centers with a total area of 127.1 thousand sq. m, of which the rentable area is 76.13 thousand sq. m.

Key rating assessment factors

Industry risk is assessed as high due to the industry’s cyclical nature, high level of overdue receivables and a significant number of companies that have defaulted over the past five years.

Strong business profile stems from a very high floor space utilization, a high quality of contractual terms and conditions (82% of the floor space is leased to retail chains under long-term contracts), and a medium diversification by asset and tenant.

Medium assessment of the Company's corporate governance is underpinned by the high assessment of the management structure and the medium assessment of the strategy, group structure and financial transparency. In 2016–2018, the Company successfully implemented the strategy for upgrade and renovation of its facilities, which boosted the net operating income. In addition, since 2017, the Company has been implementing an investment redevelopment program, under which the Perovo Mall shopping center and a chain of six local shopping centers Small have been successfully redeveloped. The redevelopment program is expected to be completed in 2023. As part of the program, the Company plans to acquire commercial buildings with a floor area of about 100 thousand sq. m, for their subsequent redevelopment and investment sale. The assessment of the Company's strategy and risk management is restrained by the practice of issuing substantial loans to both related and non-related parties.

High profitability. According to ACRA estimates for 2018-2021, the weighted average capitalization rate will be 8.7% (the ratio of net operating income to the market value of real estate), while the weighted average net operating income will be RUB 27 thousand per a square meter of rentable area.

Medium leverage and medium coverage. The weighted average ratio of total debt to net operating income is estimated at 7x, which corresponds to the medium leverage assessment; such assessment is also contributed by the weighted average LTV (Loan to Value) at 0.61x. The weighted average ratio of net operating income to payments is estimated at 1.4x, which implies the medium coverage assessment.

Weak liquidity. The very low short-term liquidity ratio (0.74x) is due to the substantial amount of debt repayments falling on 2019–2020 amid a relatively small volume of non-utilized open credit lines. In its liquidity calculations, ACRA excluded the expected repayments on loans issued by the Company, but took them into account as a funding source for the investment program. The short-term liquidity ratio is very low, however, the qualitative assessment of liquidity is determined as medium due to availability of diversified internal and external funding sources on the backdrop of peak debt payments.

Key assumptions

  • The rental charges in the key shopping centers of the Company will keep up with the rate of inflation;
  • The percentage of rented floor space in the key shopping centers will remain high;
  • The redevelopment program investments will be about RUB 12 bln in 2019–2021, and some redeveloped projects will be sold in 2020-2021.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • The short-term liquidity indicator going above 1х.

A negative rating action may be prompted by:

  • The ratio of debt to net operating income going above 8х and LTV going above 0.8х;
  • The ratio of net operating income to payments going below 1.2х.

Rating components

Standalone creditworthiness assessment (SCA): bbb+

Adjustments: none.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned to "Garant-Invest Commercial Real Estate" 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 and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.

The credit rating has been assigned to "Garant-Invest Commercial Real Estate" JSC for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action date (December 24, 2018).

The credit rating is assigned based on the data provided by "Garant-Invest Commercial Real Estate" JSC, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and "Garant-Invest Commercial Real Estate" JSC participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by "Garant-Invest Commercial Real Estate" JSC in its financial statements were discovered.

The coverage factor has been assessed with a deviation from the methodology.

ACRA provided no additional services to "Garant-Invest Commercial Real Estate" JSC. No conflicts of interest were discovered in the course of credit rating assignment.

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