An increasing number of companies whose equity and/or bonds are listed on the Regulated Main Market of the MSE are exposed to the property sector. Some companies may be exposed to a single asset which is already developed and fully leased out while other companies may have a portfolio of assets leased out with other properties earmarked for future development.
When property companies are either preparing for an initial listing of their equity or bonds on the MSE, or companies which are already listed conduct a corporate action that requires the issuance of a Prospectus or a Circular, they must abide by Chapter 7 of the Listing Rules. This chapter specifically deals with additional requirements for property companies. Naturally, such companies must also comply with the requirements contained in other chapters of the Listing Rules.
I wish to highlight the specific requirements of property companies, in particular the requirements of the contents within a valuation report especially with respect to a property that is in the course of development.
The Listing Rules state that “where the valuation is in respect of property currently being developed, the following additional information must be given in the valuation report: (i) the open market value of the property in its existing state at the date of valuation; (ii) the estimated capital values at current prices and on the basis of current market conditions (a) after development has been completed; and (b) after the development has been completed and the property has been let”.
Few investors or financial observers may have realised that this very valuable information was available in the Prospectus published by Trident Estates plc on October 7, 2019 in connection with the 2-for-5 rights issue for one of the company’s single largest assets, namely Trident Park located in Mrieħel.
Trident Park is currently being developed and is expected to be completed by the end of 2020 (and commence operations in Q1 2021) at a total development cost of around €45 million. It will involve the conversion of an old bottling factory and stores into a state-of-the-art complex housing circa 14,600 square metres of office space complemented by conference and gym facilities as well as a multi-level car park for approximately 700 cars.
The €15 million rights issue announced in early October is partly funding the development of the Trident Park with the balance from the company’s own cash resources and bank debt of €28.5 million.
The Prospectus issued by Trident gave a value to each of the 10 properties within the company’s portfolio. The valuation methodology consisted of a discounted cash flow, taking into account existing lease agreements for properties which are currently leased out.
In the case of the Trident Park property, however, three values were disclosed in line with Chapter 7 of the Listing Rules. The architectural firm AP Valletta Ltd who were engaged by the company to prepare a valuation of Trident’s property portfolio attributed a value of €19.2 million to Trident Park in its existing state as at July 31, 2019.
Some companies may be exposed to a single asset which is already developed and fully leased out while others may have a portfolio of assets leased out with other properties earmarked for future development
Meanwhile, it was estimated by AP Valletta Ltd that upon completion (due by the end of 2020), the value of Trident Park would increase to €60 million. Moreover, the architectural firm attributed a value of €68 million to Trident Park once all the rentable area is fully leased out. This is based on the assumption that the company will generate revenue of circa €4 million per annum from the Trident Park project and generate an annual cash surplus after debt servicing costs of €0.8 million per annum.
During a meeting with financial analysts on October 10 shortly after approval by the Listing Authority of the Trident rights issue, the company’s CEO, Charles Xuereb, indicated that there is “significant interest and an interesting line-up of prospective tenants”. As such, the company should benefit from a good level of occupancy as from the opening of Trident Park in the first quarter of 2021.
Since property development companies should be mainly valued based on the net asset value (NAV) of the company, the expected property valuation of Trident Park is a very important factor to calculate the estimated net asset value of the company in the near term once this major development is concluded and leased out.
Prior to the conclusion of the rights issue, the issued share capital of Trident was of 30 million shares and the NAV per share as at July 31, 2019 was €1.258 based on the valuation of Trident Park as at July 31, 2019 of €19.2 million. Once fully leased out, the valuation of Trident Park is expected to rise to €68 million representing an increase of €48.8 million from the current market value. In order to work out the impact on the net asset value of Trident Estates, one would also need to take into consideration the bank loan of €28.5 million. As such, the increase in NAV (all things remaining unchanged) should be of circa €20.3 million.
Based on the new number of shares in issue following the rights issue of 12 million shares, (equating to 42 million in total), the NAV of Trident Estates should therefore increase by €0.483 per share to just above the €1.74 level assuming all the rentable area is immediately leased out in 2021.
The calculation of the estimated NAV of Trident Estates in 2021 was only possible as a result of the valuation requirements for property development companies which is very important information for the investing public. Moreover, this estimated NAV does not take into consideration any valuation uplift to the other major asset of the company, namely Trident House in Qormi with a footprint of 13,200 square metres and valued at only €10.7 million. The CEO of Trident Estates reiterated once again that after the completion of the Trident Park project, it is the company’s intention to shift focus towards the study and development of the Trident House.
The other major companies that have future property development initiatives are MIDI plc and Malta Properties Company plc. Estimated values of the various properties that will be developed by these two companies would be very valuable information for shareholders in these companies to understand potential uplifts in their current net asset values and comparing this to the share price. Detailed valuation reports by these two companies would only be required according to the Listing Rules should the companies resort to specific transactions requiring the publication of a Prospectus or a Circular to shareholders.
The information disclosed in the Prospectus of Trident Estates shows again the importance for investors to go through such documents and look out for certain essential details that may have a strong bearing on one’s evaluation of the company from an equity perspective. Property development companies should be measured from a net asset value perspective and as such the requirements of Chapter 7 of the Listing Rules provides the required information for investors to take more informed decisions.
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