Russian residential real estate group Samolet Group to IPO on MOEX as mortgage subsidy programme drives Russia’s real estate growth

Up-and-coming Russian residential real estate group Samolet Group has announced on October 15 that it will list its shares on the Moscow Exchange (MOEX) with an IPO.

The existing shareholders will offer circa 5.1% of the company shares to investors. The offer is being led by Samolet’s principal shareholder Pavel Golubkov and he will offer, together with his fellow shareholders, stakes of 1%, 0.5% and 3.6% from their respective holdings.

The offer has already been registered via open subscription with the Central Bank of Russia (CBR). The money raised will be used to buy new land plots and fund the ongoing construction business, the company said in a statement.

The Russian state-owned bank VTB Capital (VTBC) is acting as sole global co-ordinator and joint bookrunner for the offering, with BCS Global Markets as joint bookrunner.

Anton Elistratov, CEO of Samolet Group, said: “Ever since we established Samolet Group, we have developed the company with the intention of becoming a public company. Within the partnership business model, which is not typical for the Russian market, there is an expectation of transparency for partners not only regarding joint projects but also at the level of the company as a whole. Samolet has therefore since its very beginning adhered to the standards expected of a public company in its corporate governance and the development of its business processes.”

The IPO expands the universe of listed real estate developers, which has been a popular sector with equity investors thanks to its dynamic growth, good corporate governance and generous dividends. The other players are led by PIK and also include LSR Group (LSR) and Etalon, which make up the majors in the sector.

Samolet has the largest private land bank among its peer group, which is a key factor in the company’s consistent delivery of outstanding results, according to Elistratov.

“That enables us to set ambitious goals for our future growth. The company, as well as its existing and new shareholders, is ideally positioned to make a qualitative breakthrough in its financial performance and to further increase its market share. With our new status as a public company, we aim to increase our free float to 30-40% over the medium term,” Elistratov adds.

By listing, the company is recommitting itself to the high standards of corporate governance as part of accessing more capital to continue its fast pace of growth, the company said.

The principal shareholder and chairman of the board Dmitry Golubkov added: “The company has set a course to progressively develop its corporate governance. Today, corporate governance remains one of the priorities in developing the business’s investment case and creating value for shareholders. Today, both the management board and the board of directors include senior managers from major consulting companies, as well as leading experts in finance and real estate.”

Good corporate governance is a pre-requisite for any listed company, but a generous dividend policy is what really gets investors’ notice.

Russian companies in general have adopted generous dividend policies as owners have on the whole decided to take the cash rather than invest into the business, due to the uncertain long-term outlook. But in the meantime generous dividends have become a general feature of Russian listed companies as they can see the appeal they have to investors and it has become necessary to invest into a company's equity with dividend payments as a way to counter the traditional perceived “Russia risk.”

Samolet will IPO with a new dividend policy that has a fixed minimum payout of RUB5bn ($64mn) annually, the company said. “The policy takes into account the company’s leverage and aims to increase the amount and regularity of payments."

The formula Samolet is proposing to calculate the size of the dividend pay-outs depends on the debt to earnings ratio and proposes to share any profits with the investors once the debt is taken care of.

If the net debt/adjusted EBITDA ratio is below 1, then the dividend payment for the previous financial period would be not less than 50% of net income, in accordance with IFRS. If the net debt/adjusted EBITDA ratio is equal to or above 1 but below 2, then dividend payment would represent not less than 33% of net income. And if the net debt/adjusted EBITDA is equal to or above 2, or if the payment of dividends would result in a breach of covenants under the company’s material undertakings, Samolet may choose not to pay dividends at all other than the guaranteed RUB5bn.

As of June 30, 2020, the company’s net debt amounted to RUB13.2bn, up from RUB11.4bn as of December 31, 2019.

As bne IntelliNews reported in an interview with the company, Samolet residential real estate business is flying on the back of the state-subsidised mortgage programme. The Kremlin has always been keen to promote home ownership, as it sees this as a “social stabiliser” as well as an effective means of supporting economic growth by indirectly supporting construction. The government’s scheme has brought the effective interest rates down to 6.5% for would-be home-owners vs the central bank’s 4.5% prime rate and the programme has just been extended into 2021. The economic uncertainty caused by the multiple crises and the threat of new sanctions led Russians to put their cash into property as a value store and the share of mortgage-funded transactions has soared as a result.

Indeed, the business has been growing so fast that Alexander Danilov, director of the CBR’s banking oversight department, told PRIME in an interview on October 9 there is a danger of a real estate bubble developing in the future.

"There are no reasons for worry now. About RUB400bn ($5.1bn) of loans were given in the framework of the programme as of the beginning of September, while the total limit is RUB900bn. This is not much, because the entire mortgage portfolio of banks stands at about RUB8.5 trillion," Danilov said, adding that the government scheme could cause demand and price to rise.

Samolet has been growing fast, concentrating on the enormous Moscow market. With a population of about 15mn people, including the unregistered residents, the city of Moscow is bigger than most central European countries. And if you add in the surrounding Moscow Oblast (which is a separate administrative region from Moscow City, one of only two city regions in Russia) then the population is even bigger.

Samolet is one of the largest developers in the Moscow combined city and region area, and as of the end of 2019 was the fifth largest developer by commissioning volumes. According to an independent valuation carried out by Cushman & Wakefield, the company has the largest land bank among its competitors, with more than 15mn square metres of sellable area as of June 30, 2020, the company said in its statement. About a third (30%) of these plots are already at the construction stage, and the rest are at the pre-project stage and the design stage, according to Samolet.

“Based on the company’s current project pipeline, the group intends to increase its number of active projects to 23 by 2024 and to commission about 1.8mn sqm. According to the same assessment by Cushman & Wakefield, the company’s land bank was valued at RUB176.9bn ($2.3bn) as of June, and its total assets were valued at RUB200.1bn,” the company said.

The company’s strategy is to continue to focus on the lucrative Moscow market and the metropolitan area in particular, where average incomes are multiples of the national average and on a par, or better, than most European cities. However, despite a decade of fast growth in the boom years of the noughties, the housing supply in Moscow is still lagging behind demand and many Soviet-era structures remain.

At the same time the continuingly falling interest rates keep creating new sections of the population that can afford to buy an apartment. A rule of thumb suggests that each 1% the CBR cuts off the prime interest rates makes a mortgage affordable for another million Russians.

“The housing market, both in Russia as a whole and in the Moscow region in particular, is characterised by low per-capita levels of housing stock compared with both developed and developing economies,” Samolet said. “At the same time, a high degree of depreciation has been observed in housing stock in Russia. Against a background of favourable mortgage rates and an increase in new housing, this is contributing to a gradual increase in the affordability of housing in the country. As a leading player in the mass-market segment, Samolet is able to capitalise on these trends in a meaningful way.”

As a later entrant into the business Samolet has adopted a slightly different business model where it seeks out partners and jointly develops land plots. Rather than just buy land, the company often approaches the owners of land – entrepreneurs, companies and institutions – and offers to develop their land for mutual benefit. For example, some companies in and around Moscow own sizable plots of land, but as real estate development is a non-core activity they have done nothing with their land. Samolet comes in and develops the land in a partnership with the owner, which also reduces the up-front payment for land ownership.

The company further reduces its overheads and requirement for lots of working capital by outsourcing construction and installation works, which keep capital needs down to a minimum and the projects financially self-contained.

“[This model] makes it possible to minimise operational risks, ensure a competitive cost structure and finish construction ahead of schedule while maintaining flexibility during market downturns,” Samolet said.