APAC Realty – Acquisition Of ERA Centre Is Cashflow Negative

Well, at least until October 2023.

But first, let me state that this post is not exactly a discussion on APAC Realty. I don’t own APAC Realty’s shares, I traded it twice, and was fortunate to walk away with a mere couple of grand in profits, but that’s about it.

This is specifically, a discussion of APAC’s recent acquisition of Hersing Centre. (And the numbers behind it)

On the 10th Sept 2018, APAC completed the acquisition of Hersing Centre, situated in Toa Payoh, and renamed it ERA Centre.

The plan is to use ERA Centre as the headquarters, while simultaneously generating rental income from leasing out the retail units.

“The Property is a leasehold commercial property with a site area of approximately 1,392.4 square metres and a gross floor area of 4,121.4 square metres. Its 99-year lease from the Housing and Development Board (“HDB”) commenced on 1 August 1970. The Property has three levels: the first and second levels are currently leased to retail businesses, while the third level and the mezzanine are currently leased out as office space. There are also two auditoriums on the third level which are leased out. Total lettable floor area is approximately 2,155.3 square metres, excluding auditorium space of 441.34 square metres.”

ERA Centre’s location is not too bad actually. It is just a little off the main road, but enjoys pretty good frontage. It’s also not exactly smack in the Toa Payoh town hub per say, where all the buzz is, but is pretty close… I’d say, just 5 mins walk away.

Aside from using it as a HQ, the company plans to use the auditoriums in the 3rd floor for internal training and lectures for their own agents. (that’s what I’m told by an agent that I checked with)

The consideration for the acquisition is a cool $72.8 million, of which $58 mil is a property loan from DBS bank (according to FY18Q3 earnings release).

“The loan bears interest at the prevailing 1-month SIBOR plus 0.9% per annum for the first 2 years and 1-month SIBOR plus 2.0% per annum thereafter. The loan is repayable over 59 equal monthly instalments of $241,667 per month with a final bullet principal payment of $43,741,647 on the final maturity date, 19 October 2023. The first monthly instalment repayment of the loan is on 19 November 2018.”

Yup. So APAC has to cough up repayments of $240k every month, all the way till Nov 2018.

Being the curious cat, I rolled up my sleeves to investigate as I wanted to figure out if ERA Centre is going to be cashflow positive every month.

TBH, it’s not so much cos of interest in APAC Realty… but rather…. hey, if commercial premises in TPY town centre was going to be CF positive, I might jump in (on a much smaller scale of course), and pick up a few units somewhere there as well. I happen to be offered another commercial unit that’s even closer to the town centre than Hersing Centre.

It’s been almost half a year since the completion of the acquisition of ERA Centre though, and thus far, it doesn’t look good.

The ground floor is leased out to the “Hawker Chan” restaurant, which is famous for being the 1st 1 Michelin starred hawker. That certainly does brisk business, so they’d probably be around for a while longer.

That’s where the good news end.

After almost 6 months, the building is still terribly empty, with little traffic. Many units are empty too.

Even the road facing unit on the ground floor, which certainly enjoys pretty good roadside frontage, is empty.

I’d let the pictures do the talking.

I’d certainly think this should be the easiest unit to lease out.

Ground floor, just beside the road that many people use to cross to reach the HDB hub.

But it’s empty.

And empty for several months already.

I’ve been down to assess twice. Cos the 1st time was right after their announced acquisition and… well, maybe the company needed more time right?

But these pictures are recent. And it’s kinda disappointing I think (not to me, I’m not a shareholder!) that they still can’t get it leased out.

The 2nd floor is worse. There’s a hairdresser and a law firm on the 2nd floor.

These 2 are the only 2 non-F&B businesses in the entire building I think. I won’t put pictures of these cos the staff faces are in it, and it’s maybe not very nice if they suddenly find themselves plastered over an investing blog.

The rest are all small sized eateries selling F&B.

And yes, there are yet some more vacant units.

And finally, THIS.

I actually found this to be quite funny.

LOLOL! Check that out.

The sign btw, says “ACCESS TO LEVEL 3 ARE STRICTLY FOR TENANTS ONLY”

OK, firstly, it should be “is” and not “are”.

And they didn’t need to put that sign up. I wouldn’t have dared to go up anyway!

LOL!

The escalator was not working, and it’s almost like a pathway to hell with the darkened corridors and the eerie red light! Maybe they can lease this part out to film ghost movies.

Anyway, I’m told that it’s just 2 auditoriums on level 3. They certainly don’t have retail units there since the public is not allowed to go up.

Initially, I thought that since the total lettable area is a known fact, I’d just have to guesstimate occupancy rates, and crunch in the average psf numbers (can call agents to find out easily)… but looking at how unoccupied it is, I think we can safely conclude that ERA centre sure isn’t going to generate $240k in rent every month.

In other words, expect this to be CF negative every month until the end of the lease. (unless they find tenants)

I’d also point out that with this acquisition and the accompanying loan, the company no longer has an “asset light” model. As a matter of fact, they further increased their exposure to rate hikes, as the loan is pegged to Sibor.

Rate hikes are of course, always going to be a dampener for the property market, both price and volume wise, but with this loan, APAC would also be further directly impacted by rate hikes, or the lack of it.

Again, this by no means, indicates the current investment merits of APAC Realty.

I’m just sharing some observations, thoughts and photos of their acquisition of ERA Centre.