Ceiba Investments, the owner of Cuban commercial real estate, reported interim results today that saw net asset value fall 8.9% due largely to big valuation falls in its hotel properties.
The company is debt free and its four-strong hotel portfolio is capitalised to the tune of $40m, which is more than enough to comfortably see out the current COVID-19 disruptions.
Two of the group’s four hotels on the Caribbean island (Melia Varadero and Melia las Americas) have been closed for six months, while the other two (Melia Habana and Sol Palmeras) are operating at a skeleton capacity. The 79% decline in income (H1 2020: $2.2m vas H1 2019: $10.6m) and uncertainty over the immediate future has seen the hotels drop in value by $41.7m in the six months to 30 June 2020.
However, the group’s largest asset, an office scheme in Havana called the Miramar Trade Centre, recorded its best results ever in the six month period. Unlike in the UK and other countries across the world, working from home is almost impossible in Cuba due to relatively poor telecommunications infrastructure, so the office market has been less affected. Occupancy was at 98% and rental income grew in the six months by 4.3% to $7.2m and rent collection was at normal level, with only a very small number of concessions granted.
The Cuban economy has been hit hard by tough embargoes placed on it by US president Donald Trump, which has stopped US travel to the island and halted foreign direct investment into the country. With the US election just over a month away, a Joe Biden win is likely to see these embargoes eased to levels seen under the Obama administration (Biden was Obama’s vice-president and has intimated that the embargoes would be swiftly rolled back if he won).
Financial results
Ceiba’s NAV per share fell 8.9% from 114.5p at the end of 2019 to 104.3p on 30 June 2020. As mentioned earlier this was due to a big fall in the value of its portfolio of 13.84%, or $46.9m, in all. Despite the good operational performance of the Miramar Trade Centre, the asset fell in value by $5.4m due to a higher discount rate used in the calculation because of the investment uncertainty created by the pandemic as well as continued aggressive sanctions against Cuba adopted by the US.
The valuation deficit meant the company made a $29.4m loss in the six months. NAV total return for the period was -8.9%.
Other assets
Progress on the construction of the beachfront hotel near Trinidad being undertaken by TosCuba, in which the Ceiba has a 40% interest, has been delayed due to the pandemic. Ceiba is in negotiations to extend the capital expenditure programme and spread the disbursement schedule out over a longer timeframe. This would imply that the hotel would be completed and begin operations in Q4 2021. The company is in discussions with several parties to obtain €10m in funding to finalise construction, which it said it was confident of getting.
Manager’s comments
QuotedData spoke to Ceiba’s manager Sebastiaan Berger and he was in positive mood, despite the losses. He said the impact of COVID-19 and a Trump win in the election was more than priced in to its current share price (which is trading at a 38.2% discount to NAV). He said today represented “rock bottom” for the company and with events on the horizon, such as the US election and COVID-19 coming under control, the company’s NAV could materially improve in the coming years.
Cuba has one of the best COVID-19 infection rates in the world and has effectively minimised the spread of the infection on the island. International flights are only allowed in the north of the island with tourists using isolated hotels. Travel to Havana and Varadero (where Ceiba’s hotel assets are located) is not allowed, which has impacted Ceiba but in the long term the policy of minimising the spread of COVID on the island could see it become one of the first to open to international travel when the situation is brought under control.
The company has no leverage and is well capitalised to see out the current issues it faces with COVID-19 and economic sanctions on Cuba and has significant upside potential.
CBA : Ceiba “will survive COVID”, look out for Biden win