News Mercury Tower project ‘slightly delayed’ by COVID

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 abovementioned 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 sixmonth 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 internationallyrenowned 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.