The brief kidnapping of the Libyan Prime Minister Ali Zeidan on October 10 and the difficulties experienced by the Libyan Government to restore order in the face of the unrest by militias and other gangs created renewed tension in Libya in recent months. The militia fighters, or as they are better referred to “the revolutionaries”, took over military bases, blocked off ports causing disruption to the export sector and occupied airports and other important landmarks.
The volatile situation in Libya caught the attention of the international press and also created some concern among the local investing community due to the exposure of some Maltese companies to Libya.
With this in mind, I met up with Reuben Xuereb, managing director of Mediterranean Investments Holding plc, to seek a better understanding of the present situation in the country and whether this has had any impact on the operations of the Palm City residences, which is currently the only operational asset of Mediterranean Investments Holding plc.
Mediterranean Investments Holdings plc, a joint venture between the Corinthia Group and the National Real Estate Company of Kuwait, had raised a total of €75 million via the Maltese bond market and therefore the situation in Libya is of utmost importance to the many investors who have some MIH bonds in their investment portfolio.
Mr Xuereb acknowledged that the tension that erupted in recent months limited the ability of the present Libyan administration to govern the country effectively but he claimed that “as the militias voluntarily surrendered on November 21 and retreated to their former regions, the situation has improved considerably and people are now feeling much more positive”.
When asked whether the instability over recent months impacted the tenants of Palm City or the actual operations of the development, Mr Xuereb explained that there were no conflicts within the Palm City area.
He added that, given the current set-up, no further security was required to protect their tenants.
“No tenants of Palm City evacuated the complex as a result of the tensions, and therefore Palm City has not had any cancellations of leases.”
In a meeting held earlier this year with the financial community, Mr Xuereb indicated that Palm City had a waiting list of international companies wishing to lease out units for their employees. The managing director confirmed that following the departure of some NGOs, the vacated residential units have been re-leased to various tenants operating in different business sectors. The new tenants within Palm City operate in the oil and gas, construction as well as the manufacturing sector. In fact Mr Xuereb confirmed that, by the end of this year, the occupancy rate would be maintained at the 95 per cent level notwithstanding the fact that occupancy had briefly declined to 80 per cent during September when a number of units were vacated, refreshed and prepared for the new tenants.
The new agreements entered into by Palm City with a number of different tenants operating in various sectors have added value since they reduce the dependency on a single organisation. Another positive element in the recent changes within the tenant mix is that while the NGOs had agreements for short-term lets, these have now been converted to medium and longer-term lease agreements, providing further financial stability to the company.
On the other hand, however, Mr Xuereb reported that “the new rental rates are reflective of the longer duration of the contracts and therefore the average overall rental per residence will decline during 2014”.
He spends considerable time in Tripoli with the team on the ground to monitor the operations at Palm City and to also work on upcoming projects. He confirmed that there is still a very strong demand for the residences within the Palm City residences.
Despite the temporary decline in occupancy over recent months as new tenants replaced the NGOs, Mr Xuereb confirmed that: “MIH will maintain the 2013 budgets envisaged at the start of the year”. In April 2013, when the company presented its financial statements for 2012 to the stockbroking community, it reported that the company’s performance would improve during 2013 and management were targeting to achieve an overall EBITDA of €24 million compared to €20.8 million in 2012.
The six-month interim financial statements as at June 30, 2013 reflected a significant improvement in profitability over the first half of 2012 with a 27.5 per cent increase in revenue to €15.7 million and a net profit of €8.5 million compared to €4.4 million in the first six months of 2012. Mr Xuereb indicated that the company will be achieving the targets set for this year and expects a stable financial performance during 2014.
Although “no real competing development is expected in the near term”, Palm City is investing in state-of-the art IT infrastructure to maintain a premium service to tenants and anticipate their ever-changing needs. Mr Xuereb explained that they engaged a Maltese IT company to develop a facilities management software system which will also be integrated into a newly developed social media platform to enable improved communication facilities between tenants and also to enable tenants to communicate with the Palm City management on site to provide a truly unique experience within the gated compound.
No tenants of Palm City evacuated the complex as a result of the tensions, and therefore Palm City has not had any cancellations of leases
“We want our clients to have the best service at their fingertips, and this is why we have been working hard on designing and implementing a new software system that will allow tenants to request services, report faults and book restaurants and sports facilities from the comfort of their own home or remotely through their phones online wherever they are”. The system is currently being implemented and expected to go live during the course of the first quarter of 2014.
Since the end of the Libyan revolution and the gradual build-up of occupancy within Palm City, the financial performance of MIH improved considerably in 2012 and in 2013. The managing director confirmed that the cash being generated is sufficient to meet bank obligations in full. The banking facilities were refinanced during the conflict and the new arrangements stipulate a repayment of €4.5 million every six months covering both interest and principal. Mr Xuereb noted that apart from the €9 million bank repayment programme every year, the healthy operational performance at Palm City is also generating sufficient cash to cover the interest and sinking fund obligations on the three outstanding bonds in issue.
MIH does not intend to make any distributions from current revenue streams to the two shareholders in the near term as they are seeking to grow their real estate portfolio through investments in other projects in Libya and also potentially in other countries.
The last time MIH had tapped the bond market was in July 2010 to partly fund the development of the Medina towers project. This high rise development was naturally delayed as a result of the conflict that started in February 2011. However, Mr Xuereb explained that “all design, engineering works and drawings have been completed to enable works on site to start sometime in 2014”. At the last meeting with the stockbroking community he said that negotiations are ongoing with the banks in Libya for the required portion of debt funding. Mr Xuereb however indicated that there were delays in securing the required banking facilities but the executive team is actively engaged to conclude this in the near term. Meanwhile, he explained that they are finalising a campaign to create awareness of the project.
‘The Lifestyle at Medina’ is intended to initiate the branding of the development. Mr Xuereb stressed that the Medina Towers is “an innovative and unique project in more ways than one”. He continues to believe that the project will be well-received and he is convinced of the strong demand for apartments and high grade office area that will be constructed.
MIH also intends developing the Palm Waterfront on a parcel of land measuring circa 60,000 sq.m. located beside the existing Palm City Residences. Here again, some delays are being encountered on the funding aspect but in the meantime active discussions are taking place with the Libyan authorities to obtain all required approvals.
Before concluding the interview, we touched upon the present state of the local bond market in the light of the upcoming redemption of the €15 million 7.5 per cent bonds due by December 4, 2014 at the latest. Mr Xuereb rightly pointed out that the company was looking at all possible options although he does not exclude partly refinancing this through another bond issue in Malta similar to the strategy adopted by International Hotel Investments plc and Corinthia Finance plc in recent years.
The passion with which he speaks about the projects in hand and the potential in Libya is admirable. “Libya has tremendous opportunities despite the present volatile situation. Businesses who persevere in their efforts and take risks are those that achieve superior returns for stakeholders in the long-term”.
Rizzo, Farrugia & Co. (Stockbrokers) Ltd (RFC) is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the issuer/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC, on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC nor any of its directors or employees accept any liability for any loss or damage arising from the use of all or any part thereof, and no representation or warranty is provided in respect of the reliability of the information contained in this report.
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Edward Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.