Over the past two weeks, my articles have focused on bond market developments and the suggestion for investors to review all the financial information at their disposal to gauge the financial strength of a company in order to ensure its ability to honour its obligations.
Last week, I specifically highlighted the bond issuers ranking in the top quartile when taking the net debt to EBITDA multiple into consideration. The companies mentioned last week all had a net debt to EBITDA multiple of below three times.
Exalco Properties Ltd, as guarantor to the €15 million in bonds issued by Exalco Finance plc in 2018, did not place within the top quartile as its net debt to EBITDA multiple is expected to reach 3.1 times in 2024. Nonetheless, this is still a very comforting financial metric, and given the repeated debates about the health of the office rental market, it is worth looking into the financial performance of Exalco since the bond issue in 2018, especially in the light of the group’s upcoming plans to develop its seventh business centre.
At the time of the mid-2018 bond issue, Exalco owned five business centres. The bonds are secured by a first-ranking special hypothec over two of the properties (the Marina Business Centre and the Mayfair Business Centre) which had a combined value of €25.5 million at the time of the bond issue in mid-2018. This gives ample comfort to bondholders given the size of the bond issue of €15 million.
Moreover, it is worth noting that given the multiple developments that have taken place in recent years in the immediate vicinity of the Mayfair Business Centre in St Julian’s, the value of this property could be enhanced significantly should this be redeveloped or sold in future years.
Shortly after the bond issue, the guarantor acquired the ‘Phoenix’ building in Santa Venera. This property was immediately upgraded and this helped the guarantor achieve full occupancy on this property by September 2020.
The six business centres owned by Exalco currently have a total net lettable area of circa 15,700sqm, of which circa 3,600sqm is commercial space (18%), with the remainder being office space (82%).
The Marina Business Centre in Ta’ Xbiex (one of the properties secured in favour of bondholders) and the Golden Mile Business Centre in St Julian’s remain the largest revenue contributors of the guarantor. These two properties account for circa 41% of the guarantor’s total lettable area and contributed 59% of revenue in 2023.
Since the Golden Mile Business Centre remains fully occupied by one large gaming company and this property represents 29% of total revenue, Exalco continues to have an understandable concentration of its rental income from the gaming sector. Although all other properties accommodate a mix of tenants from various sectors, income from tenants within the gaming sector is just over 50%, compared to 63% at the time of the launch of the bond issue in 2018.
The lease agreements in place between the guarantor and its various tenants provide an initial definite term of rent and are subject to annual increments ranging between 2% and 3% of the rent payable in the previous year. Certain lease agreements also cater for the automatic renewal of the lease for a period ranging from one to three years.
Despite the onset of the pandemic and increasing levels of office space available for rent, Exalco saw its revenue rise from €3.8 million in 2018 to €5.3 million in 2023 as a result of the high occupancy levels over the past few years.
Exalco continues to have an understandable concentration of its rental income from the gaming sector
In the recent Financial Analysis Summary published last month providing projections for 2024, it was noted that all properties are expected to remain fully occupied during the current financial year, with the company’s tenant mix broadly unchanged; this will enable revenue to remain at these record levels.
The elevated occupancy levels resulted in EBITDA also rising from just under €3 million in 2018 to the €4 million mark in the past two years. This is expected to be maintained also in 2024.
The guarantor achieved a pre-tax profit of just over €2.8 million in each of the past two years compared to €1.8 million in 2018. The consistent performance over the years helped strengthen the financial metrics of the company.
In fact, the interest cover is anticipated to strengthen to above five times while the net debt-to-EBITDA multiple is forecast to improve to 3.1 times compared to a ratio of above six times at the time of the launch of the bond issue in 2018.
Over the years, the guarantor reduced its overall indebtedness in a material manner. Indeed, total debt contracted from €22.6 million in 2018 to just over €15 million as at December 31, 2023, solely composed of the bond issue due to mature in August 2028. The guarantor repaid all bank borrowings, providing it with ample financial capabilities to carry out future developments.
In fact, following the acquisition in January 2023 of the Savoy Hotel, the guarantor obtained Planning Authority approval to redevelop the building into a prestigious business centre last May.
In recent media reports, it was noted that preparatory works on this major project (the guarantor’s seventh business centre) will start in the final quarter of this year.
It is interesting that Exalco is steadfast in starting works in what the company described will be “an aesthetically pleasing and environmentally friendly building” at a time when several business centres in multiple localities have been built and various industry observers point to an excess supply of office space.
The company’s strategy in moving ahead with this major project is a clear sign of confidence in the long-term dynamics of the industry and the know-how gathered over the years. Exalco has proved it has a resilient and sound business model, which will enable it to be favourably viewed by the industry once it formalises its financing requirements for the upcoming business centre.
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