On June 25, Tumas Investments plc announced that it will be exercising its early redemption option and it will be redeeming the €25 million 6.25 per cent bonds on July 31, 2014. The company also announced that, subject to regulatory approval, it will be issuing a new €25 million bond which will mainly be offered to the existing 6.25 per cent bondholders in exchange for their current holding.
Earlier this week, Tumas Investments confirmed that it obtained regulatory approval from the MFSA and it will be issuing €25 million in unsecured bonds carrying a coupon of 5 per cent per annum.
This is the fifth bond issue by Tumas Investments since the first offering in 2000. Tumas Investments is the financing arm of Spinola Development Co. Ltd (SDC), one of the main subsidiaries of the Tumas Group. Since Tumas Investments is only a financing vehicle, SDC also acts as the guarantor of the bonds. It’s main business activities over the years have been the development and management of the Portomaso Complex which comprises a mix of residential apartments, the five-star Hilton Malta hotel as well as commercial and office space complemented by various amenities including an underground car park and a yacht marina.
Tumas Investments is dependent upon the cash flows and operational success of SDC, given that it on-lends the funds it raises from bond issues to the guarantor. As such, the performance and projections of SDC are the financials that matter and which are important to analyse. The financial statements have been published annually over the years since SDC was also the guarantor of the maturing bonds and the other bonds currently in issue which mature between 2017 and 2020. Therefore, financial analysts and investors would have had access to the financial performance of the Portomaso owner over the years.
Although in its earlier years SDC was mainly regarded as a property development company, nowadays, the five-star hotel, the adjacent conference centre together with the yacht marina and the underground parking are the main contributors to SDC’s revenue and profitability. The hotel and conference centre are operated by Hilton International pursuant to a management agreement which expires in 2031. The hotel has a leading position in the five-star segment and statistics indicate that it has consistently outperformed its peers in respect of room rates, occupancy as well as gross operating profit (GOP) per room. The hotel segment contributed almost 80 per cent of overall revenue to SDC in 2013 at just under €30 million.
The financial analysis summary annexed to the prospectus indicates that revenue from this segment is expected to rise by 3 per cent in 2014 and edge minimally higher to €31 million in 2015. The improved performance is largely attributable to an increase in revenue per available room (RevPAR) although the refurbishment taking place between 2014 and 2015 (at a cost of €9 million funded through a mix of sanctioned bank loans and own funds) is expected to dampen overall revenue in 2015 due to less room stock available. Nonetheless, the contribution to the company’s earnings before interest, tax, depreciation and amortisation (EBITDA) from the hotel segment is expected to remain largely unchanged at circa €9 million also in 2014 and 2015. The benefits of the hotel refurbishment are then expected to accrue in future years.
The Hilton Malta should continue to be a major player in the tourism industry in the years ahead given its prime location, the wide range of amenities as well as the long-term management agreement with such a major hotel brand.
By its nature, the contribution by the property development segment has been volatile given its dependency on the number of apartments available for sale on the market, the timing of new developments and the timing of final contracts with buyers. The Tumas Group can boast that out of the 455 residential apartments in Portomaso constructed to date, it managed to sell 432 apartments.
Hilton has a leading position in the five-star segment
A further six apartments are subject to a promise of sale agreement, leaving a stock of 17 apartments valued at €14 million. As a result of the decline in the stock of available apartments, the dependence on the property development segment has reduced significantly in recent years with the contribution declining to €2.3 million in 2013 from over €10 million in 2011 and 2012. The projections included in the financial summary analysis reveal that the contribution from property development will remain relatively unchanged during 2014 and 2015.
The Portomaso Complex is in the final stages of completion and the Laguna extension represents the final phase of property development in the area. After recently being granted the relevant development permits, construction works on the 44 Laguna apartments have commenced and although these are expected to be launched on the market in 2015, revenue and profits from the sale of such apartments will only be booked starting from 2017 once the apartments are eventually delivered to their owners.
The development costs of the Laguna extension are expected to total €16.6 million and will in part be funded by a mix of the internal cash flows and banking facilities in hand of €6.2 million. Furthermore, the company also owns the site measuring approximately 9,000 square metres of the former Halland Hotel in l-Ibraġ (Swieqi). In the years ahead, the Tumas Group via SDC is also planning a major residential project on this parcel of land but this project is not included in the projections since the company is focusing on completing development works at Portomaso. Given the upcoming investments, the property development segment could show some more meaningful contributions in the years ahead. Both developments are in central locations and demand for local property could intensify in the future from locals as well as from foreigners both for residences as well as an investment for rental purposes.
Demand for property for rental purposes has been strengthening as a result of Malta’s growing services-oriented economy originally in the gaming and financial services sectors but in more recent months also in other sectors given Malta’s strategic position in the Mediterranean. Meanwhile, one must also not underestimate the additional demand for residential apartments that is expected to be created from the citizenship scheme, the global residency scheme and also from the repatriation of funds from the recently announced Investment Registration Scheme.
The third operating segment of SDC comprises the rental of office and commercial space at Portomaso with occupancy at 97 per cent in the 2013 financial year. The floors within the Business Tower owned by SDC have a total lettable area of 3,200 sq.m. while all the other commercial areas, all owned by SDC, have a rentable area of 11,000 sq.m. Revenues from this segment have grown consistently over the years in line with the contracted rate increases, which are expected to grow further in 2014 and 2015 reaching €3.4 million per annum.
The Tumas bonds are unsecured but as argued in my article published on June 19, investors should not only consider the element of security but the company’s trading history and other financial indicators. Total revenue generated by SDC amounted to €38.3 million in 2013 and this is anticipated to reach €40 million by 2015 with EBITDA rising to €12 million from €11.7 million in 2013. The EBITDA margin is also expected to maintain a level of circa 30 per cent in the coming years. The company is expected to maintain a comfortable interest cover ratio of circa three times in 2015. Meanwhile, the gearing ratio of 58 per cent is not expected to change significantly following the bond issue since no additional borrowings are being taken. However, the level of leverage may increase in the future due to the additional borrowings to finance the hotel refurbishment and the Laguna project.
The lower coupon being offered of 5 per cent per annum compared to the 2009 issue of 6.25 per cent per annum has to be viewed in the light of the significant decline in yields over the past five years reflecting the very low interest rate scenario. Moreover, while other property development companies are dependent on the construction and sale of apartments to achieve a positive cash flow and finance their interest payments, the Portomaso development has now entered into a mature operational phase with fewer sales of apartments and a consistent revenue generation from the hotel, office space, retail outlets and other amenities.
Rizzo, Farrugia & Co. (Stockbrokers) Ltd acted as sponsor to the Tumas Investments plc Bond Issue.
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Edward Rizzo is a director at Rizzo, Farrugia & Co (Stockbrokers) Ltd.