It was long rumoured within the business community that following the €36 million bond issue of PTL Holdings plc, the property subsidiary of the Hili Ventures Group would also be tapping the bond market.
Hili Properties plc, which was set up in October 2012 as the parent company of the property division of the Hili Ventures Group, issued a ‘formal notice’ yesterday confirming that it has launched a €37 million bond issue at a coupon of 4.5 per cent per annum. This is the first bond issue in many months which is on offer to the public at large since this year’s bond issues of International Hotel Investments plc, Mediterranean Investments Holding plc and 6pm Holdings plc were all targeted at existing bondholders or shareholders of the respective companies.
The Hili Ventures Group is involved in logistics and engineering, technology, property management, restaurant operations under the franchise of McDonald’s and retail operations in collaboration with Apple.
This is the third bond issue of the Hili Ventures Group following the €25 million 6.8 per cent Premier Capital plc 2017/20 bonds in 2010 and last year’s issue of €36 million by PTL Holdings plc at 5.1 per cent per annum. Following the €37 million issue of Hili Properties, the total outstanding bonds of the Hili Ventures Group would amount to €98 million – the third largest issuer behind the Corinthia Group and Bank of Valletta plc.
Hili Properties’ focus is to acquire commercial properties with high rates of occupancy, providing a steady stream of cash flow through rental income. Its current property portfolio comprises 24 properties located across Malta, Latvia, Lithuania and Estonia valued at €64.9 million.
The total rentable area (presently 46,900sqm) generates an annual rent of €4.8 million, representing a gross rental yield of 7.3 per cent per annum and the weighted average unexpired lease term is of eight years.
The diverse portfolio represents a mix of office spaces (40 per cent), retail outlets and shopping malls (32 per cent) as well as restaurants (25 per cent) spread across four jurisdictions: Malta (53.3 per cent of property value), Latvia (39.1 per cent), Lithuania (4.5 per cent) and Estonia (3.1 per cent). Latvia represents the lion’s share in terms of the total annual income (54.1 per cent) and rentable area (62.8 per cent). Meanwhile, the six properties located in Malta contribute 37.5 per cent of total annual income at an average yield of 5.2 per cent. The local property portfolio achieves the highest average rate of €151 per square metre.
Almost 42 per cent (equivalent to circa €2 million) of revenue is generated from Hili Ventures Group companies and other related parties. The largest property within the present portfolio is the Hili Building in Luqa with a total rentable area of 5,015sqm valued at €13.5 million (equivalent to €2,700 per sqm) generating annualised rent of €677,000 (gross yield of five per cent. This office block and warehousing facilities are leased to various Hili Ventures Group companies and other firms owned by the Hili family.
Meanwhile, the restaurant portfolio, which is almost entirely leased to Premier Capital plc (a sister company of Hili Properties), amounts to 14,675sqm. Premier Capital is the development licensee of McDonalds in Malta, Greece and the Baltic states. The other anchor tenants are supermarkets and convenience stores of chains well known in the Baltics and Northern Europe.
The total rentable area generates an annual rent of €4.8 million
The average occupancy rate of the current property portfolio as at August 2015 was 93 per cent. Only three properties are vacant. Hili Properties owns a property in Floriana which has a total rentable area of 900sqm. This property was originally used as the Hili Group’s head office for several years and the prospectus indicates that the company is in the process of concluding a lease agreement with a prospective tenant for an annual rental income of €70,000 per annum which translates into a rental yield of only four per cent per annum based on the valuation attributed to this property of €1.75 million. A rate of €77 per square metre is on the low side given the strong demand for office facilities in Malta.
However, the reason for this could be due to the fact that the property is in dire need of a major refurbishment. Likewise, another property in Sliema is only half occupied. This building, which is currently valued at €6.8 million, is partly leased to Premier Capital plc until 2023 for use as a McDonald’s restaurant while the overlying level is an office area comprising 520sqm which is still vacant.
The remaining vacant property is a restaurant in Latvia which was previously leased to Premier Capital plc until December 2013. Hili Properties estimates that it should achieve annualised rent of €42,000 per annum which is rather immaterial to the overall income stream of the group.
Hili Properties is currently in discussions to acquire commercial properties valued at circa €26.9 million. The new properties being earmarked will be funded partly by the bond issue proceeds of €10.7 million while the balance will be raised through additional bank funding. The potential new acquisitions include retail outlets in Romania and Greece as well as logistics centres and office facilities in Lithuania. The overall aim is to generate an average portfolio yield of about eight per cent per annum.
Furthermore, the group plans to dispose of the land situated in Bengħajsa between 2018 and 2020 at the latest and the proceeds will be used to invest in additional properties overseas.
Although the bonds are unsecured, which could sound odd to some investors given that this is a property company, the two guarantors (Hili Estates Ltd & Harbour (APM) Investments Ltd) which own the head office in Luqa and a large parcel of land in Bengħajsa valued at €25 million, have committed to collectively ensure that their aggregate net asset value will amount to not less than €37 million at the end of each financial reporting period (being June 30 and December 30 of each year). These properties will become unencumbered following the repayment of certain bank loans following the bond issue. Nonetheless, bank borrowings totalling €19.4 million after the bond issue will rank senior to these bonds.
Since a number of properties were acquired during the current financial year, the 2015 forecasts published in the prospectus do not provide a good overview of the financial performance of the company since the income generation of the properties acquired this year do not reflect a full 12-month period.
On the other hand, the financial analysis summary annexed to the prospectus provides the projections for 2016 which include a full-year contribution of the properties acquired in 2015 as well as anticipated contributions of new properties expected to be made in the coming months. The directors expect to generate €5.5 million in earnings before interest, tax, depreciation and amortisation (Ebitda) in 2016 up from the €3 million forecasted for 2015. The Ebitda projection for 2016 should translate into an interest cover of 1.8 times, which can be considered to be adequate but not as attractive as many other bonds listed on the Malta Stock Exchange.
Although the gross rental yield of the property portfolio is 7.3 per cent, the reason behind the interest cover not exceeding two times is the high level of gearing. The projections as at December 31, 2016, indicate a gearing ratio in excess of 70 per cent composed of equity of €30.4 million and net debt of €73.5 million.
Given the high gearing, further equity injections and/or property sales will eventually be necessary to enable Hili Properties to sustain its long-term strategy.
Following this bond issue, it is expected that other issuers will offer more fixed interest investment propositions in the coming months after a relatively weaker-than-expected flow of bond issues during the first half of 2015.
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