Mercury Tower project ‘slightly delayed by COVID

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The Mercury Projects Finance Group of companies consists of the Issuer, the Guarantor and Mercury Car Park Limited.

The Issuer, Mercury Projects Finance plc, is a limited liability company registered in Malta on 16 January 2019. The Issuer is, except for one share that is held by Joseph Portelli, a wholly-owned subsidiary of the Guarantor, which latter entity is the parent company of the Group.

The Issuer, which was set up and established to act as a finance vehicle, has as at the date hereof an authorised share capital of €500,000 divided into 500,000 ordinary shares of €1 each and has an issued share capital of €250,000 divided into 250,000 ordinary shares of €1 each, all fully paid up.

The Guarantor, Mercury Towers Ltd, is a private limited liability company incorporated and registered in Malta on 28 September 2016. The Guarantor, which is the parent company of the Group, owns land in the heart of St Julian’s measuring c. 7,702 sq.m., which it acquired on a freehold title over two stages, in December 2016 and June 2017 respectively.

The land is currently being developed into a mixed use development project comprising, among others, a tower (incl. apartments), a boutique hotel, retail and commercial activity, as well as an underlying car park.

The authorised and issued share capital of the Guarantor is €500,000 divided into 500,000 ordinary shares having a nominal value of €1 each. The sole shareholder of the Guarantor is Joseph Portelli.

Mercury Car Park Limited in which the Group holds a 25% equity interest (equivalent to a €1,500 investment), owns and will operate the car park, which is part of the project and will give access to over 400 parking spaces situated on levels -3 to -6 of the property.

Major assets owned by the Group

The Issuer does not have any substantial assets other than the loans receivable from the Guarantor since it is essentially a special purpose vehicle set up to act as a financing company.

The Group is currently principally involved in the real estate sector, with a view of entering the hospitality and leisure sector in the near future by operating the areas to be retained by the Guarantor.

The Guarantor owns land in the heart of St Julian’s measuring c. 7,702 sq.m., which it acquired on a freehold title over two stages, in December 2016 and June 2017 respectively. The land is currently being developed into a mixed use development Project comprising, amongst others, a tower (incl. apartments), a boutique hotel, retail and commercial activity, as well as an underlying car park.

In February 2018, the Planning Authority approved the Group’s plans for the above-mentioned development and issued a development permit for the project.

Mercury Car Park Limited owns and will operate the car park, which is part of the project and will give access to over 400 parking spaces situated on levels -3 to -6 of the property.

The major asset of the Group is the underlying land on which the project is being constructed. The land, the constructed portion of the project and the airspace has been classified as “property” and “investment property” in the audited financials. In FY19, the property represents the value of the land and the constructed portion of the project to be retained by the Group and held for operations, while the value of the airspace of units to be held by the Group as an investment has been classified as investment property.

The Group was set up in view and for the purposes of, and will principally operate by reference to, the Project. The Group has a limited operational history and is of recent origin, with the longest existing member of the Group being the Guarantor, set up in 2016.

Albeit, the ultimate beneficial owner of the Group, Joseph Portelli has a long trading history in the acquisition, development, management and operation of real estate developments including hotels, residential, office and retail property and entertainment projects and outlets.

The most recent developments of the Group are described hereunder:

Impact of COVID-19 on the Group’s business

The Group has been closely monitoring the developments ensuing from the outbreak of the COVID-19 pandemic and the impact on both the local and global economy, with specific reference to the real estate industry. The pandemic, which is a rapidly evolving situation, has adversely impacted global and local commercial activities. Even at this time, when the outbreak appears to have subsided, the current situation precludes any prediction of its ultimate impact, which may have a continued adverse impact on economic and market conditions and trigger a period of global and local economic slowdown.

However, to date, the Group has continued to operate without disruptions, even during the more challenging months of the pandemic. Construction has been limitedly impacted, if at all, and at this point in time, given that the government relaxed the strict COVID-19 related restrictions experienced during the first half of the year, management is confident that the Group can continue to manage the situation without any significant impact.

The Group will continue monitoring developments in relation to the COVID-19 pandemic and is coordinating its operation response based on its business continuity plan and on guidance from health organisations, government and general pandemic response best practices. Management is confident that, notwithstanding the current circumstances, the Group will be able to operate through the prevalent market conditions.

Notwithstanding the above, it is worth noting that currently certain works are being negatively impacted by restrictions on the availability of an imported skilled workforce for specialised work. This may result in the Group experiencing a delay in terms of the project’s completion date but management is confident that the Group can continue to manage the situation without any significant impact.

FY20 Projections

The Group has prepared forecasts to measure the impact of COVID-19 on the Group’s operations. The projections were prepared on the basis of a number of assumptions, which was deemed by management to be as realistic in view of the information and data currently in hand. The salient assumptions on which the projections have been prepared are illustrated below:

•           The Group will sell 134 apartments during FY20, which when combined with the units sold during FY19 (106), amounts to 240 apartments by end of year. The units expected to be sold during FY20 are contracts entered into already or will be entered into by end of 2020;

•           The Group expects the remaining 27 apartments to be sold during FY21. It is worth noting that some of these units are already under promise of sale, however, management opted for a conservative approach and excluded such units in the forecasts for FY20;

•           Management expects cost of sales to be in line with prior projections and these will vary depending on the number of units sold;

•           Given that currently the Group is predominantly focused on real estate development, administrative expenses are not material and are forecasted to remain in line with prior projections;

•           The Group enjoys a number of bank relationships which can provide bridge financing from time to time that can supplement the funding from the Bonds and provide the necessary short-term liquidity;

•           In October 2019, the Guarantor obtained a bridge loan of €10m, which was revolved in July 2020;

•           Despite the current economic downturn caused by the pandemic, management does not anticipate the need of further financing, however, should the need arise, management confirmed they have in place the necessary banking facilities.

The Issuer has settled its first bond coupon which was due by the end of the first quarter of 2020. Additionally, the forecasts prepared by the Group indicate that sufficient cash will be generated throughout this financial year and the Group should be in a position to meet its financial commitments, including the next bond interest due on 27 March 2021. The Group’s forecasts for FY20 capture the actual trading results for the six-month period (1 January to 30 June) and the financial projections for the remaining six-month period (1 July to 31 December).

Mercury Project

As described above the Mercury site was acquired in two stages, for the total price of €24.3m. The first acquisition in December 2016 was made for the total price of €17.4m and was mainly financed through the deposits received by the Guarantor on the preliminary agreements for the sale of airspaces for development of apartments within the Tower.

The second acquisition was made on June 2017 for the price of €6.8m, excluding the interest accrued on the payments due between the first and second deed amounting to €305,385, which were financed through a bank loan advanced to the Guarantor.

In accordance with the bond’s prospectus, this loan was refinanced from the bond’s net proceeds, with the remaining proceeds amounting to circa €16.4m utilised for the construction and finishing of project elements owned by the Guarantor.

The project is designed by internationally-renowned architectural firm Zaha Hadid Architects and is one of the final projects signed off by Zaha Hadid herself. The project was awarded full development permit by the Malta Planning Authority on 7 February 2018 – Ref: Planning Authority Permit PA 06955/17.

The finished complex will include a mix of historical and ultra-modern edifices on its site. At its heart is a 19th century heritage building, also known as Mercury House, which will be flanked by a 31-storey tower as well as two underground storeys with a boutique hotel situated in its podium and in parts of the said tower, and will also be serviced by an underlying four-storey car parking facility.

The construction of the project was limitedly interrupted by the COVID-19 outbreak. Management explained that the majority of workers continued to work during the local partial lockdown, except for a few workers who could not work either due to health restrictions or partial lockdowns imposed by government.

In fact, the Mercury Tower is now almost built in shell form, with the commencement of finishing works in Mercury House and in the lower levels of the tower. The cladding of the tower, which was contracted to a Turkish company, has now commenced after experiencing some delays. These interruptions were a result of the travel restrictions imposed by government to contain the outbreak, which led to the delay of the workers’ arrival.

To date, only a fraction of the fitters are currently on-site and started working on the cladding installation. Consequently, the opening date of the project is expected to be impacted by these developments. It is too early to assess the length of the delay and the Group will be in a better position to assess the situation during the last quarter of this year.

However, the project may also be affected if local and overseas suppliers and contractors would not be in a position to provide the material and personnel when due.

Apart from the minor interruptions caused by the pandemic, the construction of the tower was interrupted due to some delays in the construction of the section where the tower twists on itself. However, as noted above this has been completed and the tower is now built in shell.

The following are the main features of the project:

•           Tower

As noted above, the tower is now going to be spread over 31-storeys above ground level and six storeys underground, four of which are designated as parking spaces. The gross floor area of the tower (excluding parking spaces) is of 19,754 square metres.

The tower will consist of 279 branded serviced apartments (an increase of four apartments due to the redesign of the gym to other areas), the majority of which are intended for sale to third parties (267 apartments), with the remaining 12 apartments intended to be retained by the Guarantor.

As at the date of this Analysis, only 23 units are still available for sale out of the 267 apartments, with eight of these units currently put on hold for interested clients. The Group plans to convert the above mentioned 12 units into a lesser number of apartments, which will be much larger in size.

The Guarantor will predominantly retain these apartments at the uppermost level, which is intended to be used as part of the hotel accommodation pooling arrangement explained below, and levels 10 to 12 and -2 to 2 thereof, which are allocated to be used as an integral part of the hotel and its amenities.

The owners of the apartments will have the choice to either keep such apartments for their personal purposes (including rental in their personal capacity), or else to pool these as part of an extended five-star serviced accommodation for the hotel users. The latter will also be operated as part of the hotel, with these being let to the Guarantor for pre-agreed periods under a pre-agreed rental consideration arrangement.

As described above, the Group is the sole owner of the land on which the tower is being built. The construction, development and finishing of the apartments, as per the prospectus dated 4 March 2019, is being performed by Mercury Contracting Projects Limited, a related party to the Group. In this respect, potential owners seeking to purchase units shall initially enter into a promise of sale agreement with the Guarantor for the sale of the airspace in relation to a particular unit within the tower. The final deed of sale for the airspace will be entered into as soon as the construction of the underlying floor has been completed for units sold as airspace, following which the purchaser shall concurrently enter into a Contract of Works with MCPL for the development and finishing of the said units.

•           Hotel

Another major element of the project will be a five-star branded hotel, consisting of a 52-room stand-alone building at the podium of the tower and connected and joined to such tower, and extending into levels -2 to 2 and 10 to 12 of the said tower.

Its accommodation capacity will extend by virtue of the serviced apartments whose owners sign up to the hotel accommodation pooling arrangement mentioned above. The hotel will be owned and operated by the Guarantor which has entered into a hotel management agreement dated 14 August 2018 with the internationally-renowned hotel chain Meliá, in particular with Meliá Hotels International S.A. (as Manager) and Prodigios Interactivos S.A. (as Provider), in respect of the hotel and its facilities. The Group is currently in discussions with Meliá with respect to timelines and expected dates of opening. It is expected that the serviced apartments in the tower will be finished next year. As stated above, the Group is still assessing the extent of the delay brought about by COVID-19.

•           Commercial outlets

The project will also comprise a mix of retail and catering outlets, situated across the open large piazza onto which the tower and the hotel will abut. It is currently planned that the commercial outlets will consist of nine shops with a total floor area exceeding 1,120 square metres and four catering establishments with a total floor area exceeding 1,500 square metres, although such plans may change from time to time by joining or further splitting such elements or otherwise.

•           Open areas and amenities

The buildings will be located around several open and landscaped areas, including piazzas, which will occupy approximately half of the total floor area. Moreover, the entire complex will sit on and be serviced by a four-storey underground car park with over 400 parking spaces, which are generally meant for use by owners and users of the various components of the project and the public. As noted earlier, the car park will be owned and operated by a company in which the Guarantor has 25% ownership.

 ·         Phase II

Mercury Project Phase I of Mercury Project will be complemented by Phase II. Phase II will consist of a nine-storey block, linked to the existing tower via the podium. The project will consist of a re-design of the hotel which will now include 130 rooms, further commercial spaces and other units which will be sold to third parties. Permits (Permit no: PA1892/19) have been applied for and are currently undertaking the process for approval.

Additionally, should these permits be approved, the main tower will increase by an additional eight metres, which will host an amenity floor at level 32 and a bar and swimming pools at roof level.

The Group is currently discussing the financing options for this development and management will keep the market informed of any material developments, as appropriate.