EPF scraps plan to buy Quill City Mall

THE Employees Provident Fund (EPF) has scrapped its plan to buy Quill City Mall in Jalan Sultan Ismail, Kuala Lumpur, from the Quill Group of Companies as the shopping centre has not met the preconditions stated in the sales and purchase agreement (SPA). Hence, both parties are in the midst of terminating the transaction.

This decision has put to rest talk that the two parties may be renegotiating a deal with new terms. Last November, The Edge reported that the EPF and Quill Group were reviewing their agreement as the mall had failed to satisfy the terms of the deal. At the time, the EPF had indicated that its decision might include the termination of the transaction.

When contacted, the EPF tells The Edge: “The EPF is in the process of finalising the terms of the termination, which is expected to be completed soon.”

It is learnt that as part of the termination of the agreement, there may be a compensation or fee, which is part of the arrangement between the parties. However, neither the EPF nor Quill Group addressed this query.

Quill City Mall, a 1.35 million sq ft shopping centre with a net lettable area (NLA) of 800,000 sq ft, is owned by Quill Retail Malls Sdn Bhd (QRMSB). It is located within the 7.1-acre Quill City, which is equally owned by Datuk Michael Ong and Datuk Jennifer Low.

Previously known as Vision City, Quill City is an integrated development originally undertaken by RHB Daewoo Sdn Bhd and subsequently abandoned. In 2007, Quill Group bought the asset for RM430 million. Ong is Quill Group’s group executive director while Low is group managing director.

In mid-2013, it was reported that the EPF was planning to invest as much as RM1.2 billion in Quill City Mall, at a time when retail malls were mushrooming everywhere. Many viewed the deal by the provident fund as a bailout of the financially stressed Quill Group. However, the EPF said it was investment-driven with several conditions attached and that it would not have to make any payment until all the conditions were satisfied.

Among the conditions made public was the requirement for the physical completion of the mall within three years and according to specifications agreed on. The mall commenced operations in the fourth quarter of 2014. The EPF also wanted the mall to have an occupancy rate of 70% at an agreed sustainable minimum commercial yield over the long term. The occupancy rate is currently at 80%.

The EPF pointed out that the purchase price would only be determined after the mall opened for business and was subject to it achieving an agreed revenue and profit within a time frame. A source familiar with the Quill Group says the Quill City Mall’s valuation is in excess of RM900 million.

It is unclear which of the conditions were not met, but it would be safe to assume that it was the performance target.

The source says the mall is performing well despite the challenges in the retail sector. He adds that notwithstanding the softening in the market, Malaysia’s overall retail industry is growing, albeit at a slower pace. “Quill Group believes that the mall’s performance will improve with its ongoing advertising and promotional activities as well as its effective leasing strategy,” he points out.

The Edge reported last November that in anticipation of a possible termination of the SPA with the EPF, Quill Group was looking to retain the mall and refinance its debt.

To recap, QRMSB in 2013 established a RM850 million bond facility to fund the development of the mall, of which RM700 million was issued. Currently, the outstanding bonds stand at RM420 million, which will be refinanced through a proposed issuance of RM350 million sukuk murabahah and the balance via its internal funds. Hong Leong Investment Bank and Malaysian Industrial Development Finance Bhd are the joint lead arrangers for the sukuk.

RAM Ratings, in a press release dated Dec 29 last year on QRMSB’s RM350 million sukuk issuance, says: “Based on its (the mall’s) performance in the nine months ended Sept 30, 2016, the mall achieved an annualised net property income of RM20 million, although its cash flow is expected to be 21% lower, given the present average rental collection rate of 79%.”

Nevertheless, the rating agency adds that QRMSB has since tightened its credit practices, which should further improve its rental collection. It also says the mall is exposed to tenant-concentration risk as AEON Co (M) Bhd is occupying 32% of its NLA and that the property’s lease maturity profile is lumpy as a substantial 80% of its NLA will be due for renewal this year.

Meanwhile, the residential component of Quill City is expected to be officially launched by the middle of the year.

Last November, The Edge reported that Quill Group was looking to divest its 24-storey office building in Lebuh Ampang, Kuala Lumpur. The building sits on 0.297 acre of freehold land and has an NLA of 185,254 sq ft. However, the group may not sell the asset. “Quill Group will continue to review the best options available, which may include but is not limited to the sale of Quill 6,” says a Quill Group official.

This comes as Quill Group is undertaking a fundraising exercise via a company called Lucida Capital Bhd. A search on the Companies Commission of Malaysia’s website reveals that Lucida Capital was set up on Dec 6 last year. Its core business is
described as “a special purpose vehicle for the issuance of medium-term notes under a purpose medium-term notes programme pursuant to the securitisation of property”. The directors of the company are Norshamim Besa@Lesa and Chan Jau Yuan.

In a press release dated Jan 13, RAM says Quill 6 will be securitised via a RM370 million MTN programme with a total of RM224 million expected to be issued. Quill 6 is leased to HSBC Bank Malaysia Bhd. The fixed-term 12-year lease expires in March 2022, with an option to extend it for two three-year terms.

The rating agency adds that the building was valued at RM221 million by Khong & Jaafar Sdn Bhd, but RAM’s adjusted valuation is RM164.6 million.

This article first appeared in The Edge Malaysia on Jan 30, 2017.

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