Among the companies whose bonds are listed on the regulated main market of the Malta Stock Exchange, one can identify nine companies which are mainly focused on commercial property activities, namely Central Business Centres plc, Exalco Finance plc, Hili Properties plc, Mediterranean Investments Holding plc, Melite Finance plc, Plaza Centres plc, Shoreline Mall plc, Stivala Group Finance plc and TUM Finance plc.
Although the main objective of all these companies is to hold a portfolio of properties for long-term rental income, there are many differences between them and, therefore, they are not strictly comparable. For example, the only asset of Mediterranean Investments Holding plc is in Libya, while Hili Properties plc has a diverse portfolio of 23 properties in various countries including Malta. Melite Finance plc does not actually own any properties but holds long-term leases over of a number of retail stores in Italy. Shoreline Mall plc is still in the development stage and the project is expected to be completed in December 2021, while Stivala Group has an important hospitality segment within its operations.
Nonetheless, a review of some credit metrics is interesting to gauge the overall creditworthiness of this important set of companies within the overall bond market. Since it is generally the norm for commercial property companies to have long-term rental agreements in place, the interest cover is a key credit metric to follow, showing the ability of a company to honour its annual interest obligations.
Central Business Centres plc has three separate bonds in issue totalling €12 million maturing in 2021, 2025 and 2027. The company has three business centres – one in Żebbuġ, one in Gudja and the St Julian’s Business Centre which welcomed its first tenants in June 2019. The company also owns a large tract of land in Żebbuġ with the intention of developing it into a complex comprising retail, storage and office space. As at April 2020, the Żebbuġ business centre was 100 per cent occupied while the occupancy rate of the Gudja business centre was 86 per cent. Meanwhile, the St Julian’s business centre had an occupancy of 56 per cent in April 2020. The interest cover improved in 2019 to 1.4 times as a result of the income being derived from a related part on the tract of land in Żebbuġ pending the execution of the agreement with LIDL Immobiliare Malta Ltd. In view of the COVID-19 pandemic, the company assumed a decrease in revenue which would result in a decline in the interest cover to below one time. The gearing ratio is not expected to change materially from the level of 41 per cent.
Exalco Properties Limited, as guarantor to the €15 million bonds in issue by Exalco Finance plc, has a portfolio of six business centres with a total of 15,600sqm in lettable area. The financial performance of the company is expected to improve in 2020 mainly on account of the commencement of rental income from the remaining available space at the Phoenix building effective January 2020 but also due to the renewal of some agreements at higher rates also effective from the beginning of 2020 as well as annual rental increments as stipulated in existing lease agreements. The interest cover is expected to improve to 4.3 times in 2020 while the gearing ratio will be practically unchanged at 35 per cent.
Hili Properties plc has a portfolio of 23 properties in Malta, Romania, Latvia, Estonia and Lithuania with rentable area of over 76,000sqm spread across offices, restaurants and retail. Revenues are anticipated to drop by 8.3 per cent in 2020 to €8.02 million reflecting the sale of the Tower Business Centre located in Swatar in late December 2019 for a total consideration of €7.1 million. As a result, the interest cover is expected to deteriorate slightly to 1.47 times compared to 1.65 times in 2019, while the gearing ratio is anticipated to improve marginally to 57.1 per cent.
The only operating asset of Mediterranean Investments Holding plc is the Palm City Residences in Libya. The interest cover is expected to decline to three times in 2020 from four times in 2019 as the company is anticipating revenues to drop to €21.8 million in 2020 from over €27 million in 2019 on account of a reduction in some of the short-term leases. Nonetheless, the company reported in August that it generated revenue of €12.5 million during the first half of the year. Despite the weaker financial performance anticipated in 2020, the gearing ratio is expected to improve to 34.5 per cent. The three bonds listed on the MSE totalling €72 million mature over the next three years.
One needs to closely monitor developments in this sector
Melite Finance plc issued various announcements in recent months related to the difficulties it is encountering in its business operations and the resultant negative impact on its balance sheet which reduced the total equity of the company to only €1.45 million as at June 30, 2020. This is the first listed company that is seeking to restructure the terms of the bonds that had been issued in 2018. Although the company recently indicated that it managed to sublease a few of its outlets in recent weeks, the market will be very attentive to further announcements in due course including the terms of the restructuring.
Plaza Centres plc recently announced that it sold one of its two properties for a consideration of €14 million and following this transaction, the company is seeking to repurchase a number of its outstanding bonds of just over €8 million due in 2026. Since the original bond issue stipulated a minimum holding of €50,000 nominal, the company is not obliged to publish a financial analysis summary on an annual basis providing financial forecasts. Although no financial forecasts are available for 2020, the interest cover of 6.3 times is expected to decline on account of the impact on the retail areas of the Plaza Shopping Complex from COVID-19 and also no revenue earned from the Tigné Place property during the final few months of the year following the sale of this asset in September. The company’s gearing ratio was 26.9 per cent as at the end of 2019.
Shoreline Mall plc was only set up in December 2017 and conducted a €40 million bond issue earlier this year to fund the construction of a 25,000sqm shopping mall and seven foreshore residential units. The gearing ratio as at the end of 2020 is anticipated to be 68.5 per cent. The company is not anticipated to generate any meaningful revenue until the opening of the complex in January 2022 and, therefore, the interest cover is a poor metric to gauge in the coming years.
Stivala Group Finance plc issued two bonds in recent years, totalling €60 million. The Stivala Group has a sizeable property portfolio valued at over €190 million as at the end of 2019. Both bonds are secured by a number of properties within this vast portfolio including a plot of land in Ta’ Xbiex which is earmarked for the development of a commercial property comprising over 7,000sqm of rentable area. The group has other major projects in the pipeline including a 225-room hostel in Gżira. The latest FAS indicates that both projects are delayed in view of the uncertainty resulting from COVID-19. The financial performance of the group is naturally expected to be negatively impacted from the complete shutdown of the hospitality operations between mid-March and the end of June 2020 and the reduced business activity during the second half of 2020. In fact, the interest cover is expected to weaken to 3.4 times but the gearing ratio will remain largely unchanged at 39 per cent.
TUM Finance plc launched a €20 million bond issue in 2019 and, through its 100 per cent owned subsidiary TUM Operations Ltd, owns 75 per cent of Centre Parc Holdings Ltd and 100 per cent of Easysell Ltd which also acts as a guarantor to the bonds in issue. The Centre Parc complex opened in October 2019 and was fully tenanted by the end of 2019 and remained 100 per cent occupied by the end of August 2020. Meanwhile, the guarantor owns the Zentrum Business Centre in Qormi which is also held as security for the bond issue. A sizeable extension to this property was carried out recently and the building is also fully occupied. As a result of the additional rental income being generated in 2020, the financial performance is expected to improve, leading to a strengthening of the interest cover to 3.5 times and a slight reduction in gearing to 38.9 per cent.
Even prior to the sudden onset of COVID-19, there was a notable oversupply of commercial property coming to the market in Malta. As a result of recent political developments and the risk of Malta being grey-listed, coupled with the possible impact on the demand for office space in view of potential changes in work patterns due to COVID-19, one needs to closely monitor developments in this sector.
It is important to verify whether rental agreements will remain in place to provide the consistent income required by these various issuers to honour their obligations in a timely manner.
Rizzo, Farrugia & Co. (Stockbrokers) Ltd, ‘Rizzo Farrugia’, 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 company/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. Rizzo Farrugia, its directors, the author of this report, other employees or Rizzo Farrugia 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, and may also have other business relationships with the company/s. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither Rizzo Farrugia, nor any of its directors or employees accept any liability for any loss or damage arising out of 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.
© 2020 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.