Photo: Chris Sant FournierLast week, Plaza Centres plc published its 2014 financial statements showing a 19 per cent increase in pre-tax profits to a record level of €1.5 million. The improved financial performance, which was very much in line with expectations given the results of the first half of the year and the disclosure in the November interim statement, was both as a result of higher revenue as well as lower expenses, namely finance costs.
Plaza reported that turnover grew by 10.4 per cent to €2.39 million reflecting the increase in average occupancy levels to 93 per cent compared to 81 per cent in 2013. The higher occupancy levels came about from the success of the leasing of the office spaces which had been vacated by their largest tenant in 2013. Although the average occupancy during 2014 was 93 per cent, this increased to 96 per cent by the end of the year and to 100 per cent during the first quarter of 2015.
Operating expenses increased by 17.7 per cent to €0.42 million although the majority of this increase is due to a bad debt provision of €40,793 with respect to a catering outlet which ran into financial difficulties. Meanwhile, finance costs dropped by 26.6 per cent to €0.14 million reflecting the better interest rates contracted by the company after it switched its banking facilities in August 2013.
In last week’s announcement, Plaza indicated that occupancy within the complex during 2015 is expected to remain at the same average levels of 93 per cent achieved in 2014. Although occupancy improved to 100 per cent in the first quarter of 2015, the company expects four outlet leases to be terminated during the year. However, Plaza indicated that it is already in negotiations with prospective tenants and anticipates that it will conclude new leases in the third and fourth quarter of 2015. This important development was discussed at length during a meeting with the CEO Lionel Lapira shortly after the publication of the results.
Mr Lapira indicated that three of the tenants are retail outlets which for varying reasons will be terminating their leases. The other outlet is a sizeable catering unit. When questioned on the possibility of McDonalds’ terminating its lease – it expires on July 31, 2015 – the CEO stated that discussions are still ongoing but indicated that other potential tenants are already showing a very keen interest in the area presently occupied by McDonalds’ should they decide to vacate their operation on Level 0 following the sizeable investment in their stand-alone outlet not far off from the Plaza shopping centre.
The CEO also confirmed that demand for retail and catering units was still very strong despite the intense competition in the sector and the growing threat from online shopping among Maltese customers. The company has a waiting list of tenants and for this reason, the CEO is confident that average occupancy will be within the same levels in 2014 despite the lead time required for new operators to enter into any vacated retail or catering units.
Mr Lapira explained that the tenant mix was very important for the success of any commercial centre and the company is seeking to ensure that new catering establishments start operating in the complex to improve the catering mix currently on offer.
Plaza indicated that occupancy within the complex during 2015 is expected to remain at the same average levels of 93 per cent achieved in 2014
Although the office areas are presently fully occupied, the CEO also confirmed that the company has a waiting list of new tenants wishing to lease office space while some existing tenants are also seeking additional space due to expansion plans. Mr Lapira agreed with a comment recently attributed to Ray Fenech of the Tumas Group, who opined that demand from certain international operators relocating to Malta is “insatiable”. As such, despite the sizeable increase in availability due to upcoming projects in the immediate vicinity and other locations, it is unlikely that Plaza will run into any difficulties to maintain full occupancy of its office space despite the lack of parking facilities.
Plaza’s CEO believes that the company’s main weakness is the absence of parking as part of the complex and the shortage of parking in the immediate vicinity. Mr Lapira is adamant in seeking to address this issue in anticipation of the more intense competition emerging in the years ahead from upcoming office developments in close proximity such as Pendergardens, Midi’s Business Centre and the Metropolis in Gżira apart from other large projects in other locations such as Smart City, the Mrieħel Towers of Tumas Gasan and the planned new business centre by Malta International Airport plc.
Plaza’s CEO indicated that discussions are ongoing with the owners of a large site in close proximity to the complex as well as with the authorities with a view to addressing this parking shortage. Although Mr Lapira was non-committal on the possibility of reaching an agreement within the current financial year, he indicated that discussions are taking place regularly. An agreement could also see the company increase its retail and office space in the years ahead, through a phased development.
Plaza’s historic dividend distribution since the initial public offering in May 2000 has been remarkable with a consistently strong dividend payout to shareholders. Following the record financial performance in 2014, the directors recommended the payment of a final net dividend of €0.0268 per share representing a 12.6 per cent increase over the previous year’s net dividend of €0.0238 per share. The dividend payout ratio declined to 80 per cent as the company retained additional profits to create a cash buffer in order to partly support the ongoing maintenance programme and also eventual expansion plans.
Notwithstanding the additional cash retained by the company, Plaza would undoubtedly also need to resort to additional debt funding which should not pose a problem given the currently conservative leverage position.
In fact, Plaza’s gearing level dropped below 15 per cent in 2014 following the partial repayment of bank borrowings but more importantly following the increase in shareholder funds, not only due to the profit retention but also as a result of the property revaluation.
Plaza’s property is revalued every three years and last week the company reported that the value of its ‘property, plant and equipment’ increased to €32 million from €28 million in 2011. The property valuation is conducted by an independent qualified architect based on the commercial value of the land and its location as well as on the lease contracts in hand.
Furthermore, the property value is also dependent on the discount rate applied. Given the prevailing low interest rate scenario, this would also have contributed to the increase. This also helped shareholders’ funds rise by 15.7 per cent to €23.79 million resulting in a net asset value of €0.842 per share, a key metric for property companies.
Plaza’s equity is the second best performer since the start of 2015 with a remarkable appreciation of 43.1 per cent to a new record share price of €0.93. Following the announcement by the European Central Bank of the quantitative easing programme and the resultant sharp decline in yields across the sovereign and corporate bond markets, local investors also turned a keen eye to equities in the search for yield. The reaction was immediate with a steady increase in the share prices of those companies offering an attractive yield given the low interest rate environment.
Notwithstanding the strong rally in Plaza’s share price, the dividend yield of Plaza, following the 12.6 per cent increase in dividends for 2014, still ranks among the highest across the local equity market. At 4.43 per cent gross (2.88 per cent net of tax), Plaza’s yield is still well above yields on Malta Government Stocks.
Plaza’s equity could therefore remain in the limelight especially in the coming weeks since the shares will continue trading ‘cum-dividend’ until close of trading on Thursday April 23.
Following divident payment , investors will remain attentive to Plaza’s announcements on occupancy levels as well as upcoming expansion plans, the latter being the major driver for future growth over and above the contracted increments in lease payments.
Edward Rizzo is a director at Rizzo, Farrugia & Co (Stockbrokers) Ltd.
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