The commercial property companies

Financial Article 561 by Edward Rizzo - Oct 25, 2018

In the early years of the Malta Stock Exchange, most equity issuers listed on the regulated main market were banks and other financial services companies. As the government’s privatisation programme progressed, companies from other industries (telecoms, airport operator and postal services) were added while a number of private companies from the IT and property sectors were also attracted to the capital market over the years.

Today, there are several companies involved in the property sector which either have their shares or debt listed on the MSE. This does not come as a surprise given the growing importance of the real estate sector to the local economy.

However, it is important to distinguish between the pure property development companies that typically develop property for resale or rental purposes, and other companies that own commercial property to generate regular and steady income flows. The different classification is important both from a portfolio management perspective as well as from a valuation perspective since different metrics would need to be considered when contemplating an investment in diverse property equities.

There are now four commercial property companies whose shares are traded on the regulated main market, namely Plaza Centres plc, Malita Investments plc, Tigné Mall plc and Main Street Complex plc.

Since all these companies have their properties practically fully occupied, the rental income flow and the profitability of these companies is easily predictable from one year to the next. Most companies have their rental agreements increasing in line with inflation and their track record over the years shows the sustainability of their financial performance. Given that one of the main objectives of all these companies is to distribute regular dividends to shareholders, the dividend yield is one of the main metrics that investors should monitor to gauge the attractiveness or otherwise of the equities of these commercial property companies. Moreover, investors should compare the yields of these companies against one another and it is also useful to compare these to the yield on a medium-term sovereign bond (such as the yield on the benchmark 10-year Malta Government Stock).

The net yields currently being generated by these commercial property companies range between 2.8% and 3.3% per annum while the yield to maturity on the 10-year Malta Government Stock which is published on most websites or media articles is 1.6% (gross), equivalent to 1.36% net of 15% final withholding tax.

Despite the similar financial models of these four commercial property companies, they also have differing characteristics and are at different stages of maturity.

Plaza Centres conducted an important acquisition of a building known as Tigné Place in September 2016 for a value of €9 million having a total rentable area of 3,200 sqm. Most of the area of the new property is dedicated to office space with only a very small area leased to retail tenants apart from a total of 100 car park spaces. The company had financed this acquisition through a bond issue and embarked on a refurbishment programme of the building in 2017. The building was fully leased out upon acquisition with a large number of tenants approaching the expiry of their lease agreements towards the end of 2017. Following the completion of the refurbishment programme, coupled with the very strong increase in office rental rates in certain locations across Malta, Plaza’s management had confirmed in their Annual General Meeting that they were successful in achieving a sizeable increase in rental rates for the offices which were up for renewal. This should therefore positively impact Plaza’s overall financial performance during 2018 and in future years. Meanwhile, in recent months, the company also embarked on a reconfiguration of some areas within the Plaza Commercial Centre with the ultimate aim of maximizing rental space including the addition of a food court on Level 0. As a result of the lead time required for these changes, Plaza is likely to report overall lower occupancy levels in 2018.

This will offset some of the positive impact to the 2018 financial performance of the Plaza Group from the upturn at Tigné Place and therefore the full benefits of the recent changes within both properties are expected to become more evident as from the 2019 financial year. Plaza indicated that it aims to acquire additional office premises as it envisages that the revenue contribution from the leases of offices will amount to 65% of overall revenues with the remaining 35% from the lease of retail outlets. Presently, the revenue mix is 54% from office space and 46% from retail areas.

While Plaza is a company having exposure to both the office rental market and to the retail sector, Tigné Mall plc and Main Street Complex plc only cater for retail outlets.

Tigné Mall has an area of over 14,000 sqm dedicated to retail space within ‘The Point’ and upon completion of the final deed of sale for additional car park spaces by the end of November 2018, the total number of car park spaces of Tigné Mall will increase to 355. Most tenants within ‘The Point’ pay rent which is based on the overall turnover of the outlet subject to a minimum base rent. This leads to higher rates of growth in the revenue of Tigné Mall plc at times of higher economic growth. Since the Initial Public Offering in March 2013, the company’s financial performance has been very positive and exceeded the projections published in the Prospectus enabling a faster pace of repayment of bank borrowings apart from the semi-annual dividends to shareholders.

Main Street Complex plc conducted an IPO earlier this year. It ranks as the smallest among these companies since its rentable area amounts to 4,000 square metres (excluding the terrace). The retail and entertainment complex is not situated in Sliema (like Plaza and The Point) but in the main square of Paola which, in turn, is considered as the most popular shopping destination in the south of Malta and is widely regarded as the third busiest destination after Sliema and Valletta. The complex is almost fully leased out and most tenants have a fixed rent subject to annual increments.

On the other hand, Malita Investments plc is a somewhat different story since the company owns the sites over which the airport and the cruise liner terminal are built (thus receiving annual ground rents from Malta International Airport plc and Valletta Cruise Port plc respectively). Malita also has a 65-year lease agreement with the Government of Malta over the City Gate project in Valletta (incorporating the parliament building and the open-air theatre). Moreover, in December 2017, the company entered into an emphyteutical deed for a period of 28 years with the Housing Authority to acquire 16 property sites in a number of locations across Malta. Once developed, these sites will provide a stock of residential units earmarked for affordable housing. The company has two classes of shares and only the 30 million ‘B’ shares are listed on the MSE. The ‘A’ shares (totaling 118,108,064) are held by the Government of Malta and are not listed on the MSE. Another differentiating factor of Malita is the method of how it accounts for movements in the fair value of investment properties. This leads to fluctuations in the income statement and balance sheet of the company on a yearly basis. These are linked to movements in interest rates and are merely accounting entries and do not impact the cash position or distributable reserves of the company.

Notwithstanding that the dividend yield is possibly the main investment consideration by investors in these companies, the growth in the net asset value over the years should also not be overlooked. As the financial performances of these companies improve over time in line with their rental agreements, and assuming that property prices will continue to follow a positive trend over time (undoubtedly not at the same extraordinary rate as in the most recent years), the value of the underlying property should rise to the benefit of all shareholders. The net asset value per share of Plaza gradually increased from €0.50 in 1999 just prior to the Initial Public Offering to €0.97 as at the end of June 2018, representing an average growth of 3.7% per annum. The rate of growth in the net asset value of Tigné Mall plc was stronger as this increased from €0.50 in March 2013 to €0.815 as at 30 June 2018, translating into an average annual increase of approximately 10%.

Investors need to be aware of the financial metrics applicable to each economic sector to develop a better understanding of the various companies listed on the regulated main market of the MSE. This is especially helpful when material developments take place within certain companies and share prices begin to move rapidly.

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