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Rating Action:

Moody's assigns first-time B1 rating to O1 Properties; outlook stable

02 Sep 2016

London, 02 September 2016 -- Moody's Investors Service has assigned a first-time non-investment grade B1 corporate family rating (CFR) and B1-PD probability of default rating (PDR) to O1 Properties Group (O1), a commercial real estate investment and management company operating in Moscow. The outlook on the ratings is stable.

"O1's B1 rating reflects risks related to elevated leverage profile with a high reliance on secured debt and its single-market concentration in Moscow particularly amid the current challenging economic environment in Russia. These risks are only partly compensated by the company's competitive position with a large high-quality office portfolio, strong tenant base, and balanced lease terms as well as a sound liquidity position," says Ekaterina Lipatova, a Moody's Assistant Vice President and Analyst.

RATINGS RATIONALE

O1's B1 rating reflects the company's (1) large office property portfolio, which is comparable to those of its Baa-rated peers in Europe and the US, as measured by its adjusted gross assets of $4.3 billion as at 31 December 2015; (2) modern properties, with Class A offices comprising around 92% of its total asset value and around 81% of assets being located in Moscow's central business district (CBD); (3) diversified top-tier tenant base with 68% of net operating income coming from large multinational companies with strong credit profiles and the share of its top-10 clients not exceeding 30%; and (4) well-spread lease maturity profile, averaging 4 years, and protective lease terms with a triple net structure, annual indexation, and no break clauses.

The company's strong business profile -- which features the leading position in the most lucrative and stable segment of Class A properties in the Moscow CBD -- coupled with prudent asset management partly mitigates the risks related to its high geographic concentration in Moscow. The capital city, while being the largest and the most stable market in Russia, remains vulnerable to the country's economic cycles and its generally less developed regulatory, political and legal framework.

Indeed, despite the ongoing pressure exerted by a weak economy on the Moscow office market, O1 has preserved adequate occupancy and retention rates, as well as reported relatively modest rent reductions and asset revaluations when compared with the market average. Moreover, supported by the positive effect of the rouble's depreciation on its operating expenses, O1's historically strong adjusted EBITDA margin further improved to 89% in H1 2016 from 78% in 2014 and will likely exceed 90% in 2016.

The rating also incorporates O1's conservative development strategy. The company has generally targeted development projects equal to around 10% or less of its total portfolio, but now prefers to further limit development risk to below 5% in response to the market downturn. It has also shifted its focus to optimizing its existing property portfolio with no material cash acquisitions planned in the near term.

At the same time, the rating is largely constrained by O1's historically leveraged financial profile due to its aggressive investments in 2010-2013 when it was actively building its real estate portfolio via debt-financed acquisitions, as well as pressure from negative asset revaluations and declines in rental income against the backdrop of the current economic downturn.

Moody's expects that the adoption of a more conservative financial and development policy and some stabilisation in the market since Q2 2016 will likely result in gradual deleveraging in 2016-2017 with "effective" leverage measured as adjusted debt/gross assets falling below 70%, adjusted net debt/EBITDA declining below 9.0x, and fixed charge coverage improving to above 1.5x. However, the company's financial metrics will still be fairly weak and remain subject to the ongoing uncertainties related to geopolitical and economic developments in the country, and further market shocks.

Despite O1's increased focus on optimising its debt portfolio, the company will remain highly reliant on secured debt funding at its properties level. It will also stay exposed to foreign exchange risks with almost all its debt denominated in US dollars albeit partly mitigated by its ability to retain around 64% of revenues derived from US dollars.

The company's sound liquidity position, however, partly offsets the risks related to elevated leverage, in view of support from a substantial cash balance, which comfortably covers debt maturities over the next 18 months, moderate capex, and flexible dividends.

Moody's also expects that O1 will be able to improve otherwise fairly tight headroom under bank financial covenants at the properties level and further extend its maturity profile by the end 2016. Moreover, the rating positively incorporates potential support from its founding shareholder, Mr. Boris Mints, whose commitment to support is evidenced by several rounds of equity capital increases in 2014-2015, and a flexible approach to dividend payments with a historically modest FFO payout to be further reduced to 20% in 2016-2017 in response to the challenging market environment.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's view that despite the weak economic climate prevailing in Russia, O1 will continue to produce healthy cash flows, leveraging its competitive market position with its high quality office portfolio in prime Moscow locations, strong tenant base, and balanced lease terms.

Moody's also expects the company to continue to adhere to its conservative financial and development policy, which will allow it to improve and maintain its adjusted "effective" leverage below 75% and adjusted fixed charge coverage at 1.4x or above, while preserving its historically solid liquidity profile.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Upward pressure on the rating could develop if, on a sustained basis, adjusted "effective" leverage and adjusted fixed-charge coverage trend towards 60% and 2.0x respectively, secured debt/total assets stays below 50%, while O1 preserves its strong liquidity and operating profile.

O1's rating could come under pressure if the company faced a material deterioration in its business and financial profile, with adjusted "effective" leverage exceeding 75% and adjusted fixed-charge coverage falling below 1.4x on a sustained basis. A noticeable deterioration of the company's liquidity could also pressure the rating.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Rating Methodology for REITs and Other Commercial Property Firms published in July 2010. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

O1 Properties Group (O1) is Russia's leading real estate investment company. It manages, develops, and acquires office properties in Moscow. O1 owns a portfolio of 12 yielding assets with net rentable area of 484.000 sqm, generating $368 million in annual rental income. Including two development projects, the reported gross asset value of its real estate portfolio stood at $3.7 billion as of 30 June 2016. The company also participates with a 50%+1 share in a JV for the "Bolshevik" development project with a total reported gross asset value of $264.5 million.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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Ekaterina Lipatova
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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