Plaza keeping abreast of a dynamic market

Financial Article 363 by Edward Rizzo - Dec 04, 2014

In the Interim Directors’ Statement of Plaza Centres plc published on 23 October, the company revealed that occupancy levels during the third quarter of 2014 continue to rise leading to an uplift in revenue and pre-tax profits compared to the corresponding period in 2013.

During the first six months of the current financial year ending 31 December 2014, Plaza’s revenues increased by 10.7% to €1.15 million, earnings before interest, tax, depreciation and amortisation (EBITDA) grew by 8.4% to €0.95 million and pre-tax profits climbed by 18% to €0.71 million.

Following the strong performance during the first half of the year and the announcement of a continued increase in occupancy and profitability also during the summer months, I met up with the CEO Mr Lionel Lapira to understand the factors behind this continued success for the company.

Mr Lapira confirmed that while all retail units are leased out with the exception of a small catering outlet on Level 2 which is being vacated, the current occupancy level for the office space is 97% and this should increase to 100% during the early part of next year.

The Commercial Centre has a total rentable area of 10,600 sqm split up as to 4,600 sqm dedicated to the retail outlets across 4 floors and 6,000 sqm for offices. However, the large majority of revenue is generated from the retail units and the CEO indicated that the various retail outlets contribute almost 70% of overall revenue with the balance from the office facilities. The major challenge for the company over the last 2 years was to lease out the office area vacated by their previous largest tenant in 2012.

Plaza embarked on a complete refurbishment of the office space spread over two floors and the area was also split into various offices to attract a number of different tenants so as to reduce the dependency on a single tenant again. The refurbishment was completed in mid-2013 and during the course of last year and this year, Plaza was successful in signing lease agreements for all these units with various international companies operating out of Malta. Moreover, as a result of the strong demand for office rentals in such a central location, the company also converted the restaurant on the penthouse level to office facilities and also relocated its management office to a lower floor in view of the higher demand for offices on the penthouse level as opposed to the lower floors. While this naturally led to an overall improvement in rental income for the company, Plaza’s CEO also confirmed that the changes to the office area in terms of the refurbishment programme and the higher number of tenants that signed up, also translated into a higher rent per square metre. This is possibly one of the reasons for the double-digit growth in the company’s turnover during the first six months of the year. The improved rental income from the office area will also positively impact the company’s financial performance in the immediate future.

Moreover, the CEO confirmed that rates in the retail area were maintained despite the onset of increased competition in recent years from more modern shopping malls in the immediate vicinity and also in other parts of the island. Plaza’s rental agreements with retail tenants are in the large majority fixed and not based on the performance achieved by the outlet. This is very different to its main competitor in the area, Tigne Mall plc, which has most agreements with tenants structured with a minimum base rent and a top-up mechanism should the outlet exceed certain pre-established revenue targets.

When questioned on what led Plaza on the one hand to maintain rates for retail units and on the other hand to improve office occupancy at higher rates, Mr Lapira explained that the decisions taken by the company over recent years for a total refurbishment programme split into various phases definitely served its purpose. Plaza first refurbished the retail floors in 2009 followed by the office area in 2012 and 2013. Currently works on the modernisation of the façade are in the final stages. The CEO also commented that while it is important to maintain the building regularly to keep abreast of market dynamics, it was equally important to continue providing a good level of service to tenants, customers and employees of the office units. Naturally, the location of the Commercial Centre is also a key determinant and Plaza’s location is excellent since it is in the heart of what has become a much busier shopping and entertainment area. The significant increase in catering outlets along the high street and promenade is also testament to the strong rise in visitor flows to the Sliema area.

Plaza’s CEO however admitted that the biggest disadvantage of the Commercial Centre as opposed to other competing destinations both for retail and office units is the lack of parking facilities. Although this does not seem to have deterred the new tenants from taking up the vacated office space despite the increase in office availability in close proximity to Plaza and in other locations across Malta, Mr Lapira indicated that the company is actively seeking ways of alternative parking arrangements to better accommodate tenants and their employees in this respect.

Another upcoming challenge for the company could be the termination of the contract with the local franchisee of McDonalds. The agreement expires on 1 August 2015 and when pressed on whether there is any indication of whether this will be extended or terminated, the CEO couldn’t comment but assured shareholders that the company has various alternatives which would include the re-modelling of Level 0 where the present fast food outlet is located.

In the past, Plaza’s property was independently valued every three years. Mr Lapira confirmed that this revaluation exercise is currently taking place and the results will be revealed at the time of the publication of the annual financial statements which normally takes place in March. When questioned on the indications of the results of this exercise, the CEO argued that although this is ongoing, the hard work by the company over recent years to improve office occupancy should indeed be reflected in the valuation. The last valuation conducted in 2011 attributed a value of €25.6 million to the property and this did not require any revaluations or impairment since it was equivalent to the latest value in the company’s books. On the other hand, the previous valuation of 2008 resulted in an uplift of €1.5 million. The current net asset value per share of €0.72 as at 30 June 2014 is largely composed of the value of the property and any increase in the property value should be likewise reflected in a higher book value at the year-end.

Following the strong performance in the first half of the year and the confirmation from the company that this trend has since continued, Plaza is in a strong position to continue maintaining attractive dividends to shareholders since it is on course for a record financial performance. Plaza’s equity was always tailored for income-oriented investors seeking diversification away from traditional bonds. Given their similar business models, Plaza Centres plc, Tigne Mall plc and Malita Investments plc all rank in this way, providing such investors with a wider range of options to spread their investment portfolio. Other property companies with a similar business model should consider the pros and cons of going public and seeking an equity listing given the very strong demand from retail and institutional investors for investments providing regular and sustainable income streams.

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