Friday 29 Mar 2024
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This article first appeared in Capital, The Edge Malaysia Weekly, on November 14 - 20, 2016.

 

THE Employees Provident Fund (EPF) may abort the planned purchase of the 1.35 million sq ft Quill City Mall in Kuala Lumpur from the Quill Group of Companies as the retail asset has failed to fulfil the terms of the sales and purchase agreement.

The Edge understands that in the event the sale is scrapped, Quill Group will opt to retain the mall and refinance its debts.

”The Quill (City) Mall has not met the preconditions for the sale to proceed. Both parties are currently reviewing the position, which may include the termination of the transaction,” the EPF tells The Edge when asked about the status of its investment in the two-year-old mall in Jalan Sultan Ismail. However, it did not say which conditions have not been met.

To recap, in mid-2013, news broke that the provident fund was planning to invest in Quill City Mall. Many viewed the RM1.2 billion deal as a bailout of the financially stressed Quill Group. However, the EPF explained that deal was purely investment driven and had several conditions attached. The EPF would not have to make any payment until all the conditions were satisfied and the asset had achieved the pre-agreed yield.

One condition was the physical completion of the mall within three years, according to the specifications agreed on. The mall, with 800,000 sq ft of net lettable area, commenced operations in the fourth quarter of 2014. Another requirement set by the EPF was a minimum 70% occupancy at an agreed sustainable minimum commercial yield over the long term. As at December 2014, the occupancy level was at 74%, and has reached 80% today.

The EPF said the purchase price would only be determined after the mall opened for business and was subject to it achieving a pre-agreed revenue and profit target over several years. Neither party disclosed the exact specifications.

As for the RM1.2 billion price tag, the EPF said it was the maximum price payable and would only be made if all the performance targets were met within the agreed time frame.

Quill City Mall is part of what was once the 7.1-acre Vision City integrated development originally undertaken by RHB Daewoo Sdn Bhd. In 2007, Quill Group, via Quill Vision City Sdn Bhd, acquired the abandoned project for RM430 million with a view of reviving it. Quill Vision City is equally owned by Datuk Michael Ong and Datuk Dr Jennifer Low, who are group executive director and group managing director respectively. The duo helm the Quill Group of Companies.

Filings with the Companies Commission of Malaysia show that Quill Vision City’s wholly-owned Quill Retail Malls Sdn Bhd (QRMSB) — the owner and manager of the mall — posted RM35.75 million in revenue and incurred a net loss of RM32.41 million in the financial year ended Dec 31, 2015. Total borrowings as at December 2015 stood at RM936.42 million, of which RM53.36 million were current liabilities.

A source close to the management says while both parties continue to negotiate and review the transaction, “Quill has been preparing itself to retain the mall under its management should the sale to the EPF not materialise. They are in the process of implementing a refinancing exercise for the mall to better match its cash flow of the mall.”

In 2013, QRMSB issued bonds of up to RM700 million to redevelop the mall. Of this, RM570 million fall due in March 2017. RAM Rating, in a July 29 press release, says QRMSB’s credit profile was weighed down by its weak operating performance and highly leveraged balance sheet.

The rating agency adds that QRMSB’s shareholders intend to meet RM220 million of these obligations via a cash injection and the remaining RM350 million by way of fresh loan arrangements, noting that the plans to sell the mall had been under review even then.

RAM says RM150 million in cash had already been set aside for the redemption of the bonds. Danajamin Nasional Bhd, DBS Bank Ltd and United Overseas Bank Bhd provided guarantees of RM260 million, RM260 million and RM180 million respectively for the bonds.

RAM notes that as at December 2015, the occupancy rate at the mall was 78.4%. It registered a net operating income of RM15.6 million in a tough operating environment. This, RAM adds, was a weaker-than-expected monthly average rental rate of RM4.50 psf in the first year of operations. The performance was also weighed down by incentives provided for the tenants.

“A lengthy receivable cycle of 122 days (as at December 2015) amid poor business conditions had further constrained the company’s operating cash flow — RM650,000 FY2015 compared negative RM3.63 million in FY2014,” RAM comments.

According to the source, Quill City Mall, like any new shopping centre, needs at least five years to reach an optimal tenant mix and yield contribution.

“But mall valuations are tied mainly to asset yield. Given the prevailing softer retail market, one is unlikely to achieve its optimal value in an asset disposal scenario,” the source says, suggesting it is unlikely the mall will be sold soon.

It is noteworthy that Quill Group this year sold Quill 18 in Cyberjaya for RM450 million. It is understood that it has placed for sale another office block, Quill 6, Kuala Lumpur, for an estimated RM220 million.  The asset sales are perceived to be a move to ease its financial stress.

 

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