In last week’s article, I wrote about the hospitality sector with specific emphasis on the extent of leverage of the six hotel companies whose bonds are listed on the regulated main market of the Malta Stock Exchange.
Property development companies generally have higher leverage ratios than companies in other sectors since they take on debt to finance their development pipeline and seek to pay it back once the property/ies are sold upon completion. Moreover, the financial performance of property development companies is generally very volatile from one year to the next since the recognition of revenue is dependent on the timing of the final deed of sale of any properties.
As such, one can often observe that a company of this nature registers a very high revenue and profit figure in one year when a large amount of units are delivered to their owners, followed by weaker performances in future years until a subsequent phase of the development is completed. The interest cover is, therefore, not a reliable financial metric to gauge the strength and creditworthiness of such companies.
As such, for property development companies, the extent of leverage by comparing the overall debt taken on, compared to the level of equity, should be given added importance than other financial metrics like the interest cover, since the gearing ratio could indicate the company’s ability to withstand a period of weakening sales or to take on added leverage should the property sector experience excess supply. This takes on even more importance in current circumstances as the pandemic undoubtedly resulted in a period of slow sales.
Among the various companies whose bonds are listed on the regulated main market of the Malta Stock Exchange, one can identify the following six companies which are mainly focused on property development activities, namely, MIDI plc, Pendergardens Developments plc, GAP Group plc, Best Deal Properties Holding plc, Von der Heyden Group Finance plc and Mercury Projects Finance plc.
MIDI plc was the first among these six companies to utilise the bond market in early 2009. Following the bond issue, the company had then conducted an equity IPO in 2010 and subsequently refinanced the original bonds through an issuance of new bonds in 2016. The company has the lowest level of gearing among the six property development companies with an estimated 41.6 per cent as at the end of 2020, comprising total debt of €72.6 million and equity of €102 million. Naturally, this is expected to increase once additional funding will be taken to develop the long-awaited Manoel Island project, assuming planning approval is obtained in due course.
Although the emphyteutical deed signed with the government of Malta specified that “the entire development shall be substantially completed by March 31, 2023”, during the recent annual general meeting held remotely, the company clarified in response to a question sent by shareholders that “the deadline to substantially complete the development by March 2023 is subject to extension, in terms of the provisions of the emphyteutical deed and “discussions have commenced with government to extend this deadline”.
Pendergardens Developments plc had launched two secured bonds in 2014 totalling €42 million, with redemption dates of May 31, 2020, and July 31, 2022. In fact, the €15 million 5.5 per cent bonds were duly redeemed on May 31. As a result of the repayment of the €15 million in bonds, the gearing ratio is anticipated to decline to 46.9 per cent at the end of 2020. The company is projecting to have a reserve fund of €11.6 million by the end of the year.
Apart from a few residential units and car spaces which are still available for sale, the company holds a number of commercial properties (offices and retail areas) valued at over €30 million, some of which are leased and generating rental income.
The gearing ratio could indicate the company’s ability to withstand weakening sales
In September 2016, GAP Group plc issued a €40 million bond offering a coupon of 4.25 per cent, maturing in 2023. GAP Group plc has a number of property development projects located in various towns and villages, and the bonds are secured by hypothecs over various pieces of property and land.
Meanwhile, in March 2019, the company issued another bond maturing in 2022 with an interest rate of 3.65 per cent, mainly in order to encourage holders of the 4.25 per cent bonds to exchange their bonds into the new offering. Just over €20 million were exchanged, and while the original bond of 4.25 per cent was reduced to €20 million, a total of €40 million was issued through the new bond at 3.65 per cent.
Since then, the company has repurchased a number of its bonds on the secondary market, totalling over €3.7 million. The latest Financial Analysis Summary indicates that the company had a sinking fund totalling €21.3 million as at June 30, 2020.
Incidentally, last week, GAP Group plc announced that it has submitted an application to the Listing Authority of the Malta Financial Services Authority requesting the admissibility to listing of €21 million 3.70 per cent secured bonds maturing between 2023 and 2025. Subject to the attainment of the necessary regulatory approval, the new bonds will be offered for subscription to existing GAP Group bondholders (namely holders of the €36.7 million 3.65 per cent secured bonds 2022, and holders of the €19.4 million 4.25 per cent secured bonds 2023) as well as the public.
Once the prospectus is published, it would be interesting to understand the rationale for such a new issue and whether this is due to a new property development project or whether the company suffered a delay in construction and/or a slowdown in sales of existing units due to COVID-19. The company envisages that it requires further time to sell all its stock and repay bondholders.
Best Deal Properties Holding plc also repurchased a number of its bonds in recent months. In fact, from the original amount issued of €16 million in December 2018, the outstanding amount has been reduced to €15.5 million. The company has an equity base of only €4.6 million (estimate as at December 31, 2020), which translates into a high gearing ratio of 83.3 per cent. The company has two of its major development projects in Żabbar and Mellieħa due for completion during the second half of 2023 and these are expected to generate combined revenues of circa €48 million.
Von der Heyden Group Finance plc launched a bond issue in January 2017. This special purpose vehicle is the finance arm of the Von der Heyden Group, which in turn has interests in various property projects located in several countries. The bonds are guaranteed by Timan Investments Ltd.
The group’s largest investment was in a sizeable property development project in Munich, Germany, which was sold in December 2019. In fact, cash and cash equivalents are expected to rise to €25.1 million as at the end of 2020 (€6.3 million as at December 31, 2019) following the sale of the ‘Blue Tower’ within the Bavaria Towers development.
The group’s net debt will still amount to €58.2 million at the end of the year, which also comprises a significant amount of lease liabilities. The group is now conducting another major investment in Poznan, Poland, due for completion in 2023, comprising a sizeable commercial offering.
Mercury Projects Finance plc issued two bonds totalling €22.5 million in March 2019. The bonds are guaranteed by Mercury Towers Ltd, which is carrying out a large mixed-use development in St Julian’s comprising a high-rise with 279 apartments, a boutique hotel, retail and commercial activity, as well as an underlying car park. The group reported that 86 per cent of the units are either sold or subject to a promise of sale agreement. Permit applications have been lodged with respect to the second phase of this mixed-use development, comprising a further nine-storey block consisting of a redesign of the hotel, which will now include 130 rooms, further commercial spaces and other units that will be sold to third parties. The financing for this second phase is still under consideration.
In the months ahead, it would be interesting to review announcements by these six companies to gauge the impact of the COVID-19 pandemic on the property development sector. It is of utmost importance that the large majority of promise of sale agreements are translated into final deeds of sales to enable these issuers to repay bondholders in due course.
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