Commercial property companies in focus

In last week’s article I provided some details of the current takeover bid of Tigné Mall plc by the subsidiary of Hili Ventures Ltd, Marsamxett Properties Ltd.

Many minority shareholders are likely to accept the offer given the pricing dynamics and the very strong likelihood of miniscule trading activity that will likely take place in the shares of Tigné Mall plc following the conclusion of this current takeover in the event that the company remains listed on the Malta Stock Exchange.

With the offer price of €1.04 per share representing the highest share price in over 6 years and at a marginal discount to the company’s net asset value after taking into consideration the two recent dividends received by shareholders, several investors have questioned whether this takeover could be a catalyst for a re-rating of the shares of other commercial property companies, many of which are still trading at a steep discount to their net asset value.

Apart from the very weak investor sentiment that dominated the Maltese equity market over the past 5 years, the spike in interest rates across the eurozone and in other parts of the world between 2022 and the end of 2023 also negatively impacted the share prices of these commercial property companies that generally provide a stable rental income and a consistent dividend to shareholders. In a rising interest rate environment, this dividend would have become less attractive compared to bond yields from fixed-income securities that have been rising from the very low levels for a long number of years. Conversely, given the new monetary easing cycle we are now in with bond yields easing from their recent multi-year highs, equities offering consistent dividends will be looked upon more positively.

Among the commercial property companies whose shares are listed on the MSE, there are some owning a single asset similar to Tigné Mall plc (such as Plaza Centres plc and Main Street Complex plc) while others own a portfolio of real estate assets which make them more ideal candidates for investors who wish to maintain an exposure to the sector given the dynamics of ongoing rental income and regular dividend distributions.

Within the latter category, there are various companies namely AX Real Estate plc, Hili Properties plc, Malita Investments plc, Malta Properties Company plc, Trident Estates plc and VBL plc. However, these companies possess very different dynamics and are at different stages of maturity and therefore are not easily comparable.

AX Real Estate is the largest of these with a market capitalisation of just over €120 million and an investment property portfolio valued at around €300 million. The majority of the properties are hotels operated by the AX Group. The lease agreements also include a variable component based on the performance of the hotels which should positively affect the financial performance in the current financial year as a result of the surge in tourist arrivals. The other properties within AX Real Estate have diversified uses and are also primarily leased to AX Group. AX Real Estate also has a pipeline of other projects. The Verdala Wellness Hotel is expected to be operational by March 2025 while there is no timeline or funding plan as yet on the next phases of the sizeable Qawra development in close proximity to the recently enlarged AX ODYCY hotel which opened in May 2023.  The shares of AX Real Estate are currently trading at an eight per cent discount to their net asset value.

Hili Properties has a market capitalisation of just over €85 million. The investment property portfolio is composed of 22 income-generating properties valued at over €200 million and spread across Romania, Latvia, Lithuania, Estonia, and Malta having a total rentable area of over 115,000 sqm. The company has a more diversified portfolio of real estate both in terms of geographical as well as sectoral exposures. The properties comprise offices, restaurants, industrial buildings, retail centres, and a hospital. The company also owns a number of sites in Benghajsa in close proximity to the Malta Freeport.

The strategy of Hili Properties is to generate stable long-term cash flows through its property portfolio and the company does not typically engage in redevelopment activities. In contrast, Hili Properties seeks to dispose of assets that are deemed to have reached their maturity and seeks others that could enhance the overall portfolio in terms of risk-return dynamics. The shares of Hili Properties are currently trading at a 27 per cent discount to their net asset value.

Trident Estates has a market capitalisation of just over €47 million. The company was previously part of Simonds Farsons Cisk plc but was spun-off from its parent in 2019. Although it owns several properties across Malta, the vast majority of its revenue is currently generated by the Trident Park property in Mriehel having a book value of over €65 million. Over the past months, the company explained that contracted tenancy agreements within Trident Park now account for 83 per cent of the space available, which resulted in a sharp increase in revenue generation. In fact, revenue for the six-month period ended 31 July 2024 amounted to €2.51 million compared to €1.78 million in the same period last year, largely due to the impact of the higher occupancy at Trident Park. Another key property within the company’s portfolio is Trident House in Qormi having a book value of €18 million. This is expected to be vacated in 2026 and the company is currently considering enquires and expressions of interest for this property.  The shares of Trident Estates are currently trading at a 33 per cent discount to their net asset value.

Malta Properties has a market capitalisation of just over €33 million and it was also the result of a spin-off in 2015. The company, previously part of GO plc, currently owns 15 properties across the Maltese Islands having a book value of close to €90 million, which are mainly office buildings and telecommunication exchanges with additional storage facilities. In fact, the largest property is the Zejtun facility having a net leasable area of over 10,000 sqm and is leased to GO plc to house their main offices and also offers industrial storage space. Malta Properties is currently working on an extension of the Exchange Property in Spencer Hill, Marsa which has already been leased out and seeking tenants for properties which will become vacant in the latter part of this year, namely, the GO Head Offices in Marsa and the HSBC call centre in Swatar. The shares of Malta Properties are currently trading at a 40 per cent discount to their net asset value.

Through the passage of time, the investing community may fail to appreciate the extent of the downturn in share prices over the past few years and how the weak sentiment continues to translate into evident pricing anomalies across a number of companies.

M&A activity can prove to be a good catalyst for improved investor sentiment among the Maltese community which has been at very low levels since the pandemic. The recent surprising news of potential consolidation across the banking sector is dominating the media and also most conversations across business circles. The renewed M&A activity in Malta in the property and banking sectors is likely to maintain an elevated level of attention on developments across the Maltese capital market.

Read more of Mr Rizzo’s insights at Rizzo Farrugia (Stockbrokers).

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