Prepared by Rizzo, Farrugia & Co. (Stockbrokers) Ltd, in compliance with the Listing Policies issued by the Malta Financial Services Authority
The Issuer
Tumas Investments plc is a public limited liability company incorporated in Malta on 17 November 2000 to act as the financing arm of Spinola Development Company Ltd. Given the company’s nature of activities, that is, raising finance for on-lending to SDC, there is an inherent dependence on SDC’s cash flows and operations.
Since 2000, the Issuer has tapped the local bond market six times. The first four bonds, issued in 2000, 2002, 2009 and 2010 respectively, have to date been redeemed.
Meanwhile, the Issuer has today, two outstanding bonds, namely the €25m 5% bonds maturing in 2024 and the €25m 3.75% bonds maturing in 2027.
The Guarantor
SDC was set up as a limited liability company in Malta on 10 May 1966 and was acquired by the Tumas Group in 1986 through Spinola Investments Limited. The business of SDC has, to date, comprised primarily of the development, management and operation of the Portomaso Complex situated in St Julian’s.
SDC owns three subsidiaries, namely Portomaso Leasing Company Limited, Halland Developments Company Limited and Premium Real Estate Investments Limited, all of which are incorporated in Malta.
In 1994, the then Malta Hilton Hotel was completely demolished, making way for the development of the Portomaso Complex. The land title was acquired by SDC from the Government of Malta and today the Guarantor benefits from freehold title of the site.
For the purpose of management and administration of Portomaso, in 2004 SDC set up PLCL to focus primarily on the leasing of long-term commercial and office components of the Complex.
In 2009, HDCL was set up with the main objective being that of acquiring the freehold title of the Halland site and the adjoining land from St Andrews Hotels Limited – a sister company within the Tumas Group. This company is now in the process of developing the site.
PREIL was incorporated in 2011 with the principal objective of acquiring property for investment purposes. The only major transaction that this company has entered into since its formation was that related to the acquisition of the dominium directum on a portion of Portomaso properties from SDC in 2012.
PREIL is 99% owned by SDC, with the remaining 1% held by Spinola Investments Limited.
Group Structure
Both TI and SDC are wholly-owned subsidiaries of Tumas Group Company Limited – one of the largest and most diversified private business groups in Malta. The Group, which is ultimately owned by members of the Fenech family, is primarily active in property development and leasing, hospitality, leisure and gaming and energy.
Update on operations and major assets
The Issuer
As the financing arm of SDC, the Issuer’s operations are inherently limited to that of raising finance for capital projects and advancing such funds to SDC. The borrowings of the Issuer are on-lent to SDC and are regulated through loan agreements that mirror the characteristics of the borrowings taken by TI plus an additional interest margin intended to cover the costs of the company.
Major Assets
Issuer
The assets of the Issuer are predominantly made up of the loans receivable from SDC, which altogether amount to over 90% of the Issuer’s asset base.
The Guarantor
The principal activities of the Guarantor have to date been the development and operation of the Portomaso Complex and adjacent areas situated in St Julian’s. The Complex includes the Hilton Malta hotel and its convention centre, the Portomaso Business Tower, other office units, residential apartments, a marina, a car park and a number of commercial and catering outlets.
The Complex was launched by SDC in 1996 and to-date remains one of the largest, single private real estate developments undertaken in the Maltese Islands.
The Complex also enjoys a Special Designated Area status which allows both EU and non-EU nationals to purchase property within such area on the same acquisition rights as Maltese citizens without having to obtain an Acquisition of Immovable Property permit which typically applies to other non-SDA areas.
The operations of SDC are divided into four segments: A. The hotel and its ancillary operations; B. Property development; C. Rental operations and D. Complex management operations.
Major Assets
Guarantor
The below are considered to be the major assets of the Guarantor.
- The Hotel and its ancillary operations
This segment comprises the Hilton Malta, the conference centre and ancillary operations including the underground car park, the marina and Twenty-Two Club Bar (a wine lounge on the 22nd floor of the Portomaso Business Tower). As at the end of FY2019, the Guarantor’s property, plant and equipment (PPE) had a carrying value of €162.2m. The last revaluation exercise relating to the Group’s PPE was carried out in FY2018, with PPE valued at €165.6m at the end of the said financial year (net of depreciation charges).
I) Hilton Malta – The Hilton Malta is a five-star 413-room hotel, with modern conference facilities, a health centre, themed restaurants, a large indoor pool and a number of outside pools and beach clubs. SDC has an operating agreement with Hilton International for the operation of the hotel under the Hilton brand, whereby Hilton International markets and manages the hotel and its adjacent conference centre as an integral part of its worldwide chain. This agreement, which had an initial term of 15 years, was renewed for a further 20 years in 2013, effective from 1 January 2012.
The hotel underwent an extensive refurbishment, which commenced in 2014 and reached its peak in early 2016 when the hotel was closed for a consecutive period of 10 weeks between February and April 2016. The final phases of the refurbishment, which include an upgrade of the 2008 extension hotel rooms, the presidential suite, the Business Centre and spa and wellness areas operated by Livingwell, all of which were concluded in 2019.
II) Portomaso Car Park – SDC operates underground public car parking facilities of circa 1,175 car spaces (excluded those sold for private use) with residents and tenants of the Business Tower having reserved areas for their exclusive use. This structure is ancillary to the hotel and contributes to this segment’s returns albeit to a much smaller scale.
III) Portomaso Marina – The Portomaso marina has been in operation since 1999 and has a total capacity of approximately 130 berths. It offers a number of ancillary services to its tenants including mooring assistance which is constantly provided on the quayside; security around the whole perimeter; water and electricity facilities and pump out facilities for waste-water and used oil.
IV) Twenty-Two Club Bar – Twenty-Two Club Bar is a lounge located on the 22nd floor of the Portomaso Business Tower. It opened its doors during the summer of 2006, providing evening entertainment attracting an exclusive customer base. This club is currently closed in terms of the restrictions imposed on bars and clubs by the Health Authorities with respect to the COVID-19 pandemic.
- Property Development
SDC has to date completed the development of circa 490 apartments within the Portomaso Complex including the Laguna units. In the past few years, the Guarantor undertook the following property development projects:
– The Guarantor undertook the construction of 44 premium residential units referred to as the Laguna apartments. During FY2018, the Guarantor delivered 40 of the Laguna apartments to their new owners and as at the end of FY2019 had three apartments left unsold.
– Construction of the Crystal Ship – the building adjacent to the Portomaso Business Tower – finished in FY2018, and the delivery of the said tower was spread over FY2018, FY2019 and FY2020, as the Guarantor completed the finishing works in line with its obligations as per agreement with the purchaser.
New Developments
During FY2018, the Guarantor obtained Planning Authority permit to develop the parcel of land previously occupied by the aparthotel known as the Halland. SDC commenced excavation works during the last quarter of FY2019, while construction is expected to commence in 2021.
The Guarantor has two sites that will complement the Portomaso Complex. A block consisting of 13 residential units and underlying commercial outlets (referred to as Block 32) is expected to be completed during FY2020 and will be placed on the market towards the end of this year for conclusion during FY2021.
The Guarantor has also a property annexed to the Portomaso Complex which it plans to develop in later periods.
C. Rental Operations
SDC, through its subsidiary PLCL, leases out areas within the Business Tower (circa 3,313 square metres) and other commercial and office areas within the Complex (circa 11,300 square metres). At present, practically the entire area within the Portomaso Complex is leased out.
D. Complex Management Operations
SDC has retained responsibility for the management and administration of the Portomaso Complex, including, the maintenance, cleaning, security and utilities within the common areas of the project and within each block of apartments, and across the exterior landscaping that characterises the whole of the Complex. SDC apportions the expenses incurred in the management of the Complex and recharges the relative costs to the residential owners / tenants, Portomaso-related operating units and the offices and commercial areas. Moreover, SDC receives a management fee as remuneration for its services towards this activity from the various occupants within the Portomaso Complex. The Guarantor has unilaterally taken up on itself the responsibility to participate in the cost of upgrading certain Complex infrastructure by injecting the necessary capital funding to meet particular targeted initiatives.
Material Contracts
– The Guarantor
The following are considered to be material contracts that the Guarantor has in place:
- Hotel Management Agreement With Hilton International
As mentioned earlier, SDC has a management agreement with Hilton International, the latter being responsible for the marketing and management of the hotel, as well as the adjacent conference centre, under the world-renowned Hilton brand. The operating agreement is based on standard industry norms and provides for a remuneration package that is based on performance. This agreement, which had an initial term of 15 years, was renewed for a further 20 years in 2013, effective from 1 January 2012.
- Lease Agreements
In the main, SDC’s lease agreements with office and commercial tenants have a term of between one and five years. The lease agreements provide for renewal terms and periodic inflationary increments. As lease contracts approach closer to the end of their di fermo period, the value of the minimum lease payments starts decreasing.
- Capital Commitments & Contingencies
The Guarantor is party to commitments of a capital nature in relation to contracted or upcoming works. As at 31 December 2019, the value of these commitments was €4.7m.
These commitments relate to the finishing works in respect of the building adjacent to the Portomaso Tower (known as the Crystal Ship), works at a Laguna apartment and other projects. In addition to the guarantees given to TI, SDC has also guarantees issued on behalf of other fellow companies within the Tumas Group which at the end of FY2019 amounted to €67.1m.
- Other agreements with the Tumas Group
Until FY2018, SDC served as the treasury function of the Tumas Group, however, since the inter-company balances have been wound down, this role has now been shifted to other fellow companies within the Tumas Group. Nevertheless, SDC continues to provide corporate guarantees (including hypothecs over its assets) in favour of fellow Group companies and / or subsidiaries (as mentioned above). These guarantees fall within the parameters established and as permitted in the prospectuses governing the bonds in issue.
V. Market overview of the Property Market
The construction and real estate industry has traditionally been a key driver of growth for the local economy. Moreover, the positive correlation between the performances of the local economy and the construction and real estate industry has been particularly evident in recent years. These have been mainly fuelled by favourable local and external macroeconomic dynamics as well as various initiatives (including fiscal incentives) by the Government of Malta aimed at boosting the overall level of public and private investment, regenerate business/retail and consumer confidence and increase the participation and relocation of numerous foreigners and foreign companies opting to reside and do business in Malta.
The most recent data, issued by the Central Bank of Malta, shows that property prices in Malta increased by 6% in 2019 over the previous year. This led the CBM Property Price Index, which tracks movements in the advertised prices of the major types of residential property, to reach a new all-time high of 298.7 points as at the end of 2019 compared to 281.1 points as at the end of 2018.
The CBM Property Price Index also shows that property prices in Malta have increased by a compound average growth rate of 5.6% per annum (in nominal terms) since 2000. The most recent upturn in property prices in Malta was mainly demand-driven. In fact, although statistics show that the number of permits for residential units issued by the Planning Authority eased slightly for the first time in five years, this was still the second highest amount of planning permits for new dwellings ever issued.
During 2019, the Planning Authority sanctioned the development of 12,485 units, slightly lower than the 12,885 permits issued in 2018 but significantly higher than the 9,006 permits issued in 2017. The slight decline in 2019 was due to a decline in permits for apartments (the largest category of residential units), while maisonettes and terraced houses both experienced increases.
Commercial Property
Although commercial property is a very important niche of the local property market, available statistics are indeed limited. Nonetheless, empirical evidence suggests healthy and buoyant demand, particularly for high quality office space in line with the increase in the number of foreign companies operating in Malta. Indeed, with the constant influx of foreigners seeking to set up, transfer or expand their business locally, the demand for office space has increased considerably in recent years, mainly driven by government’s efforts at promoting Malta as a prime international business destination particularly for entities operating in financial services, i-gaming, information technology, aircraft maintenance and maritime.
Other factors that contributed towards this success are an advanced telecommunications network, highly skilled professionals at competitive labour costs, Malta’s strategic location and the implementation of laws in line with EU laws and directives.
Economic Results
Property remains an important contributor to the country’s GDP. The improved activity and sentiment across the local property market also reflected in the contribution of this sector to Malta’s GDP. In fact, gross value added of the construction sector increased by over 14% to €447m in 2019 compared to €393m in the previous year.
Over the same period, the percentage share of the construction sector to Malta’s GDP grew as the construction sector grew at a faster pace than other sectors within the local economy. Similarly, during 2019 strong growth was also registered within the real estate activities segment which grew at a rate of 7% to €552m from €514m in 2018.
COVID-19 impact on the property sector
The COVID-19 pandemic has impacted the residential rental market in Malta in a number of ways. Firstly, the demand side from incoming tourism has ceased following the temporary closure of Malta International Airport and the lasting effect on tourism worldwide. Secondly, a substantial number of third-country nationals have been made redundant and have since been repatriated to their home countries and in doing so increasing the number of vacant residential properties.
Finally, the strong supply of new properties on the market has also put downward pressure on rental prices. Altogether, this has encouraged short-let property owners to consider renting their properties on a long-let basis at considerably discounted rates when compared to pre COVID-19 times, although to date, it is not evident that properties within the Portomaso Complex were impacted to that same extent as properties located elsewhere.
The weakened demand has also forced some property owners to sell their properties at discounted rates in order to meet debt obligations with credit institutions. In cognisance of the importance of the property sector to the Maltese economy, the Government of Malta has so far introduced a number of fiscal measures within this segment including reducing the stamp duty for buyers and withholding tax for sellers which applies to anyone still under a promise of sale agreement and will cover the first €400,000 for deeds published until March 2021. For buyers, the stamp duty was dropped from 5% to 1.5%, while the withholding tax for sellers was dropped from 10% / 8%, as applicable, to 5%.
Moreover, going forward, owners of small property portions and garages will be eligible as first-time buyers. Furthermore, the Government of Malta has directed credit and financial institutions to offer a six-month moratorium on repayment of capital and interest aimed to support economically vulnerable persons who have been materially affected by the COVID-19 outbreak.
Another incentive recently issued by government to support the property market was the launch of a loan scheme for property buyers between the ages of 21 to 39 who do not have enough liquidity available to fund the 10% deposit.
The Tourism Industry
Tourism has traditionally been one of the major pillars of the Maltese economy. Moreover, the importance of the tourism industry to the local economy became more apparent in recent years as tourism numbers grew significantly while various tourist operators (including those in the areas of accommodation, dining, transportation and entertainment) expanded their business to cater for the increased numbers and/or target the higher end of the tourism spectrum.
Statistics published by the Malta Tourism Authority (based on figures compiled by the Malta National Statistics Office) show that during 2019, total inbound visitors amounted to 2.77 million (excluding overnight cruise passengers), representing an increase of 5.2% over 2018. Furthermore, the total number of guest nights increased by 4.1% to 19.3 million while tourist expenditure grew by 5.7% to €2.2bn.
Moreover, the majority of total inbound tourists came from the UK (24%), followed by Italy (14%), France (9%), and Germany (8%). Expenditure has also increased and interestingly, the chart below indicates that the growth pattern has been extending over all quarters throughout the year increasingly making the country a year-round destination. Source: NSO
The increase in tourism numbers in 2019 was mainly driven by the increase in the number of leisure tourists which accounted for 81.3% of total tourist arrivals in 2019.
On the other hand, the number of business, professional and other travellers (including educational, religious and health) was marginally lower when compared to 2018 figures. With respect to the type of preferred accommodation, the NSO statistics indicate that the total number of nights stayed in private rented accommodation (self-catering apartments, farmhouses and private residence) recorded the strongest increase with a jump of just over 9%.
On the other hand, nights spent in collective accommodation (mainly hotels, guest hotels and hostels) fell by 4%. Overall, the share of collective accommodation as a percentage of total guest nights continued to ease to 52.1% in 2019 from 54.3% in the previous year.
In contrast, the share of private accommodation surged to 48% from 45.7% in 2018. The determining factors that contributed mostly to the overall growth in tourism numbers over the past years have been Malta’s accession to the European Union in 2004 and the ensuing adoption of the euro as Malta’s currency in 2008, as well as the introduction of low-cost airlines in 2006.
Another factor that contributed notably towards the development of the Maltese tourism industry in recent years has been the increased focus to market Malta as a destination that is also ideal for business and conferences. Over the past few years, the country has increased its efforts to mitigate seasonality and boost the overall significance of the tourism shoulder months (traditionally November to March). In fact, although tourism to Malta remains concentrated during the peak months, the shoulder months have, until 2019, represented an increasingly important contributor to the performance of the tourism sector in general.
Impact of COVID-19 on the Tourism Sector
When in March Malta’s ports (both air and sea ports) were put under heavy restrictive measures because of COVID-19, tourism came to a halt. Malta was only allowing essential travel in and out of the country and as such, leisure and business tourists could no longer travel to and from Malta. Business was being conducted over digital means and conferences were cancelled as mass gatherings were not allowed. Furthermore, restaurants and bars were not allowed to operate for a period of three months.
This resulted in a sharp drop in the demand for accommodation, F&B and conferencing facilities across all the operators in the said segments. In late June, most of the restrictions were lifted and demand, particularly for hotel accommodation and F&B somewhat rebounded as locals were not too keen on travelling overseas, and further supported by a government scheme whereby every Maltese resident received €100 worth of vouchers which could be spent at outlets that were mostly impacted by COVID-19.
Furthermore, as ports started re-opening, particularly the airport with flights to selected destinations, Malta has had an encouraging level of incoming tourists visiting the islands, which however declined late in August following new restrictive measures introduced by countries such as the UK and Italy on returning / incoming passengers.
As such, the level of tourist arrivals is nowhere comparable to that experienced in earlier years.
VI. Company’s Financial Review & Forecasts
All figures referred to in this section of the report have been extracted from the audited financial statements of the Issuer for the respective years and supported by management information as necessary, with the exception of ratios which have been calculated by Rizzo, Farrugia & Co. (Stockbrokers) Limited.
The limited scope of the company, acting as the financing vehicle of the Guarantor, is reflected in the composition of its income statement. Over the years, the Issuer on-lent funds that it borrowed from the capital markets to the Guarantor, making a margin on the rate to cover its administrative expenses.
Finance income for FY2019 was in line with that of FY2018 (these figures are not comparable to the FY2017 finance income since the latter included the interest effect of a bond issue which was priced at 6.2% and which was refinanced in mid-2017 at 3.75%).
Administrative expenses incurred by the Issuer in FY2019 amounted to €126K and related to listing and compliance costs, and directors’ remuneration.
The FY2020 forecasts of the company, as prepared by management, indicate that TI’s profitability figure for the year is expected to remain largely unchanged.