The local hotel bond issuers

While reviewing the financial statements of the many issuers whose bonds are traded on the Regulated Main Market of the Malta Stock Exchange (MSE) in preparation for the articles of the past two weeks, it became evident that the majority of the owners of the main hotels in Malta resorted to the bond market in recent years in order to diversify their sources of funding. As a result, the financial statements of the main local hotel ownership companies are published via the MSE on an annual basis.

It is therefore interesting for analysts and investors to review the performances of these six hotel ownership companies given the importance of the tourism sector within the local economy especially following a number of years of record tourist arrivals. Moreover, the amount of debt in issuance by these six companies amounting to €492.5 million accounts for almost 30% of the total amount of €1.74 billion of bonds across the Regulated Main Market.

Apart from the revenue and EBITDA generated from hotel ownership and operation, most of these companies are involved in other business activities (mainly property development activities) and this makes it difficult to make a perfect comparison between one company and another.

Moreover, not all companies published the same key performance indicators (such as average room rate [“ARR”], revenue per available room [“RevPAR”], occupancy, etc) of each of their hotel properties so a detailed comparison of the effectiveness and efficiency of each and every hotel property company cannot be reached.

Spinola Development Company Limited as guarantor of the bonds of Tumas Investments plc generated total revenue of €125.8 million and an EBITDA of €63.8 million in 2018. This includes revenue amounting to €77.8 million from property development as the company recognised the revenue from the delivery of the 40 Laguna apartments to their new owners during the year and part of the revenue and associated costs in relation to the transfer of title of the adjacent tower to the Portomaso Business Centre. In fact, the EBITDA margin of 50.7% and return on equity of 37.3% are clearly above the returns generated by the other companies for this reason. The segmental information provided in the Financial Analysis Summary indicates that the revenue of the Hilton Malta hotel amounted to €42.1 million in 2018 and EBITDA of €16.4 million resulting in an EBITDA margin of 38.9%. This compares to the figures of €31.7 million in revenue and €9.37 million in EBITDA in 2014 indicating the overall growth in the tourism industry following the record number of passenger arrivals for nine consecutive years.

The improvement in operational performance over recent years was also evident across other companies. AX Holdings Ltd, as guarantor of the bonds in issue by AX Investments plc, registered total revenues of €56.8 million and generated an EBITDA of €20.9 million in their last financial year to 31 October 2018. AX Holdings is also involved in other business activities apart from hotel ownership although the hospitality segment generated revenue of €39.5 million in 2018 (compared to €21.3 million in FY2013/14), representing almost 70% of Group revenue compared to 14.3% from the construction and building materials segment and 8.4% in healthcare. Analysing the hotel performance over recent years also shows a marked improvement in profitability partly arising from the overall growth in tourism figures. In fact, the EBITDA from the hospitality segment of AX Holdings grew from €7.5 million in FY2013/14 to €16.9 million in FY2017/18. It is also worth highlighting that the latest financial statements of AX Holdings as at 31 October 2018 show a contribution of €26.6 million from the revaluation of investment property which led to a net profit for the year of €31.9 million and boosted the return on equity to 16.6%. The three main hotels across the portfolio of the AX Group (namely the Seashells Resort by Suncrest, The Palace Hotel and the Victoria Hotel) also have varying KPI’s with the RevPAR of the 5-star 144-room The Palace Hotel in Sliema at €197, compared to the 4-star 137-room Victoria Hotel also in Sliema at €120 and the 4-star 452-room Seashells Resort at Suncrest in Qawra at €101.

Eden Leisure Group Ltd as guarantor of the bonds issued by Eden Finance plc also showed a marked improvement in its financial performance in recent years following the growth in the company’s main revenue generator being the InterContinental Malta. During 2018, Eden Leisure Group saw its revenues increase by 13% to just over €41 million (with the revenue of the InterContinental Malta amounting to €27.3 million) and Group EBITDA amounting to €12.1 million. In 2014, the revenue of the Eden Leisure Group amounted to €26.4 million (in the same year the InterContinental Malta registered a turnover of €20 million) and Group EBITDA was €6.2 million. In 2018, Eden Leisure Group also benefited from the first full-year contribution of the Holiday Inn Express Malta with the Financial Analysis Summary indicating that the revenue generated by this new property amounted to €3 million. It is interesting to distinguish between the RevPAR achieved by the 5-star 481-room InterContinental Malta in 2018 of €156 compared to that of the 3-star 118-room Holiday Inn Express Malta at €70.

SD Finance plc approached the bond market in 2017 so the analysis of the financial statements of SD Holdings Ltd as the guarantor of the bonds only started recently. On 31 July 2019, SD Holdings Ltd published its annual financial statements as at March 2019 showing another record performance mainly arising from the Group’s principal activities namely the ownership and operation of the db Seabank Resort & Spa and the db San Antonio Hotel & Spa which have a total room inventory of 1,052 rooms. During the 12-month period to 31 March 2019, total revenues of SD Holdings amounted to €56.1 million and Group EBITDA climbed by 22.5% to €26.4 million up from €21.6 million in FY2017/18. The strong performance of SD Holdings Ltd was driven by continued growth in both hotels especially the db Seabank Resort & Spa. Both properties continued to enjoy very high occupancy levels which remained close to or above the 80% mark during the past financial year. The RevPAR of the 4-star 539-room db Seabank Resort & Spa amounted to €122 and at €116 for the 4-star 513-room db San Antonio Hotel & Spa.

The highest EBITDA figure among the six hotel ownership companies published in today’s article is of International Hotel Investments plc. Although the Corinthia Group subsidiary owns the largest number of rooms in Malta among the six companies (totalling 1,186 rooms across its 5 properties in Malta including the Radisson Blu Resort & Spa Golden Sands which is 50% jointly held with third parties), it is worth highlighting that the revenue of €256.3 million and the EBITDA of €66.4 million from IHI takes into consideration the entire property portfolio of the IHI group (comprising  a total room stock of 3,777 rooms) with the main EBITDA contributors being the hotels located in London, Malta and St. Petersburg. Moreover, the London property is only 50% owned and therefore one will also need to adjust the EBITDA figure accordingly. Collectively, the 5 hotels across Malta accounted for almost 20% of the adjusted EBITDA figure of €61.3 million for the 2018 financial year. Another point worth mentioning is that IHI’s property in Libya generates a very small contribution compared to the high revenue and EBITDA several years ago. This is also one of the reasons for the Group’s low return on equity of only 1.7% compared to the other hotel ownership companies.

The newest bond issuer within the hotel industry is Phoenicia Finance Company plc whose bonds are guaranteed by Phoenicia Hotel Company Ltd and Phoenicia Malta Ltd.  2018 was the first full financial year following the major refurbishment exercise of €29.4 million that took place between November 2015 and April 2017. As such, the financial performances of the Phoenicia Hotel between 2017 and 2018 are not comparable also due to the fact that the hotel was operating at circa 75% capacity from mid-April 2017 until all works were completed in November 2017. During 2018, revenues amounted to €12.9 million and EBITDA amounted to €4.7 million representing an EBITDA margin of 36.1%. Although this is undoubtedly the smallest of the issuers compared to the other larger hotel operators with total shareholders’ funds of €35.6 million, the Phoenicia Hotel achieved an ARR of €234 in 2018 (which is 7.3% higher than previously anticipated) and a RevPAR of €185 (compared to the forecasted RevPAR of €168).

Although the hotel industry seems to be facing a number of increasing challenges not only from competing destinations but also due to competition from private accommodation including unlicensed properties and Malta’s appeal may be negatively impacted by the heavy construction taking place simultaneously, the performances of these six companies over the past years has improved considerably. This is naturally good news for the many bondholders which are exposed to the local hotel industry.

As the Maltese capital markets continue to develop with the entry of new issuers from various industries, it is important that investors carry out regular financial analysis especially of some of the large sectors or the groups of companies where they may be mainly exposed to. For investors to keep updated with the developments taking place across the various issuers within their investment portfolios, regular communication by equity and bond issuers is essential. Apart from the customary company announcements, issuers also need to provide detailed information when publishing financial statements, interim directors’ statements and the Financial Analysis Summary all of which help to enhance financial literacy among the investing public.

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